A contrarian strategy may be characterized by a philosophy that factors beyond companies’ stated worth may push stock prices to unjustified levels. The strategy watches for signals that investor sentiment has reached an unreasonable extreme, and buys or sells in response. In short, the strategy generally pursues buying in response to strong bearish signals and selling in response to strong bullish signals.

What factors drive contrarians' belief in this strategy? For one, they cite a herd mentality among investors that can fuel upward or downward momentum beyond justified price levels. For another, they observe that many investors often make poorly timed decisions. Contrarians maintain that many investors jump in too late during an investment cycle-creating disconnects between valuations and fundamentals. In addition, contrarians contend that companies' future growth expectations can be difficult to quantify, leading to mispricing among so-called "growth" stocks. Contrarian investors thus typically eschew markets and investments with high growth expectations.

A contrarian approach can be applied to markets, sectors, or individual securities.

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