Investing & Contrarians

The million dollar question in investing is when is the right time to invest and when should one think about exiting. There are some theorists who say "Be greedy when others are cautious and be cautious when others are greedy." This is more of a contrarian way of investing. Then there is another school of thought which suggests "The trend is your friend." This is more of a buying when others are buying kind of strategy. The question which tends to be asked to most portfolio managers and investors almost every time they make an investment decision is which one is better.

From my personal investing experience, I feel the contrarian strategy works better for me which is - Invest when others are cautious.

Comparing with the other strategy mentioned above is as follows:

a. Invested at lower levels
The main advantage is that you will be invested at a lower level more often as you will be buying when the world is selling at much lower levels. Just for the recent example when the world was cautious about sub - prime crisis and worried about who much more it can spread and as a result how lower can equity prices fall, there were points when nifty (Indian benchmark index) hit 4000 levels and even lower. Investing at those levels would have meant that one is getting good stocks at good valuations. Also, with the global co-ordination of central banks and governments, more often than not, any major economic crisis would be controlled and so in such situations investing at lower levels makes a real good sense.

b. Value investing
The idea behind value investing is picking up good stocks at a good price and then staying investing in them for a very long time. Value investors tend to look for quality stocks at a good price. Picking stocks when others are trying to sell at lower prices gives one an opportunity to pick stocks at good prices. Value investors would rarely find a stock at good value when the markets are rallying.

c. Better risk/reward
Investing in stocks at lower levels gives one an opportunity of higher upside as compared to being invested at higher levels. So not just the risk is relatively lesser considering that quality stocks have a decent intrinsic value/ Book value, but also there is a possibility of greater reward compared to being invested when the up-trend has begun.

d. Trend need not always be your friend
Investing in a market which is going upwards need not always be a wise idea. As the trend may be upwards for a particular time duration. However, if you are a long term investor, you end up buying in the market at a higher price and when the trend reverses, since you are a long term investor, you will end up not booking a profit and hence would end up with a purchase at a very high price.

Timing the markets vs time in the market
There are people who believe that one should always try and time the market right. So one would enter only when a few criteria are satisfied. I believe, that the only thing one should look into when trying to invest in for the long term is the fundamentals of that economy in which one is investing. If those are in place and one sees a 20 year growth in it, then one should be invested. The second point in deciding is that one should look in for good valuation when investing. So buy when people say its time to be cautious and markets are making lows on a very long term chart.