Contrarian Investing

In stock trading majority of investors follow a herd mentality. When a stock market is continuously rising majority of investors become frenzy and keep buying continuously. When the market starts falling, majority of investors become panic and oversell, making the stock market dive down.

In a frenzied buying, the stocks become over valued. That is the time, when the bearishness is not evident, the smart money slowly withdraws from the market, selling all their stocks. This is called distribution.

Similarly in a panic selling, when the stocks become undervalued and attractive, accumulation of stock begins. The smart money slowly builds their stock position, even when the gloom still remains.

Commonly used indicator for investment decision is volatility indexes like VIX. VIX by tracking the prices of financial options, gives a numeric measure of how pessimistic or optimistic major market players are. A low number in this index indicates a prevailing optimistic or confident investor outlook for the future, while a high number indicates a pessimistic outlook.

This type of investing is akin to value investing, since it focuses on buying under priced valuable stocks.

Warren Buffett a famous investor, believes that the best time to invest in a stock is when shortsightedness of the market has beaten down the price.

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