Contrarian Investors - Are They Making Money At The Moment?

By: James Woolley

Contrarian investors are basically those investors who prefer to buy shares in companies that are currently out of favour and unloved by most other investors. The hope is that when people do start investing in these companies again, the share price will be driven substantially higher. However in today's bear markets can contrarian investors really be profitable?

Well most of the time contrarian investing can be an extremely profitable strategy. In bull markets, for instance, there will always be companies that have been slightly ignored and are currently priced very cheaply. The trick is to be always on the lookout for companies that are temporarily oversold and snap them up because they will nearly always return to their true market value at some point.

However in today's markets this has become a fruitless strategy because for a start the global economic downturn has made it really difficult to predict the future earnings of companies. There are always analysts' forecasts of course but no-one really knows how hard a particularly company will be hit in the foreseeable future by this sharp decline.

So predicting a company's future earnings and profits in the coming years is very difficult, but another problem is that the wider markets just keep falling and falling. Therefore even the strongest of companies are being dragged down. This does create opportunities of course but it's so difficult to get a good entry point because you know prices may fall even further in the coming months.

Ultimately it really depends on your investment goals. If you are investing for the very long-term, then you can pick up some real bargains at the moment, because the share prices in many of the quality companies will surely be substantially higher in five or ten years time, for instance.

However if you investing in shares with the goal of turning over a quick profit in a matter of weeks or months, then these markets are probably unsuitable for contrarian investors. The problem is that it's so hard to identify short-term bottoms at the moment, and with the wild swings we are seeing at the moment it can be hard to bank any profits you make because a few days worth of gains can be wiped out in an instant.

So overall I think if you are a contrarian investor that is investing for the very long-term, then these markets can be profitable (although still quite risky), but if you are looking for short-term gains then it's undoubtedly a lot harder. In the short-term you are arguably better off looking for shorting opportunities in poor quality debt-ridden companies that have become temporarily overbought after rising with the general market.