Contrarian investing demands more than a willingness to go against the crowd. While the philosophy centres on identifying and exploiting sentiment-driven mispricings, executing it successfully requires a clear, repeatable process. Without structure, contrarian strategies risk becoming reactive or undisciplined – driven more by instinct than by evidence.
A robust contrarian investment process provides the necessary framework for idea generation, position selection, portfolio integration and ongoing evaluation. It ensures that decisions are grounded in valuation and fundamentals, not in the emotional reactions that often surround sentiment extremes.
IDEA GENERATION: SCANNING FOR DISLOCATIONS
The first step in building a contrarian process is establishing a systematic method for identifying areas of potential mispricing. This begins with monitoring markets for signs of excessive pessimism or euphoria. Sources include sentiment surveys, fund flow data, price momentum indicators, media tone, valuation outliers and investor positioning. These indicators act as signals rather than triggers, highlighting areas that merit further investigation.
Contrarian investors often screen for valuation anomalies, such as stocks trading at historically low price-to-earnings or price-to-book ratios. However, valuation alone is not sufficient. A low multiple may reflect deteriorating fundamentals rather than unjustified negativity. The key is to combine quantitative screens with qualitative assessments – analysing where the disconnect between sentiment and fundamentals appears most pronounced.
The screening process may also involve cross-asset analysis. Opportunities often arise not only in individual stocks but also in sectors, asset classes or regions that have been indiscriminately sold. Contrarian investors ask where the consensus view might be wrong or where the market may have extrapolated recent trends too far into the future.
RESEARCH AND THESIS DEVELOPMENT: SEPARATING SIGNAL FROM NOISE
Once a potential opportunity is identified, the next step is rigorous research. This stage is about building a full investment thesis that includes both a valuation case and a behavioural case. The valuation case seeks to determine the asset’s intrinsic worth under a realistic set of assumptions. The behavioural case explains why the market is mispricing it, typically due to fear, neglect or herd behaviour.
Contrarian investors must ask several questions during this stage. What has driven sentiment to an extreme? Are the perceived risks already reflected in the price? What is the market ignoring, misjudging or overreacting to? Are there identifiable catalysts that could prompt a revaluation?
This research involves both financial analysis such as reviewing earnings, balance sheets and cash flows and broader contextual work, including competitive positioning, regulatory developments or macroeconomic trends.
Importantly, the thesis must include a margin of safety. Because timing is uncertain and sentiment can take time to shift, the investment must offer sufficient upside potential relative to the risks. A well-constructed thesis also outlines what would invalidate the idea, enabling disciplined decision-making if conditions deteriorate.
DECISION-MAKING AND POSITION STRUCTURING
The transition from idea to portfolio position involves a deliberate decision-making process. At this stage, contrarian investors determine how much capital to allocate, how to time entry and how to manage the associated risks. Position sizing should reflect the level of conviction, the quality of the opportunity and the potential downside.
For contrarian investments, phasing into a position can be especially useful. Buying in tranches allows investors to adjust as sentiment evolves or new information emerges. This helps reduce the impact of being early – one of the most common challenges in contrarian investing. The entry point may be imprecise, but a staged approach enables exposure without overcommitting capital too soon.
Position sizing is also a function of portfolio context. A contrarian investment may offer excellent standalone value, but if it introduces significant exposure to a particular sector, currency or macro theme already represented in the portfolio, sizing may need to be adjusted. Integration into the broader strategy ensures that risk is balanced and that the contrarian position complements other holdings rather than amplifying concentrated exposures.
MONITORING AND ONGOING EVALUATION
Contrarian investments require ongoing scrutiny, especially given their tendency to underperform in the early stages. Investors must continually test the validity of their thesis against new developments. Has the fundamental outlook changed? Are the catalysts playing out as expected? Has sentiment begun to shift and is that reflected in price?
This monitoring process is not about reacting to noise but about maintaining objectivity. One of the biggest risks in contrarian investing is holding on to a position too long out of stubbornness. By establishing review points, based on time elapsed, fundamental milestones or valuation thresholds, investors can ensure decisions remain rational and grounded in evidence.
Documentation is a valuable tool here. Maintaining written records of the original thesis, entry rationale and expected catalysts helps reduce the influence of hindsight bias and emotional decision-making. It also supports better decision-making when it comes time to exit. When an asset reverts to fair value or when sentiment normalises and price overshoots, the rationale for the contrarian trade may no longer exist. At that point, reducing or exiting the position is consistent with the original strategy, not a sign of indecision.
INCORPORATING CONTRARIANISM INTO A BROADER STRATEGY
Contrarian investing does not need to exist in isolation. It can be integrated into a broader value-oriented or multi-asset strategy, providing diversification and return asymmetry. The key is to ensure that the contrarian component follows a clearly defined process, distinct from more momentum-driven or macro-based positions.
For institutional investors, this often means allocating a portion of the portfolio to contrarian ideas that are likely to diverge from benchmark movements. For individual investors, it may involve setting aside capital for longer-term positions in areas of the market that have been overlooked or abandoned. In both cases, the process must be structured and deliberate, not opportunistic or speculative.
An effective contrarian investment process includes regular reflection. Reviewing past positions – both successful and unsuccessful – can reveal where biases may have influenced decisions or where the research process may have fallen short. Over time, this builds a deeper understanding of market behaviour and strengthens the investor’s ability to act rationally when sentiment again reaches an extreme.
A DISCIPLINED APPROACH TO UNPOPULAR OPPORTUNITIES
Contrarian investing works because markets are prone to emotional excess. But recognising those excesses and acting on them requires more than intuition – it demands structure. A disciplined investment process allows contrarian investors to identify, assess and manage positions systematically, even when sentiment is at its most irrational.
By combining behavioural insight with financial analysis and by embedding this within a repeatable decision-making framework, contrarians improve their ability to generate differentiated returns while managing the psychological and financial risks that come with challenging consensus.
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.