Summary of this article
Contrarian investing requires research, patience and independent thinking.
Cheap stocks may not always offer genuine investment opportunities.
Investors must study valuation, leverage, ownership and disruption risks.
Contrarian investing is often seen as buying stocks after a steep fall in prices. But a stock becoming cheaper does not automatically make it a good investment. Investors need to understand what caused the fall, whether the business still has value and what could bring it back into favour, according to Sankaran Naren, executive director and chief investment officer, ICICI Prudential Asset Management.
Speaking at The Money Question event by Outlook Money in Mumbai, Naren explained that going against the market requires more than taking a different view. It requires research to understand whether the opportunity is genuine.
Cheap Does Not Always Mean Attractive
Naren said his approach was shaped by the market cycles of the 1990s. Stocks that surged during the 1994 market rally fell sharply during the Asian financial crisis. By 1998, many had lost 60-80 per cent from their earlier levels.
“In 1994, I could see multiple buyers. In 98, I could hardly see any buyers; they were sellers,” Naren recalled. However, taking the opposite view can be difficult when most investors disagree. “The biggest challenge of contrarian investing is that it is very lonely,” he added.
Naren also cautioned against buying something simply because it looks cheap. He pointed to junk infrastructure stocks in 2008 and real estate NBFCs in 2017-18, many of which eventually lost most or all of their value.
Research Is The Key Filter
For Naren, research helps separate a genuine contrarian opportunity from a stock that is falling for fundamental reasons. Investors need to examine factors such as leverage, institutional ownership, and disruption.
A business facing major disruption may not recover just because its valuation has fallen. Naren cited the media sector, where structural changes made some contrarian investments unsuccessful.
Institutional ownership can also provide a useful signal. If a stock is already widely owned by institutions, much of the buying may have already happened.
The Opportunity Keeps Changing
There is no fixed sector or asset class that stays contrarian forever. Naren cited periods when small and mid-cap stocks, real estate, gold and silver became contrarian opportunities.
“Can you be contrarian in the same things all the time? The answer is no,” he noted.
This makes patience important. A contrarian call can take time to work, and investors may have to wait while the broader market takes a different view.
The strategy is less about predicting when prices will turn and more about finding neglected areas, checking their underlying value and being prepared to wait.
