What makes a contrarian investor?

Contrarianism is a mindset rather than a formal theory. Most, if not all, of the greatest investors can be described as 'contrarian' despite their widely differing expertise, methods and philosophies. What gives a diffident, calculating prodigy (Warren Buffett), a high-born gambler (Sir James Goldsmith) and a committed Christian who prays before important meetings (Sir John Templeton) something in common is their determination as individuals to make their own decisions, regardless of what the majority of investors are doing.For contrarianism isn't merely doing the opposite of what the crowd's doing, since sometimes the crowd is right - for a while. Contrarianism really means developing your own approach to investing and working for the long haul.

So, while their methods may be different from one another, contrarians don't regard opinions as ideas to be blindly followed, whether they're popular or are the consensus of some professional group, such as stock market analysts. They're acutely aware that short-term movements in the market are moved by 'investor psychology', that is, by the way the majority happens to be thinking at the moment.Contrarians are in the stock market for the long haul, even if they don't hold particular shares for very long. This is a deeply contrarian behaviour. Most people simply don't do this, just as they usually don't do anything consistently enough, or long enough, to achieve outstanding results. In other words, most people are perpetually changing their goals and opinions.Contrarians learn to ignore opinions, or to read between the lines. To do this, they need to develop their own individual methods.Here's just one contrarian approachWarren Buffett is a good example of this. Here is a man who is socially isolated and brilliantly quick at mental calculations - in short, a nerd. He's lived in the same modest house in Omaha, Nebraska since 1957, drank several cans of Pepsi Cola a day until he switched to Cherry Coke, and spends most of his life compulsively studying company reports.His knowledge is encyclopaedic - it's said that in his early twenties he was familiar with the financial details of every US quoted company. His success is legendary.As his funds grew, he began concentrating on large holdings in a few companies, flying in the face of the conventional advice to diversify, and becoming the archetypal 'lumpy' portfolio holder. No doubt he'd change tactics again if he thought the circumstances warranted it.Although not cut out for a managerial role, Buffett is fascinated by business. Unlike his mentor, Benjamin Graham, who restricted himself to objective mathematical techniques for stock-picking, Buffett is a believer. He has his own ideas of the types of businesses that do well, and has been known to monitor a company for years before investing in it. He says there are only few really good businesses, and they have the following characteristics:

• They have a good 'return on capital expended' (ROCE) and low gearing.
• Buffett can understand what they do.
• The managers have due regard for their shareholders.
• They are unlikely to suffer from state interference.
• They profit from growth elsewhere (e.g. TV companies and newspapers).
• Their stock is low and their stock turnover is high.
• They have predictable earnings.
• They have good cash flow.
• They have a franchise. This means they are companies that are so dominant in their market that they have great freedom in setting prices and are unlikely to suffer from competition (e.g. Amex and Coca Cola).

Thus, Buffett combines fundamental analysis with value judgements about the nature and prospects of individual companies. He doesn't seem to be very interested in the macroeconomic views so beloved by the economists employed by financial institutions.To take advantage of the research and selection Red Hot Penny Shares is making today, start your 1 month risk free trial now!

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