To be a contrarian investor is to be fearful when others are greedy and be greedy when others are fearful. When everyone believes that this stock is the hottest stock to buy, then it will be overvalued.
The critical factors to be a successful investor are:
– Independent thinking
– Believe in your judgment
– Able embark on an entirely different route from others
Greed and fear are our human instinct, fear arises due to the unknown of the future, greed arises due to our own overconfidence. Successful investing requires learning to be rationale to control these two emotions which are greed and fear. We should not allow these two emotions to affect the decision to buy or sell our shares. The key to creating wealth is to take on a different path compared to others. Independent critical thinking will help to capitalize on the greatest opportunity and it is important to persevere walking down this lonely path for a very long time as everyone will criticize that you are wrong. In order to minimize been influence by the rest, a lot of great investors choose to live far away from wall street. For instance, Sir John Templeton, Warren Buffett, Charlie Munger, and Guy Spier.
In order to create wealth through investing is not always a straight forward path, we need to buy the most during the bear market as things become cheap and there are lots of bargain hunting in the market. There are no buyers in the market to compete with you. However, during the market euphoria, everyone is afraid to miss out on the opportunity to become overnight millionaire, the mass market are in the wall street buying stocks. Then when the bear market comes, most of the mass market will be in a panic when their stocks fall in value by half. They will get out of it at the bottom of the market. It is during this time, we need to be calm, opportunistic and aggressive in our buying of undervalued gems and hold them forever.
Don’t let emotions of greed and fear affect our judgement. The market will always have revert back to the norm. In the most depressed market, over time it will rise back up. In the most euphoric market, it will correct itself. Therefore, we should always adopt a buy low sell high, ignore this at own peril. The good contrarian investors will not always be against the mass market, they will wait for the heated market to cool its steam before buying those companies which are ignored by the mass market. The key psychological factor towards investing is to ignore your inner emotions, as long as the fundamental of the business is not affected or deteriorate, you can continue to hold on to this company. We need time to prove that our independent judgement is correct. Independence of thought is fundamental to sound investing.