Contrarian investing focuses on exploiting the market’s crowd-following behaviour. Simply put, contrarian investors will do the opposite of what the market is doing, buying and selling in contrast to the prevailing market sentiment at that point in time.
For example, if the market’s sentiment towards the utilities sector turns negative for whatever reason, shares will be sold and the price of utility stocks will be pushed down. A contrarian investor will be a bit more circumspect about these price moves and will try to understand whether that price action is justified by fundamentals or not. If it isn’t justified by fundamentals, the contrarian investor will be inclined to go against the market sentiment and buy utilities in an attempt to exploit the market’s behaviour.
Contrarian investors are sometimes also pigeon-holed as value investors but this is not necessarily true. Any investor that is willing to question the market’s movements from a fundamental perspective and has the strength to back his or her convictions against the herd, is a contrarian investor.