The Contrarian Theory


In finance, many spend countless hours and money researching trends, patterns, and sentiment. We pour ourselves into data — attempting to find a morsel of indication. Will an asset appreciate? Will a company succeed? Will gold continue to rise? With all the knowledge and complex systems packaged and sold by Wall Street, one less popular and simpler form of analysis is worth pointing out.

The Contrarian Theory of investing is not new. And, though it is quite simple to understand, emotionally it is not at all easy to follow. A contrarian, by definition, is one that invests against conventional wisdom, particularly at pivotal points in time. A contrarian doesn’t waste time worrying about corporate earnings or how “hot” the GM IPO will be. Rather, the contrarian watches the masses and goes against the grain of the herd, and human nature. When everyone else is buying, the contrarian is selling. And, when all others are running for cover, the contrarian asks, “How can I buy more?”

Due to the emotional complexities of the brain, humans tend to make bad investment choices. Simply, we are not as good as we presume we are. Investors are prone to emotional decisions and typically feel better only when others accompany that decision in a “groupthink” mentality. Consider it — did you really want to buy Ford (F: U.S.) when it was at $1.25 or not until it reached $18? Did you honestly desire gold at $800 ($/troy ounce) or not until the metal touched $1,400? Of course, we all feel better (emotionally) buying when everyone else does. But this goes against a founding principle of investing (buy low), and against the Contrarian Theory.

The contrarian looks in the face of conventional wisdom and realizes its shortfalls. The contrarian understands markets and foundational rules of investing. The contrarian is greedy when others are scared, and fearful when most others indulge. And, though the contrarian is often times laughed at, it is he or she who often has the last laugh.

Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm located in Birmingham, MI. He is an adjunct professor of finance in the School of Business at Wayne State University.

Founded in 2003, CitrinGroup specializes in portfolio management and advises clients on investment and wealth planning.

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