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Investing Specialists

Ideas for Contrarians

Morningstar.com readers share their contrarian strategies and discuss what they're buying today.

Mentioned:

We're a pretty contrary bunch at Morningstar. Like Warren Buffett, we advocate that investors "be fearful when others are greedy and greedy when others are fearful." As a result, we recently said the pessimism surrounding bank stocks was overdone. And our list of 5-star stocks is often stuffed with unpopular stocks that you wouldn't see on trend- and earnings-driven recommended lists.

Our against-the-grain mindset applies to funds, too. Recently, Morningstar FundInvestor editor Russ Kinnel published his annual Buy the Unloved report. The recipe is simple: Buy the three most redeemed fund categories in a calendar year and sell the three most heavily purchased categories, then hold for three or five years. Although we don't recommend that investors swap out their portfolios each year to align with the study, we think that using this strategy as a source of new ideas can provide some kick at the margins of a portfolio.

Given these proclivities, we asked Morningstar.com users if they practice a contrarian strategy with a portion of their portfolios--and if so, what they are buying and selling today. Not surprisingly, many readers pegged themselves as contrarian--but their approaches varied.

To read the complete thread and join the conversation, please click here.

The Traditionalists
Although there are various shades of contrarianism, many readers pursue what could be called "traditional" contrarian strategies.

Several maintain watchlists which allow them to snap up qualified stocks when they fall out of favor. Dr9bdy's watchlist, for instance, includes 30-40 names. "If quality names fall with the general market, without reasons specific to them--that is my number-one reason to buy. My number-two reason is if the market is more bearish on the stock than I think is warranted." Rgreger keeps a tighter watchlist--typically 15 stocks: "set up a couple of screens on my Morningstar portfolios and watch for the stocks that fall down to or below the 'consider buying' price, have moats, and offer some real value. When they get to that level, then look them over and see if the companies are solid--facing temporary headwinds or what's going on."

Unloved but high-quality stocks are a target for scotsailor, too: "I like to pick up high-quality stocks when their sectors are under considerable stress. Right now, an example would be Exxon (XOM). It's a 'survivor' stock that can weather the storm in energy."

"A good contrarian strategy is to follow the dividend," says hdw4567. This reader looks for solid dividend stocks that have gone down in price but have a history of 5% to 7% dividend growth over time and prospects of continued dividend growth.

Other readers' contrarian approaches begin at the sector level. "I start by looking at entire segments of the market that are dropping the most," says meddguy. "Then I look for individual companies that I feel are the best of those groups and perhaps have been unfairly punished with the rest of that particular industry. The first part of the strategy is easy, the second part, not so much." Today, meddguy is looking at financials and industrials. 

"Been buying biotech every down session for weeks--and that's a lot of buying," says jadster35. "When fundamentals are out the window, fear takes over. Then it's time to buy, and buy hard."

Farhorizons takes a sector-based approach, in moderation: "Right now, I invest 1%-2% of my portfolio in each of the truly battered market segment: gold-mining stocks, oil, and coal mining. The other 95% is locked away in low-cost, globally diversified ETFs."

More-Permanent Portfolio Stances
Unlike the "traditionalists" who snap up unpopular yet fundamentally sound investments when opportunity presents itself, other readers take longer-lasting against-the-grain stances.

"My permanent contrarian investment strategy is a CD ladder," says Therman. Consuming a third of Therman's portfolio, it "allows me, a retiree, to sleep at night and to feel more comfortable about taking risk elsewhere in my portfolio with equity mutual funds or an occasional sector bet."

Similarly, mwleach maintains a 10% stake in gold and a 10% position in highly rate-sensitive zero-coupon Treasuries, with the balance of assets in stocks. "The whole idea behind this was the theory that I could be more heavily invested in equities ... than might normally be considered prudent. I felt overweighting stocks would do well for the long run and that I could only get hurt during periods of really bad economic times. Such times, however, would be either inflationary (in which case the gold/gold stocks would do very well) or deflationary (in which case the value of long-term zeros would soar). This would give me, overall, a portfolio of quite volatile, but generally uncorrelated investment assets."

Unorthodox Approaches to Portfolio Management and Rebalancing
And finally, a few readers shared their ideas for flouting conventional wisdom when it comes to ongoing portfolio management. For them, rebalancing isn't a standard once-a-year activity in December or January where you restore you original asset mix.

"My contrarian strategy is to take things slowly," says Chief K. "I make most of my decisions about any changes to my buying strategy (or any decision about selling) in March after doing my taxes. Then I mark a date a few weeks later on my calendar to execute the decision. That gives me time to 'chew over' my reasoning for making any changes."

Kirbay isn't a dyed-in-the-wool contrarian but offered this unconventional suggestion: "Don't be so quick to rebalance your portfolio; let your winners run. ... Maybe look to rebalance every two years. But how often does Warren Buffett rebalance his portfolio?"

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.