By KR Ashalatha
Contrarian investing is an investment strategy that involves thinking differently from the prevailing market trend.
Instead of following the crowd when investors rush to buy certain stocks, contrarian investors focus on sectors that others are avoiding. They examine whether concerns surrounding these sectors are excessive.
Markets do not always price assets accurately. When a company or sector goes through a difficult period, its market price may fall below its intrinsic value. Contrarian investing seeks to take advantage of this gap.
Economic downturns, new regulations, sudden changes in an industry or prolonged poor performance can prompt investors to sell stocks in large numbers. Market sentiment often becomes excessive. People tend to focus on recent negative news and assume that the situation will continue indefinitely.
However, contrarian investors try to distinguish between temporary difficulties and permanent deterioration before making investment decisions.
The success of this strategy depends on identifying whether a company's decline is caused by temporary factors or reflects a permanent deterioration in its business. This requires thorough research into its balance sheet, management quality, debt levels and potential for recovery.
Contrarian investing requires considerable patience. Since investors buy stocks before market sentiment changes, their investments may initially appear to be making losses. The real gains emerge only when the market recovers.
This strategy is suitable for investors who are willing to go against prevailing market sentiment and hold investments for the long term. By buying stocks when they are undervalued and benefiting from their subsequent recovery, investors can potentially earn attractive returns.
The ICICI Prudential Contra Fund follows this investment strategy. It seeks to identify opportunities arising from market mispricing by analysing prevailing market conditions.
The fund evaluates factors such as valuation, debt and company ownership, aiming to generate returns when market sentiment turns favourable.
The fund's new fund offer (NFO) was open from September 28 to October 12.
(The author is managing partner at Investory Asset Services.)