Contrarian investing: Buying shares of the unloved, unwanted, and underpriced

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Sometimes the best move is in the opposite direction.

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Imagine passengers on a small boat rushing to one side. What begins as a gentle lean soon becomes a dangerous tilt. What are you going to do—maybe move to the opposite side of the boat? If so, you’re taking a contrarian position, going against the crowd.

This analogy is just one of many offered by contrarian investors (“When everyone rushes to the same side of the boat, it’s going to capsize”). In this example, the two sides of the boat represent fear and greed. Investors tend to swing between these emotional extremes, often in unison. Greed drives markets to overheat. Fear sends them plunging.

A contrarian sees opportunity in these moments—not by following the crowd, but by betting against it. The goal is to stay grounded while others lose balance; to buy when others are panicking, and sell when others get greedy. It’s a compelling idea, but also an oversimplification. In practice, identifying when the crowd is wrong—and having the patience to wait for the payoff—can be far more difficult than the analogy suggests.

Contrarian investing is simply buying what the large majority of investors are either avoiding or selling, and selling or avoiding what most investors are buying.

This strategy is at its most intense when a stock, group of stocks, or the broader market is being driven to extreme highs by “irrational exuberance” or plunging due to sheer panic.

As legendary investor Warren Buffett once advised, “Be fearful when others are greedy, and greedy only when others are fearful.” Contrarian advice like this can play out in both bearish and bullish markets.

During a sell-off, when bearish sentiment is at its peak, contrarian investors seek to buy stocks that they believe are deeply undervalued. They aim to buy shares at a steep discount while most investors are selling in panic and overlooking their true worth. If these companies later validate or improve their growth prospects or financial position, contrarian investors can reap outsized profits.

Likewise, during a euphoric market when asset prices soar to extreme highs, contrarians aim to sell—or steer clear of—stocks whose valuations have outrun their fundamentals. They believe prices are being driven more by investor frenzy than by earnings. When those prices eventually fall back to earth, contrarians benefit by sidestepping losses—or, if they’re shorting the market, by profiting on the way down.

This investing style focuses on funding fundamentally strong companies whose stocks are steeply undervalued—trading well below their intrinsic value due to negative market perception. Because most investors have miscalculated or underestimated the true value of a company, sending its stock into deep discount territory, this approach is almost always contrarian by nature.

If this strategy sounds familiar, it’s Buffett’s famed approach—deep value investing—which he learned from Benjamin Graham, called the “father of value investing,” while attending Columbia University School of Business. Graham’s acclaimed book, The Intelligent Investor, is the definitive text for the deep value investing method.

Using a wide range of metrics, including price-to-earnings (P/E) and price-to-book (PB) ratios, debt, and dividend comparisons, this strategy seeks to determine whether a beaten-down stock is trading at or below its true value. If you’re able to buy a stock at a discount price, then it’s a matter of time before that stock rises, according to the strategy.

Although Buffett started out with a deep value strategy, over time (and with guidance from his Berkshire Hathaway (BRK.A, BRK.B) colleague and confidant Charlie Munger), he adapted it to focus more on quality businesses with enduring competitive advantages. It’s an approach known as growth at a reasonable price, or GARP.

This strategy aims to invest in 10 of the highest-yielding stocks within the 30-stock Dow Jones Industrial Average, particularly when those stocks have declined significantly. The main idea is to capture these stocks while they’re undervalued, collecting high dividends and profiting as their valuations (presumably) rebound and continue to grow.

SAPI slugs is an informal—and somewhat obscure—Wall Street abbreviation describing stocks that are cheap and sluggish for a reason. It focuses on stocks in a fundamental slump that may either break out or break down.

SAPI stands for:

SAPI slugs are the ugly ducklings of the market. Some may grow into beautiful swans, but others will stay grounded or go broke. If you invest in stocks like these, keep a close eye on them.

Some of the most striking bankruptcy survivors—and near misses—include Ford Motor Company (F) in 2008, when its stock dropped below $2 and bankruptcy seemed all but certain. Yet it survived without a government bailout and staged a comeback. Or Best Buy (BBY) in 2012, written off in the Amazon.com (AMZN) era, only to rebound under new leadership. Carvana (CVNA) saw its stock crash more than 98% from its 2021 highs as debt piled up and bankruptcy fears mounted. By 2023, the company had slashed costs, refinanced debt, and returned to profitability, sending its stock surging more than 1,000%.

Perhaps most notably, Apple (AAPL) was on the ropes in the late 1990s before a $150 million investment from Microsoft (MSFT) and the return of Steve Jobs turned its business around. Within a decade, Apple went from near bankruptcy to launching the iPhone and becoming one of the most valuable companies in the world.

Contrarian investors who stepped in when these companies were widely written off saw massive returns. But those gains came with steep risk—most of the market had already declared them dead. That’s the contrarian edge: finding value where others see only ruin.

Paddling against the mainstream tide of investing opinion rubs against the instinct to stick with the crowd (a cognitive bias called the “bandwagon effect”). After all, there’s safety in numbers, right? Not if you see something big that others in the market are missing—that’s what a contrarian would say.

Going against the crowd comes with risks, such as:

The crowd could be right. In 2017, the S&P 500 posted 62 record closes in a single year, though many analysts claimed the market was overextended and overvalued.

You can get caught in a value trap. Not everything cheap is a bargain. Some stocks are down because of bad business fundamentals. Unless you have a compelling reason to believe a company can turn things around, you risk pouring money into a stock that either goes nowhere or goes to zero.

Bad timing can hurt you even if you’re right. If you take an opposite position too soon—like loading up on stocks at the beginning or middle of a bear market—and if your position is too large, you may end up carrying huge market losses.

If your mindset leans toward a value-minded approach, these tips can help:

Contrarian investing isn’t for everyone. It takes discipline, patience, and a strong stomach—plus the time and conviction to dig deep into companies the market has written off. You also need the capital (and mental resilience) to withstand long periods of underperformance while the rest of the market moves in the opposite direction. 

Legendary investor Sir John Templeton is noted for saying, “If you want better performance than the crowd, you must do things differently from the crowd.” That’s the spirit of being a contrarian. It’s about uncovering value where others see risk, or nothing at all. But it’s also a lonely path to take. There’s a party going on, and you weren’t invited—and it can be downright miserable when the crowd happens to be right. So if you choose to go down this road, stay diligent, disciplined, and diversified in your approach.

This article is intended for educational purposes only and not as an endorsement of a particular financial strategy. Encyclopædia Britannica, Inc., does not provide legal, tax, or investment advice.