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Taking a contrary view of the markets is not for the faint-hearted investor.

The true old market adage is that investors should buy low and sell high.  This principle underscores what is known as the contrarian style of investing.

Sir John Marks Templeton (29 November 1912 – 8 July 2008), one of the greatest exponents of contrarian investing advised “To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward”.

As Templeton suggested, following this advice is not easy.  An investor cannot blindly carry out market operations diametrically opposed to what the majority is doing.

In fact, there may be very good reasons for lightening market exposure or selling a particular share.  It may well be financial suicide to buy shares that are plummeting – after all, there are probably sound reasons why they are falling.  If the shares are not backed by a strong balance sheet and good management, and if the setback suffered by the company is not temporary, the shares may never recover their losses.

Contrarian investing is the development of an independent and successful investing methodology that is suited to the character of the individual investor.  Contrarian investing is not simply doing the opposite of what everyone else is doing – sometimes the crowd is right.  Rather, it is fine-tuning your own approach and having no regard for other opinions.

Markets are moved by the investor psychology of the moment and often don’t reflect true values.  In such times, the contrarian investor, having already done his research in accordance with his investing methodology, can scoop up the bargains he requires for his portfolio.  But contrarians are not speculators.  They are in the market for the long haul, even if they may not hold all the shares they buy for very long.  This in itself, is contrarian because many investors only venture into the market towards the end of a boom.  They are buying when the professionals are selling and they are burnt when the market falls back.  They then leave the market alone for many years – sometimes they never return.  These investors continuously change their goals, methods and ambitions.

In contrast, Templeton believed in being fully invested:  “The best time to invest is when you have money”.  He recommended “buying pessimism” and “selling optimism” and is famous for saying: “The four most dangerous words in investing is “this time it’s different”.

Here are some of Templeton’s rules of successful investing:

  • Achieving a superior investment record is more difficult than it appears. A market operator not only has to beat the average investor, but also the market professionals who manage the institutions.
  • Buy value and don’t rely on market trends and economic outlooks.
  • Invest for total maximum real returns – that is, after adjusting for taxes and inflation.
  • Remain flexible and open minded about types of investments. There are times to buy blue chips and there are times to sit on cash.

Templeton, for example, bought AMR which owns America Airways, US Airways Group and Continental Airlines immediately after the September 911 terrorist attack.  He piled into these shares when the markets re-opened on September 17 and in so doing he pocketed +100% returns in a matter of weeks.

What immaculate timing!

“Extraordinary profits from ordinary shares”