Contrarian Investing : Contrary to normal thought

Contrarian Investing, an offshoot of value investing concept has hardly failed anyone in recent history. The stocks we are going to discuss have been the biggest outperformers in the last one and half years and all of them have been contrarian investing calls. What is contrarian investing? It is about buying businesses with sound fundamentals when it reaches a price far below its worth on account of panic selling or carnage in the market or in that particular stock counter. Investors rarely act in a rational manner, engulfed in greed and emotions most of the time. In a bull market, they fail to protect their profits and in a bear market, they fail to buy fundamentally strong businesses at low valuations. Contrarian investing is about "detachment" from the herd mentality and thinking out of the box to grab a Rs.1000 currency note by just paying Rs.100. Lets see a few examples. Take Satyam computers now acquired by mahindra and renamed "Mahindra Satyam". The stock, soon after the scandal broke out, fell to never before seen junk levels of Rs.6 before rebounding to Rs.120 now all in a matter of 9 months. The value creation and compounding has been mindboggling for a 9 m tenure. Its been a multibagger generating 20 times wealth from its lows. I missed buying it and i regret it to this day. There was no guarantee when the stock fell to Rs.6 that the business would survive but i should have also known that they had 50000employees whose lives were at stake plus India's reputation as an IT destination. The country had its neck on the line and could not have afforded a catostrophe in its sunrise sector. And hey at Rs.6, my downside risk was minimal, the stock could atmost go to zero- we dont deal with integers in the stock market. So I missed the lifetime opportunity and so did many others of my ilk.

There are so many other "good" companies in the Indian market which suffered decimation at the hands of a few punters due to some bad news related to the sector or company specific negative news flow. It is at these vital moments that as investors we need to sit back for a minute and evaluate these considerations:

1. Why is the stock getting whacked out of shape? How bad is the news for the
company, what is the impact on revenues and the bottomline ?
2. What is the valuation now and how cheap does the stock look compared to its
historic valuations. Compare the PE (price earnings ratio over say 10 years) and
see how close are the valuations to the historic lows. Is the market overreacting
to bad news as was the case in Wockhardt, United Spirits, Glenmark, Orchid
pharmaceuticals etc
3. Finally when u find a stock getting decimated, just answer this one important
question. Will the business survive and the company remain a going concern. This
is the most important query the investor will have to rationalise and once he
finds the answer to be "Yes", u should just go out, take a position in the stock
and wait for the markets to reward you. Was a united spirits (UB group)going
to fail as it was saddled with huge debt?(were people gonna stop drinking- never-
there was an answer). Was Satyam going to fail ? Not a single client of theirs
had thrown the towel in even after the accounting scandal broke out. Was Glenmark
or a ranbaxy gonna go bust? they were producing vital drugs and medicines for the
world market. Will Kingfisher or Jet airways go to pieces? These are business
class airlines and people are not going to stop flying.Was Unitech going to pop
up? They have been in the real estate field for 30 years and have executed World
class projects in the NCR region. Their execution skills have been remarkable.
The debt that they had piled up had become a serious problem resulting in the
stock falling to Rs.25 last year when their yet to be launched telecom business
alone was worth Rs.15 per share. You were getting the core real estate business
for almost free at Rs.10. That was grossly absurd and many meatheads like me
missed buying it to only see the stock reach 105 yeterday. A mere regulatory
hassle or one source of revenue disappearing is not going to affect a diverse
business stream except maybe in the short run, which is when, the markets do
react irrationally giving investors the perfect opportunity to cash in on the
price advantage. Its in a crisis time when opportunity beholds itself with the
risk reward ratio perfectly in favour of the "intelligent" contrarian
investor.Remember, the markets are a voting machine in the short run but a
weighing machine in the long run.

Always remember that wherever the core business of the company is still running
strong at full steam, generating sizeable cash flows, that company shall come out
of a balance sheet or debt crisis pretty easily through various deleveraging
options. Both "timing the market" and "time in the market" matter a lot in
investing. I have learnt my lessons, have you?