The key to investment success is to be contrarian and be right. You need to be contrarian to find opportunities that other people overlooked and invest in a low valuation. Next, you have to be right to see the valuation rise to realize a profit. But how do you actually implement a contrarian strategy that works? I don't have a definite answer (since I am not Warren Buffett).
But there're a few consistent patterns that provide perspective on how some contrarian strategies can work:
1. Have deep understanding of an industry.
If you are an industry expert and you know what other investors don't know, you have an edge to outperform. In 2012, after putting solar panels on my own home, I realized that residential solar power might be going mainstream and there's tremendous growth ahead (since most of my neighbors don't have solar yet.) My husband and I toured the SunPower facility in San Jose, California and we read numerous research reports on the solar market and technology. 2012 happened to be the absolute bottom of the solar industry with tons of companies filing for bankruptcy. We decided it might be a good time to invest. Eventually, we made investments in SunPower at $5.5 per share and Enphase at $6 per share. Both companies have more advanced and unique technologies than competitors, and insiders are buying their stocks. Fast forward two years. Today, SunPower is traded around $32 while ENPH is traded around $12. We were not really solar industry experts, but we were an actual client of SunPower and Enphase. This definitely provided us with an edge to be a contrarian and invested at the bottom with comfort. As an entrepreneur, most likely you know your industry very well. You have an edge to be contrarian and be right in your industry sector since most people don't know what you know. This information asymmetry creates great opportunities for arbitrage.
2. Take a long-term view.
After participating in the public market for over 15 years, I found that the stock market is short sighted and forgetful. People over-react to the quarterly earning reports and recent bad news. Did you remember 3 years ago when Netflix made a controversial decision to separate the streaming and DVD subscription business? Or 2 years ago when Starbucks missed their earnings and lowered their guidance? Both companies' stock prices dropped sharply but then recovered and went even higher. They are healthy businesses with a strong consumer brand and a competent management team. Savvy investors like Carl Icahn seized the opportunity on Netflix and made a 457% return on his investment. If you take a long term view, think independently as if the stock is your business and ignore analyst downgrades and people who screamed *bankruptcy*, you will profit from the market handsomely by buying into the right business at the bottom price and letting it ride.
3. Be greedy when other people are fearful.
The basic idea is to buy into the market when other people are pessimistic and selling off. It's easier said than done because humans are wired to react to loss irrationally. Remember the time in late 2008 when everything was falling apart? My diversified Vanguard fund portfolio was down 35%. I am glad that I resisted the (very strong) urge to sell equity in my portfolio. What I should have done was to buy stocks at the end of 2008, but like most other people, I didn't do it. I did buy some stock of Whole Foods Market at $5.26 per share back in early 2009. But when the stock tanked further to $4 and back to $5.5, I sold 80% of my holdings. Now the stock of Whole Foods Market is traded at $37.8. My conclusion: be contrarian, be right, and don't change your mind.