The courage to be contrarian

When markets nosedive, a familiar piece of advice echoes through trading desks and investment WhatsApp groups alike – ’Buy the dip’. But what does that really mean? More importantly, who should be buying the dip? New York University Professor Aswath Damodaran tried to answer these questions in his most recent blog post on contrarian investing – a philosophy rooted in going against the crowd. Damodaran outlines four distinct strands of contrarianism and explains each of their mechanisms and involved risks. He also reveals the approach he likes the best and highlights why being a contrarian is really about one’s psychological makeup, beyond just investing frameworks. Knee-jerk contrarianism: A facile strategy The most impulsive form of contrarianism is also the most widely practiced: Knee-jerk contrarianism. Here, you buy whatever has dropped on the assumption that they will bounce back. It’s a strategy built on faith in mean reversion—the idea that what falls must eventually rise. Historical data on equities, especially in the US, appears to support this. As Damodaran notes, “stocks deliver the highest returns of all asset classes,” particularly when purchased after a fall. A 1985 study by DeBondt and Thaler found that so-called ‘loser’ portfolios – stocks that had dropped most in the previous three years – outperformed ‘winners’ in the years that followed. But there’s a catch. Later research by Jegadeesh and Titman showed that winner stocks actually continued to outperform losers in

This article was originally published on June 01, 2025.