Contra Investing

Mr.A was getting worried the way his portfolio was bleeding. The thought is giving him sleepless nights. While on the one hand there are people who suggest that the market is at an attractive level, there are others who still fear the doom. It’s true. One must remember that the very basis for a stock market to function is such diverse views. At any point when someone thinks that a share is priced enough and sells another person thinks that there is steam left. If all think that the price will go down, then who will buy? Likewise if everyone thinks that the price will rise, who will sell? Thus, both the views are needed.

The question now is how will one decide the right time to buy? The saying goes once bitten twice shy. So, those who have lost money will swear not to invest again or to wait till market finds the bottom. But in a bear market, finding and knowing the bottom is an art in itself. You continue to get negative news one after the other. Predicting the market’s direction itself will become difficult. That is the situation now and many of you would have experienced it. Just when the market gets into positive mode, you have the inflation number, IIP number or other things staring and we are again in the red.

Therefore under such circumstances it is time to do some contra investing. You must have heard the maxim. Buy low sell high. It is easier said than done. But such a philosophy works very well in conjunction with a philosophy of contra investing. One may ask what is contra investing? It is an approach of investing where one takes investment calls contrary to the current. For example when the rupee was appreciating stocks of information technology (IT) companies were not favored by investors. A contra investor would buy IT stocks at such point in time. The benefits would have been that when the rupee depreciates there stock’s flavor will come back That is what actually happened in the last two-three months when the whole market was crashing with sectors like real estate falling by 40-50%, the IT stocks were generally falling by only around 3-5%.

Coming to the current situation, one could say that banks and financial services is a good sector for contra investing. With inflation on the rise and carrying with it the interest rate, nothing seems right for the banks. There won’t be much credit off take, deposit rates will have to be raised and the margins will get squeezed among other things. There seems to be only bad news for this sector. Banking being an essential part of the economy and having an established business model probably provides a great chance or contra investing. With interest rates and inflation currently standing at record high levels, one can visualize them stabilizing some time. After this, the banking sector would benefit.

For hose who do not want to invest in bank stocks, ICICI Prudential has launched the ICICI Prudential Bank and Financial Services Fund. Besides there are some exiting funds from others like Reliance, UTI, Sundaram and JM. You allocate a part of your funds into this sector. You can also look at investing in a few contra schemes like SBI Magnum Sector Umbrella contra and Kotak Contra.

To conclude, contra investing is not easy. It needs careful consideration and understanding of those sectors. It needs substantial amount of research coupled with loads of conviction and courage. Besides it is also important to take bets on sectors that have an established and good business model. As you know going the contra way is not easy in any aspect of life. This includes investing.

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