Contrarian investing is the art of making profits in the stock market by going against the flow. It is similar to what George did in an episode of Seinfeld, do the opposite. If everyone is saying sell, then you buy. Humphrey Neil in The Art of Contrarian Thinking said “When everyone thinks alike, everyone is likely to be wrong.”

Contrarians do not necessarily have a bull or a bear market viewpoint. They are merely attempting to take a different viewpoint from the majority. They seek to buy shares or sell them when the majority of investors appear to be doing the opposite. Some noted contrarians are Warren Buffet who believes that the best time to invest in a stock is when shortsightedness of the market has beaten down the price. There is a mutual fund dedicated to contrarian investing and is called Dogs of the Dow.

A contrarian strategy is to buy sell rated stocks. Then you hold them until their stock price improves and then sell. Sell rated stocks are stocks that have been downgraded by analysts. However, they are usually behind the trend of the market so the market has already beat up the stock price before the downgrade recommendation. Look for consensus opinions on the stock before including it in your list.

Look for short sellers. Short interest is the number of shares that have been borrowed by short-sellers because they expect the price of the stock to go down. The short-interest ratio is a good barometer to use in this analysis. Usually in-favor stocks have a rating of 5 or below so you should look for ratios of 6 or above.

You should definitely stay away from so called penny stocks. There is simply too much risk and volatility with this group of stocks. Look for stocks that have a price of $10.00 or above. If your list does not come up with enough stocks, you can go down to $5.00 but not below that.

Look for large institutional interest. The institutional investors have the manpower and ability to analyze stocks better than you or I. Look for institutional ownership of above 65%. This can be adjusted a little but do not go below 50% ownership. Let the institutional investors drive the price up for you.

MSN’s stockscouter is a good tool to use to evaluate your list of stocks. This tool analyzes a range of fundamental and technical factors and rates the stock. Look for stocks with an 8 or above rating.

The above tactics will develop a working list for you. You can then look the list over and determine if there is some reason for the stock to have gotten beat up that you want to stay away from. Eliminate these stocks from your list. Then do some more homework on your list using other analysis. You can even play your hutches out over some time and determine if this trading system will work for you. Then go for it and buy those shares that everyone else is dumping.

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