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Value Investing And Behavioral Finance

Contrarian Investing

A Contrarian investor is one who goes against the conventional wisdom when picking investment opportunities. The book discusses personal and organizational heuristics that could become an impediment to contrarian investing. 

 

Personal heuristics include: 

  • Group Thinking - where you sacrifice your views to become a part of a group, 
  • False Consensus Effect - tendency to overestimate the percentage of people we think would agree with us, 
  • Buyer's remorse - tendency to regret our decisions if they go against us in the short-term, 
  • Ambiguity Effect - Depending on external inputs to reduce uncertainty of stock purchase and reduce ambiguity (looking for validation in message boards, for example), 
  • Herding, Recency effect - giving undue importance to recent negative stock and Confirmation 
  • Trap - Tendency to seek confirmation of your decision through actions of others (You may not want to buy when all others around you are selling) etc. When selecting investment opportunities, a contrarian investor goes against conventional wisdom. 

The book discusses personal and organisational heuristics that can stymie contrarian investing. For example, group Thinking is a personal heuristic in which you sacrifice your opinions to become a member of a group. The False Consensus Effect tends to overestimate the percentage of people we believe will agree with us. Buyer's remorse is the tendency to second-guess our decisions if they go against us in the short term. Ambiguity Effect - Relying on external inputs to reduce stock purchase uncertainty and ambiguity (looking for validation in message boards, for example), Herding, Recency effect - exaggerating the significance of recent negative stock and Confirmation Trap - The tendency to seek confirmation of your decision through the actions of others (for example, you may not want to buy when everyone else is selling), etc. 

 

The author discusses a study conducted by his firm that found that over ten years, contrarian investing (buying the ten lowest PE stocks in the index and holding them for one year) outperformed conventional investing (buying the ten highest PE stocks in the index and holding them for one year) by a wide margin.

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Units 6/15