Contrarian Investing Is Not Just About Buying Cheap Stocks: Sankaran Naren

Contrarian investing can create opportunities when investors move heavily in one direction, but buying a stock simply because its price has fallen is not enough, according to Sankaran Naren, Executive Director and Chief Investment Officer, ICICI Prudential Asset Management.

Speaking at The Money Question event by Outlook Money, Naren explained that investors need to go against popular market views while studying the asset or business before taking a position.

Why Contrarian Investing Can Be Difficult

Naren has followed contrarian investing since the 1990s. Recalling the market cycles of that period, he explained how stocks that had attracted buyers during the 1994 market peak fell sharply during the Asian financial crisis.

“Many of them had come down by 60, 70, 80 per cent. So it was a real big shock to me. And once that happened, I realised that contrarian investing would work because in 1994, I could see multiple buyers. In 98, I could hardly see any buyers,” Naren noted.

Going against the crowd can also be difficult because investors may have little support when taking an unpopular position.

“The biggest challenge of contrarian investing is it is very lonely. So if you are the only buyer and there are 10 sellers, imagine what the situation would be,” he added.

Cheap Does Not Always Mean Attractive

Naren stressed that a low valuation alone cannot form the basis of a contrarian investment. Investors need to understand why an asset has become unpopular and whether its underlying value can recover.

“People have asked me if contrarian investing is just buying cheap? The answer is no. You have to be doing the work. Otherwise, you would have ended up buying junk infrastructure stocks in 2008. And real estate NBFCs in 2017-18, and many of them went to zero,” Naren noted.

Timing also matters. Investors need to identify opportunities before they become popular again.

“You can't be buying again when everyone is buying, and it is not contrarian. You can't be selling when everyone is selling, and it is not contrarian,” Naren added.

Research And Patience Matter

Naren has highlighted leverage, institutional ownership and disruption as factors investors should examine. A sector facing disruption may not recover just because its stocks have become cheaper.

“If once a sector is disrupted, then you have to be careful,” Naren cautioned.

He also pointed out that contrarian investing can be applied across asset classes and market segments. For investors, patience is important because a contrarian idea can take time to play out.