In investing, as in life, there are two types of bargain hunters.
In one camp are the bargain hunters who simply like to buy things as cheap as possible. A package holiday with all inclusive food and drink, for example. A shopping spree in Primark or a trip down the middle aisle at Aldi. In investing, we like to call this approach Deep Value - stocks that are picked purely for their cheap valuation multiples.
On the other side of coin are the bargain hunters who like to look for discounts on quality goods. The holiday maker who searches for 5* hotels on last minute websites, for example. And the shoppers who like to peruse branded outlet stores or wait for the yellow stickers to be placed on M&S food which is soon to go out of date. In investing, these discount hunters are known as Contrarians - they pick high quality stocks which, for one reason or another, are currently being overlooked by the market and are trading on attractive valuations.
In the latest in our series on investment strategies, we’re going to be taking a closer look at this investment style. Read on and you’ll learn:
- How you can use market mis-pricing to make money
- Whether you have the right mindset and investment goals to be an effective contrarian
- How to implement this strategy successfully
Why does market mis-pricing happen and how can it make you money?
Weathered investors know the whims of Mr Market (or, as one astute reader pointed out to us last week, The Market is probably a more appropriate personification of the stock market in this day and age, after all, women can be investors too!)
The whims of the The Market are caused by the very human behaviours which influence share prices: panic, ecstasy, an absolute belief in being correct, a fear of missing out. The list could go on.
But while these behaviours cause stock market valuations to change very quickly, the underlying intrinsic value of the companies listed on the stock market tend to change slowly. Many famous and incredibly successful investors point to this discrepancy as the ultimate strategy for making money from the stock market: buy high quality shares that are trading at a discount to the underlying price of the asset.
