Contrarian investing

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"Buying low and selling high" - it's such a sweet principle; if only you can judge where and when.

It exploits a key truth that financial markets are regularly swung by emotion; that both this and the real commercial world do change. So if you are of sufficiently independent view to do the opposite of the crowd, this approach can be highly profitable. In my regular iii share dealing articles I've cited shares such as Cookson (CKSN), Fenner (FENR) and Harvey Nash Group (HVN), which have multiplied various times over; and Scott Wilson, an iBall share for 2010, nearly trebled.

You can see how effective this approach is, and it will continue to be - because human nature involves a tendency to over-react in response to new, especially unsettling, events.

To make a profit not loss, however, you need sound reasons to buck sentiment - it is no use just being a blind contrarian.

About five years ago I exploited weak sentiment in smaller housebuilders, to buy into Oakdene Homes, because it looked to have various useful projects that could flourish in a promising environment for residential property. It did for a while, but thankfully my wariness about the housebuilding cycle and smaller builders using significant debt kicked in once I was sitting on a good paper profit - and in similar contrarian fashion I was able to sell out progressively while the shares remained in demand. Although I did not envisage the crash, Oakdene later became a victim to administration after it failed to agree new banking terms.

Showing how you may need to take the opposite view even to professional industry analysts in stockbroking firms, I recall several tipping Oakdene for 200p plus, a share, when I was selling around 150p which proved the peak. Perhaps you recall how one 'leading' bank analyst was calling Barclays (BARC) a maximum of 40p, in early 2009, although in a "darkest before dawn" share dealing piece on Interactive Investor then, I took issue at about 70p on the basis of the robust statement the management had released. The price fell to about 50p on the analyst's views, amid publishing, but this proved the low and Barclays recovered to 380p that same year.

Various rules apply, so avoid knife-edge investing.

Do indeed beware "trying to catch a falling knife"; even company directors may do this prematurely with their share dealings on the way down. Again, this is where charts can help to define a support level being established. Otherwise, directors' share buying - especially when concerted and substantial - can often be a useful indicator of value. Just be aware, while they may have good insight as to the current state of their company, they are not necessarily the best judges of the stockmarket or wider economic forces.

The example of Fenner (primarily a manufacturer of belting for the mining industry) shows a virtue buying into an industry leader when the conditions and sentiment are against it. With such a robust company you can be pretty sure, it is only a matter of time before both will improve.

Frequently with a share that has fallen a long way, there are financial worries such as ability to service debt; why with this approach you need to take extra special care, examining the balance sheet - my next topic.

If you enjoy fashioning yourself as a bit of a rebel, the type who wears a baseball cap back to front, then you're probably well cut out as a contrarian investor!