Contrarian investing thrives in the spaces where others retreat: during crises, sector declines and moments of market-wide pessimism. While the strategy can generate significant returns when sentiment eventually normalises, it also carries inherent risks.
Not all contrarian positions recover. Some face fundamental deterioration, others remain out of favour indefinitely. Examining real-world examples helps illustrate both the potential and the pitfalls of contrarian investing, providing valuable insight into how investor psychology, valuation discipline and timing interact in practice.
BUYING US BANKS AFTER THE GLOBAL FINANCIAL CRISIS
The collapse of Lehman Brothers in 2008 triggered a deep sell-off in global financial stocks. US banks, in particular, were hit by credit losses, capital shortfalls and collapsing investor confidence. By early 2009, many traded at a fraction of their book value, with market participants fearing widespread insolvency. Citigroup and Bank of America, for example, saw their share prices fall by more than 90% from peak levels.
Contrarian investors who stepped in at the height of the panic viewed the situation differently. While they acknowledged that losses would be severe, they recognised that not all institutions were equally exposed. Banks with stronger balance sheets and access to government support were likely to survive and eventually recover. Investors who bought shares in JPMorgan Chase or Wells Fargo in early 2009 – amid extreme fear and pervasive media negativity – benefited as bank earnings stabilised and recapitalisation efforts took hold.
The success of this contrarian investment rested on several factors: understanding that sentiment had overshot fundamentals, identifying institutions with long-term viability and having the patience to wait for sentiment to shift. However, not all banks recovered equally. Investors who mistook deteriorating franchises for temporary mispricing suffered losses, highlighting the importance of discrimination within the sector.
APPLE IN THE EARLY 2000s
In the late 1990s and early 2000s, Apple was a struggling technology company overshadowed by dominant PC manufacturers like Dell, IBM and Microsoft. Its product line was dated, market share was small and many investors viewed its future as uncertain. By 2001, Apple shares had declined significantly and scepticism about the company's ability to compete remained widespread.
Contrarian investors who bought into Apple at that time were not following a short-term momentum trade. They were backing a firm with strong brand recognition, a committed user base and a culture of innovation that had not yet delivered commercial success. The return of Steve Jobs, combined with the development of the iPod, marked the beginning of a dramatic turnaround that few predicted.
This case illustrates how contrarian investing can work when investor sentiment is anchored in past disappointment, obscuring signs of positive change. The market’s consensus was shaped by Apple’s history, not by the potential of its future product strategy. Investors who recognised this disconnect – and were willing to act against the prevailing view – realised substantial long-term gains.
OIL PRICES AND ENERGY STOCKS IN 1999
By early 1999, oil prices had collapsed to under $12 per barrel, the lowest level in decades. Global demand had weakened in the wake of the Asian financial crisis and OPEC had failed to coordinate effective production cuts. Energy companies were under severe pressure, with profits falling and capital spending sharply reduced. Sentiment in the sector was overwhelmingly negative and many investors assumed that oil demand growth had entered permanent decline.
Contrarian investors viewed the extreme pessimism as unsustainable. They reasoned that supply reductions, improving demand and the cyclical nature of commodities would eventually push prices higher. Those who purchased shares in integrated oil majors or oilfield service firms during the 1998–1999 downturn benefited from a sustained recovery in energy prices during the early 2000s. Crude oil climbed to over $100 per barrel within a decade and energy stocks delivered strong returns.
However, not all energy contrarian trades succeed. Investors who applied the same logic to the 2014–2015 oil downturn – caused by a supply glut and rising US shale production – faced a more prolonged recovery. In that cycle, structural changes in the energy market, including improving efficiency and climate-driven policy shifts, limited the bounce-back. This contrast highlights the need for contrarians to distinguish between cyclical mispricing and long-term industry transformation.
THE JAPANESE EQUITY MARKET POST-BUBBLE
Japan’s equity market offers an example of a contrarian thesis that failed to deliver timely rewards. Following the burst of its asset price bubble in the early 1990s, the Nikkei 225 index declined steadily, falling from over 38,000 in 1989 to under 10,000 by the early 2000s. Many value investors began to see Japanese equities as attractively priced. Corporate balance sheets were strong, valuations were well below global averages and companies held significant cash reserves.
Despite these attributes, Japanese equities underperformed for much of the next two decades. Deflationary pressures, demographic headwinds and a slow-moving policy environment limited growth and investor enthusiasm. While there were intermittent rallies – such as during prime minister Shinzo Abe’s early reforms – the broader contrarian case remained elusive.
This case demonstrates a key lesson: not all undervalued markets recover within an investor’s time horizon. Valuation alone is not sufficient; catalysts, structural reform and policy direction also matter. Investors who took contrarian positions in Japan needed extraordinary patience and often faced the opportunity cost of better-performing markets elsewhere.
GAMESTOP AND THE SHORT SQUEEZE OF 2021
A highly unusual example of contrarian investing intersecting with market psychology occurred in early 2021 with GameStop. The company, a declining video game retailer, had seen its business model undermined by digital downloads and e-commerce competition. Institutional investors had heavily shorted the stock, betting on its continued decline.
Retail investors on social media forums began buying GameStop shares, arguing that the short interest was excessive and that the market had underestimated the company’s potential, especially with new board members and a pivot toward digital strategy. As the stock price rose, short sellers were forced to cover positions, creating a rapid short squeeze that pushed prices far beyond fundamental value.
While some contrarians were able to benefit from this event, the majority of gains came from recognising a technical imbalance in market positioning rather than a traditional value thesis. Those who bought early and exited quickly profited. Others, who entered late or misunderstood the temporary nature of the rally, suffered heavy losses when prices collapsed.
The GameStop episode underscores both the potential and the danger of acting against consensus. It also highlights that not all contrarian trades are grounded in fundamental analysis – some are purely behavioural. Successful contrarian investors distinguish between the two, understanding when market mechanics create short-term opportunity versus when long-term value is present.
INSIGHTS FROM CONTRARIAN CASE STUDIES
These case studies reveal that contrarian investing can lead to significant rewards when sentiment misaligns with reality but it can also expose investors to prolonged underperformance or outright failure if misjudged. The best outcomes occur when contrarian signals are supported by strong fundamentals, patient capital and clear catalysts. Failures, on the other hand, often involve the misreading of structural shifts, poor timing or excessive concentration.
Ultimately, contrarian investing requires more than just a willingness to go against the crowd. It demands careful analysis, rigorous risk management and a long-term mindset. By learning from both successful and unsuccessful cases, investors can better understand how to identify true mispricings and avoid the traps that sometimes masquerade as opportunity.
To learn more about contrarian investing, visit Orbis Investments' Contrarian Investing Playbook.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.