One of the greatest business lessons I have ever learned came from Lee Wooddall, one of my partners and mentors. The lesson he taught me was this: "Opportunity is created when emotional pricing breaks fundamental value.”
This is why contrarian investors like Warren Buffett and local entrepreneurs like Lee Wooddall and Brad Smith always seems to have the Midas touch. The contrarian investor typically watches during a bull market as prices appreciate. As soon as market emotions drive pricing to exceed the fundamental value of the asset, this is the trigger to sell into the wave. On the flip side, they watch during a bear market as market emotions drive prices downward. As soon as prices drop below the fundamental value, this triggers the time to start buying.
Although it may sound easy, contrarian investing and strategies require a tremendous amount of discipline, patience and risk. The difficult part is either having to wait and watch as others make money hand over fist during the price rally or having to hold your nose and buy into a deflationary environment as others are running for the hills. Another challenge with being a contrarian is you don't have the comfort of everyone telling you how smart you are because many don't understand what you are doing. Only years after will history smile on you. Here are a few indicators that you have a contrarian investing strategy:
1. You tell someone about your business strategy and they look at you like you have a booger in your nose.
2. Your contrarian approach is driven by a deeper understanding of price relative to fundamental value.
3. If you are in an operating business, is your strategy different enough to be creating your own road-less-traveled? Although that road is commonly misunderstood and includes more risk, your margins are usually much better when it works.
Next time you are at a cocktail party and tell someone what you do, think about what their reaction is telling you.