There are no assurances when it comes to investing. That is certainly true for contrarian investing.
That investment style occurs when an investor intentionally goes against the crowd. For instance, an investor may buy stocks when most others sell and then will sell as others buy. Contrarian investing is largely about hunting for stocks that may have been oversold, or gambling against stocks that are overrated with steep valuations.
Black Americans examining investment options might want to consider contrarian investing related to stocks. But they must be sure to do some research before making such investments.
The Finder.com’s guide on contrarian investing reports how betting against the herd can bring strong returns but also can be risky. A financial comparison site, Finder.com, claims it helps people make the best decisions tied to handling money. Credit cards and various loans are among the financial products it examines.
BLACK ENTERPRISE connected via email with Sheri Bechtel, Finder’s share trading and investments editor, to share why contrarian investing maybe be a good investment choice for Black investors now.
“Contrarian investing is, in general, a smart investment strategy, because you avoid this mob mentality that pushes a stock’s value way up. Specifically for Black American investors, this strategy is a way to grow that generational wealth that helps bolster Black communities.”
That said, Bechtel added it is a tough time for the strategy right now. During the COVID-19 pandemic, a lot of contrarians were going into airlines or cruise stocks, but those stocks have already rebounded, so the entry point has already passed for them. She says the idea is you want to get in when certain stocks are performing poorly.
“One of our contrarian picks, Suncor Energy as an example since it’s one of our picks for a contrarian strategy. That stock has seen a 35.97% return over the past year, whereas the S&P 500 has seen a 35.69% one-year gain. That’s pretty comparable.”
She offered tips on what Black investors should consider before making contrarian investments.
“Nothing is ever a sure thing, so even though you suspect a particular stock or sector is going to see gains, that won’t necessarily happen. While there may not be certain risks specifically associated with race there are other factors to consider,” Bechtel said.
She pointed out the Ariel-Schwab Black Investor Survey noted a growing number of young Black Americans under the age of 40 participating in the stock market. While this movement is positive and helps to narrow the gap between young Black and white investors there is still work that needs to be done to ensure the same resources and engagement.
She says a good example of contrarian investing done right is when investors jumped into crashing travel sector stocks during the pandemic. Most investors avoided that sector because no one was traveling and those stocks were nosediving. “But getting in low paid off well once the travel sector rebounded earlier this year.”
Like other investments, Black investors should do their homework before taking on contrarian investing.
“Research is essential. You’ll want to find sectors or stocks most investors are ignoring or avoiding because they’re performing poorly. Keep an eye on news that could impact these stocks down the road,” Bechtel says. “Choose wisely, and you could see a relatively small initial investment grow once that sector or that particular stock rebounds.”
She says the downside is that sometimes following the herd is the better strategy. “Sometimes they’re right. And if you’re wrong, you could lose some or all of your investment, so it’s important to do your research and make sure you have the risk appetite to potentially lose some money.”