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MOSL: THEMATIC | Contrarian Investing-It pays to be different-Identifying contrarian investment strategies that work

​THEMATIC | Contrarian Investing: It pays to be different; Identifying contrarian investment strategies that work

Contrarian investing is a time-tested investment tool, which involves buying/selling stocks that goes against the prevailing sentiment of crowd or the market. It is among the first lessons taught to budding investors and literature on the subject dates back decades. Contrarian Investment Strategies: The Psychological Edge by David Dreman, Extraordinary Popular Delusions and the Madness of Crowd by Charles Mackay, and The Triumph of Contrarian Investing by Ned Devis are only some of the literary works that help understand this subject. The objective of this report is to develop an application toolkit for India. We have covered two major themes based on consensus ratings (stock popularity) and valuation multiples, and have demonstrated the success of contrarian investing in India.

What is stock popularity?

Bloomberg collects analyst recommendations on each stock and assigns a consensus rating based on these recommendations. It assigns 5 points for every buy recommendation, 3 points for every hold recommendation and 1 point for every sell recommendation. A consensus rating is arrived at by taking the average of these scores.

• ​A stock with a consensus rating of 5 would have all buy recommendations.
  
• A stock with a consensus rating of 3 would have an equal number of sell and buy recommendations, apart from hold/neutral recommendations.
  
• A stock with a rating change from <3 to >3 has a recommendation change from a net sell to a net buy.
  
• A stock with a consensus rating of 1 would have all sell recommendations.
  
• Consensus sell rating (%) of a stock = number of sell recommendations / total recommendations.
  
• Consensus buy rating (%) of a stock = number of buy recommendations / total recommendations.