By Mr. Propwise
While the term Contrarian Investor is typically used for someone who invests against the crowd in the stock market, it is also applicable for property investing. In this post we’ll look at how Contrarian Property Investors think, why it makes sense to be one, and how to think like one.
What is a Contrarian Investor?
Wikipedia defines a Contrarian Investor as “one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.”
In other words, it’s a way of thinking. This sort of thinking can be applied across any investible asset class. In stocks, a Contrarian Investor will buy shares when excessive pessimism about a company’s prospects drives its stock price to unjustifiable lows, and sell when widespread optimism drives its stock price to unjustifiable highs.
Similarly, a Contrarian Property Investor will buy property when prices have been driven down due to widespread pessimism about the economy and the market, and sell when there’s over-bullishness on the property market despite a large run up.
The essence of being a Contrarian Investor is captured in this famous Warren Buffett quote:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Why be a Contrarian Investor?
Simply put, Contrarian Investing is the most reliable way over the long run to minimize the risks and maximize the profits of investing.
Making money in investing is simple – Buy Low and Sell High. Yes, we’ve heard that a thousand times. But yet the majority of investors do the opposite, driven by greed during Bull Markets to buy after prices have run up (and in their mind extrapolating this increase into the infinite future), and then by fear during Bear Markets to dump the asset they had paid dearly for because everyone else is doing so.
The skilled Contrarian Investor profits by placing himself on the other end of this trade, and makes money not by following the crowd but by being ahead of it.
The Pain of Being on the Wrong Side of the Cycle
There are painful consequences to being on the wrong side of the cycle (i.e. buying at the peak and then being forced to sell at the trough). While this is bad when investing in any asset class, it is especially traumatic in property investing because of two factors:
- The use of leverage
- The high total price of a property
Because of these two factors, a 10% fall in property prices could mean wiping out 50% of your equity due to the leverage, and years of savings due to the large dollar quantum.
It’s not uncommon for ten years’ worth of savings to be wiped out by a bad property decision. There are many people who bought Singapore property at the peak in 1996 just before the Asian Financial Crisis and have only just broken even after 15+ years. If we factor in inflation, interest costs and the value of lost opportunities, they’ve had a negative return after all these years despite the massive Bull Market in property these last few years!
How to become a Contrarian Investor
You should know that it’s not easy being a Contrarian Investor. It is far too easy to be swept up by sentiment, whether euphoria or despair. Sentiment is contagious, and you can’t escape it – you will get infected when you read the papers, watch the news, or chat over lunch with your colleagues.
Being a Contrarian Investor requires a huge amount of courage. You need to believe that you’re right and everyone else is wrong. You need to believe that you’re the (investment) genius when everyone thinks you’re crazy.
The question is – how do you know you’re not crazy?
Get on the Right Side of the Cycle
I believe the answer lies in using facts and data to guide your decisions, not hearsay, rumours, opinions or gossip.
But it’s not easy to wade through the enormous amount of data out there to come up with your own investing system. A simple way to do so is to use the Property Market Cycle Model (PMCM) created by Property Market Insights (PMI) to help you time your property investing and get the BIG picture right.
Instead of being swept up by sentiment and doing the wrong thing at the wrong time, understanding the property cycle will help you get on the right side of the wave, potentially adding hundreds of thousands of dollars (or more) to your net worth over a cycle, and saving you from disastrous mistakes.
Property Market Timing in Action
The PMCM is not some BS theory that sounds good on paper but leaves you scratching your head as to what to do next. It tells you where we are in the current cycle and guides your decisions by providing a historical context of what happened during similar parts of the cycle in the past.
And I eat my own cooking. When the PMCM indicated that we were in the Late Bull stage of the property cycle in late 2011, I put my property on the market. I was asking for a fairly high (but not unreasonable) price, but due to the weak resale market (all these insights and more are provided to PMI subscribers), it took almost a year for the property to be sold. Now I’ve locked in my profit, and am eagerly anticipating the Bear Market.
How will I know when to buy again? The PMCM will be my guide.
While Contrarian Investing is not easy, and requires courage and conviction, armed with the right insights and analysis you can maximize your investment returns over the long run through multiple property cycles.
By Mr. Propwise, founder of top Singapore property blog Propwise.sg, a Chartered Financial Analyst and resident real estate analyst at PropertyMarketInsights.com, a site to help property owners and investors make profitable decisions in uncertain times. Click here to learn more