Contrarian investing near market tops

Adrian Mastracci, Senior Portfolio Manager at Lycos Asset Management

What a pleasant surprise! Many stock market indices are hovering either at or near all time highs. Successful investing near or at market tops is a skill well worth having. It may be time to revisit your approach.

Many stock markets get their wings clipped periodically. For now, interest in stocks has soared to lofty heights not seen before. The question becomes: “how does one invest in stocks now that most people are interested?” Revisiting what “buy low, sell high” means to your plan of action is time well spent.

Risk has not gone away. However, emphasis on quality investments tames the turmoil. Contrarians know that bulls and bears can swap chairs abruptly, with little or no warning. Contrarians are content with either market direction.

Contrarian Resolve

My view is that contrarian strategy delivers rewards in the long run. I highlight contrarian investing for both advancing and retreating markets:

  • Establish your comfortable asset mix before investing begins.
  • Set your initial targets and invest within them.
  • Consider selling small positions of the winners as stocks advance.
  • Notice that I said “small” and “winners” in the same breath.
  • If stock markets continue to advance, sell more small amounts of the winners.
  • When markets retreat, buy some quality investments that few are interested in.
  • If those pesky markets drop further, buy more small positions at lower prices.
  • Do make sure that you don’t need the invested money for at least seven to 10 years.

Implementing contrarian ways takes strong resolve. Here is why this approach makes sense:

  • You control the process of when to buy, sell and how much.
  • There is no need to outsmart the markets.
  • You become skilled at taking small profits.
  • Knee-jerk reactions are not necessary.

In short, when stock prices climb, contrarians sell some. Conversely, when stock prices fall, contrarians buy some. Again, I emphasize “some” in both directions. You don’t have to act every time the markets gyrate north or south. Having ready cash on-hand makes this process seamless.

Contrarian investors are very patient investors. They are not afraid to happily zig when others are busy zagging. That strategy takes some getting used to. A series of small steps helps establish your personal discipline.