Contrarian Investment
Summary: Contrarian investment is a philosophy that goes against what most of the crowd is doing. In other words, it is investing contrary to the majority of thinking at particular times in investment or market cycles.
Inside PropertyTM with John Maher FAPI
Contrarian Investment
Contrarian investment is a philosophy that goes against what most of the crowd is doing. In other words, it is investing contrary to the majority of thinking at particular times in investment or market cycles.
Basically, it means buying when everyone else is selling and selling when everyone else is buying. By investing in this way, the theory is that the investor will ‘sell high’ and ‘buy low’. It is remarkably simple and obvious that people should buy when property prices are low and sell when property prices are high, but they don’t.
By far, the majority of people follow the crowd and get caught up in the ‘positive’ investment environment of good news and favourable market and economic conditions and invest when prices are high. When the investment environment is ‘negative’ and the news is bad, people start to ‘get out of the market’ and sell; the majority of the crowd follows and low demand pushes prices down.
As the property market has moved from boom to lower values, now is a good time to explore the virtues of contrarian investment. When the market turns, as it has with current market conditions, the amount of property on the market is steady but demand is low, there is less competition between buyers and so prices fall.
Also, the perception is that prevailing market and economic conditions are unfavourable due to rising interest rates, low market confidence and competing markets such as the sharemarket rise. Under these circumstances, homebuyers and investors leave the market; values fall and buyers pay lower prices for property.
Contrarian investment theory suggests that this is the time to buy as the market will eventually move through the investment cycle again and values will rise. For a contrarian investor this is a time to buy, not sell.
It is difficult to time equity markets, especially the sharemarket however, the property market moves through the investment cycle much more slowly and is therefore easier to watch. It just requires patience and confidence that the market will turn. However, it may take years to move through the investment cycle.
This is not advice. The article is for general information purposes only. Readers should seek independent advice before taking any action. John Maher produces the property magazine Inside Property WealthTM, is a registered practising valuer and a Fellow of the Australian Property Institute. John can be contacted through http://www.insideproperty.com.au