How to Be a Contrarian Without Getting Burned

These three tips can help you successfully buy what others are selling

Esther Pak 9 August, 2011 | 12:31PM Holly Cook

As harrowing as the recent market sell-off has been, widespread pessimism surrounding the global economy has been creating opportunities for valuation-conscious investors. For much of the year, Morningstar's equity analysts had considered stocks in their coverage universe to be slightly overvalued. But as a result of the harsh sell-off in the last week, the average stock in our coverage universe is now trading at a more than a 10% discount to fair value, and our analysts think there are several high-quality names that now appear to be rather cheap.

Picking up mispriced stocks is a contrarian investor's objective, and such opportunities invariably surface when the market is looking particularly weak. Being willing to purchase out-of-favour stocks, then selling them after their share prices have recovered, can obviously lead to above-average gains. On the other hand, avoiding companies where there is excessive optimism about a stock or sector can help the contrarian avoid market bubbles like the late 1990s’ technology heyday and the Nifty Fifty era of the 1970s.

As lucrative as a contrarian strategy might seem, executing isn't exactly straightforward. Here are three pointers for going against the crowd without getting trampled.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Esther Pak  is an assistant site editor of Morningstar.com.

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