| Have you ever wondered why some people are | | | | Company's price which has nothing to do with its |
| able to invest in any financial instrument or | | | | main operations. |
| property at a low price and why you have always | | | | • Wars and Hostilities that can affect the |
| missed the boat? This article explains the | | | | competitors of your current favourite stock. |
| importance of understanding why contrarian | | | | 3.Look out for excessive exuberance |
| investing works and how having such a mindset | | | | Contrarian Investors know that downturns can |
| can help you make more money as part of a | | | | also be profitable if you use Put options which pay |
| larger investment strategy. | | | | you when the underlying stock declines in price? |
| 1.Value Investing mindset | | | | The best way to predict such a downturn would |
| Before one can profess to be a contrarian | | | | be to look for in the words of the former Chief |
| investor, you must have an understanding of the | | | | of the Federal Reserve Allen Greenspan, |
| underlying value of the thing you are buying and | | | | "excessive exuberance". This means basically that |
| decide that it is undervalued and historically and | | | | while prices are still rising furiously, the number of |
| the market will rebound within a good period. A | | | | buyers would start decreasing and a market |
| good book to start reading on value investing in | | | | correction might follow. |
| the stock market is "The Intelligent Investor", by | | | | Some indicators of such excessive exuberance |
| Benjamin Graham who was Warren Buffets' | | | | include: |
| Professor in Columbia University and helped shape | | | | • When you see financial analysts being very |
| his investment strategy. So because you know | | | | rosy on highly speculative stocks. |
| the usual market value of something, you can | | | | • When the stock market indexes start rising |
| purchase it on the cheap when prices drop , not | | | | close to record highs. |
| unlike shopping for discounts at a supermarket. | | | | • When you notice that trading volume |
| 2.Look out for downturns | | | | diverges with the price, meaning that while prices |
| Another key indicator is to understand your | | | | are rising, the trading volume is dropping. |
| market well and then pay a careful attention to | | | | Contrarian investing is thus a mindset where the |
| downturns in the economy or freak incidents like | | | | individual looks for trading opportunities which can |
| September 11. Some investments do down in | | | | yield profits. A contrarian investor thus looks out |
| value due to macro economic factors that may | | | | for economic, political and other factors which can |
| have nothing to do with your particular | | | | cause a large market movement in the particular |
| investment. A contrarian investor would spend | | | | financial instrument that he is trading in and can |
| time looking for ominous signs in the papers which | | | | make a large capital gain from his investment. |
| may lead to a downturn so as to purchase | | | | This form of investing can be part of a larger |
| stocks, shares at a discount to the average price. | | | | investment strategy and one should consider |
| Downturns that can prove profitable include: | | | | contrarian investing as part of his online investing |
| • Natural Disasters that have nothing to do | | | | warchest today. |
| with the underlying stock. | | | | Copyright © 2006 Joel Teo. All rights reserved. |
| • Cross Border Disputes affecting a particular | | | | |