It’s said that if you follow the herd, you’re bound to fall on something slippery.

This was again proven in April when the much-vaunted “momentum investing” strategies that propelled technology stocks so high in the past two years slipped and caused a much larger market sell-off.

Unlike momentum investing in which you buy stocks that are going up because they’re, well, going up (logical, huh?), contrarian investing means seeking out stocks that are out of favor, or otherwise deploying strategies for investing that are seemingly the opposite of what the vast majority is doing.

Momentum-based investing that propels stocks to ever-loftier values, is also referred to on Wall Street as “The Greater Fool Theory” — I may have bought the stock at a ridiculously high price, but someone else will surely buy it from me at an even higher price.

When’s the best time to invest?

A fine old gentleman of Wall Street, Mr. Jack Phelan, retired partner of a major investment firm, who helped mentor me in my early career, was fond of saying that he had often been asked in his many years of investing, “When is the best time is to invest?” In part, what motivates one to invest is the notion that, “if I can buy low and sell high, then riches will follow me all the days of my life.”

In other words, according to Mr. Phelan, timing plays a key role in making money. The contrarian investment strategy, to borrow from Mr. Phelan, is simply that the best time to invest is when you have the money available. Too simple? Hardly. Any doubters should contact Mr. Phelan’s heirs and ask them what they think!

Buy what’s out-of-favor

The contrarian investing theory suggests that you buy what’s out of favor. The returns may be a little slower than if you bought the latest Wall Street darling, but the results may be longer lasting and the fundamentals more sound.

I look for down-beaten “big name” stocks in industries that are either proven (by stated earnings) or up-and-coming (by revenue growth). You have to do a little homework to make sure the reason the stock is down is not one that an internal correction within the company structure couldn’t correct; that the company’s ‘fate’ is still in its own hands. Working with a professional really helps you to discern that.

When’s the best time to sell?

It’s said that there are no bears or bulls on Wall Street, only pigs and chickens. Greed and fear are the underlying motivations, emotionally at least, for a majority of investment decisions. Accepting this premise, and I do, means that you have to overcome your own instincts in order to have a good chance to not only make money, but, more importantly, to hang on to it!

The day you decide to buy a stock you should have both a lower limit and a higher limit price in mind for when to bail-out of the stock, or you should decide the stock is a “core” investment-holding for the long-haul. The lower-limit price could be 20 percent to 40 percent below where you buy, for example. A target sell-price could be 50 percent to 200 percent above the purchase price. It all depends on your original analysis of the company and its prospects. I believe that all things being then equal, should the company’s share price cross your predetermined targets, up or down, you execute a trade. Never fall in love with your investments.

A perfect example appeared in this paper in the Stock Watch column for which I do stock picks. While past performance is no guarantee of future results, one of my picks, Triquint Semiconductor (Nasdaq:TQNT), went from $12 to $65 in a 12 month period of time. This set-off a predetermined upper trigger and a majority of holders elected to take a profit. The stock continued up to $130. Now answer this question: If that had happened to you, would it have made you a bull, bear, chicken or pig?

(Editor’s Note: Ed Stern is the Managing Director of Investments with the Poulsbo office of U.S. Bancorp/Piper Jaffray. He was also the winner of last year’s Stock Watch competition — with an average increase in excess of 200 percent on his picks. He may be reached at (360) 779-6548 or estern@45201.pjc.com.)

The information provided, while not guaranteed to its accuracy or completeness, has been obtained from sources believed to be reliable. Opinions expressed here are those of the writer at the time of writing and are subject to change without notice and may or may not be updated and may not necessarily reflect the opinions of U.S. Bancorp Piper Jaffray or its affiliates. This information should not be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. This piece is for informational purposes only and is not an offer to buy or sell any investment product or service. U.S. Bancorp Piper Jaffray, nor its affiliates assisted in the preparation of this material and makes no guarantee to its accuracy or reliability of the sources used for its preparation. Please contact Ed Stern for further information regarding the opinions expressed.

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