Contrarian Investing - Buying on the Dips

One of the hardest things to try and achieve in investing is market timing; I know it is something I have never managed to perfect, and many other more talented investors have also admitted defeat! 

However, what I do find interesting is how people approach investing. If a stock falls 10% then there is an argument that that stock is less risky than one that has risen 10% as the likelihood is the bad news has already been priced in to some degree and you are investing at a lower base.  However, time and time again people buy in on the "way up" and sell on the "way down".

I thought this article would be poignant today given Standard Chartered's announcements of a 10th consecutive year of income and profit growth as well as an increase in full year dividend of 10.5%. Over the summer Standard Chartered were hit by the Iran money laundering scandal which saw around 19% shed from their share price in 24 hours. Many investors I am sure panicked fearing almighty fines on the bank and sold their positions. If as an investor however, you had bought into the stock immediately following this scandal you would be sitting on a profit of around 46% (not factoring in any dividends!). Standard Chartered were fined around $700m for the scandal, but that has failed to dent profits significantly and the Emerging Market focused bank continues to perform strongly. 

Source: Google Finance

Of course there are examples where a stock has fallen sharply on the back of bad news and continued to fall, so investors need to keep an eye out for this. I think the key is to ask yourself, what has caused the stock to fall, what is the consensus view and have the fundamentals changed. If you believe the market has overpriced the bad news, and that in fact the company can recover then it could be a good buying opportunity. 

For investors who don't have the time or expertise for such type of investing there are contrarian funds available. Probably the most famous is M&G Recovery which has a brilliant track record, and a particular favourite of mine is Investec UK Special Situations.

Contrarian investing often means going against consensus and is a bold move, but if it is good enough for Warren Buffett then it is good enough for me!