Contrarian value: buy the cheap and hated

Think of an umbrella. In the monsoon, when the rain is pouring and everyone is getting wet, umbrellas are in huge demand. The shopkeeper knows this, so he raises the price. A simple umbrella that normally costs ₹200 might sell for ₹400. Everybody wants one right now, so they pay.

Now think of the same umbrella in the middle of a hot, dry summer. Nobody is thinking about rain. The shop has a big pile of umbrellas and no buyers. So the shopkeeper drops the price to ₹100, just to clear his shelf. Same umbrella. Same usefulness. But the price is now low, only because nobody wants it today.

Sankaran Naren, a well-known Indian fund manager, built his whole way of investing around this simple idea. A fund manager is a person whose job is to invest other people's money carefully. Naren is famous for being a contrarian - a person who does the opposite of the crowd. He likes to buy the umbrella in summer, when it is cheap and unwanted, and sell it in the monsoon, when it is dear and everyone is grabbing for it. This study is about that uncomfortable, against-the-crowd habit - and why the best bargains almost always sit inside the things people are throwing away.

First, two small words. Value means what a thing is really worth if you look at it calmly - how useful it is, how much it can earn over many years. Price is only the number written on the tag today, which jumps up and down with people's moods. A contrarian looks for moments when the price has fallen far below the value - when a good thing is being sold cheap only because the crowd has turned against it.

Here is the hard truth. When a share is cheap, it does not feel like a happy bargain. It feels bad. The news about it is gloomy. Friends are selling it and warning you to stay away. The price has been falling for months. Everything inside you says "run." That feeling of fear is exactly why the price is low - because so many people felt the same fear and sold. The contrarian trains himself to walk towards that gloom instead of away from it, because that is where cheap things hide.

And the opposite is true too. When a share is loved, it feels wonderful. Everyone is talking about it. The price has been going up and up. Your neighbour has made money on it and is smiling. That good feeling is why the price is high - because so many happy people rushed in to buy. The contrarian gets careful exactly when everyone else feels safe, because a loved thing is usually a dear thing, and a dear thing has little bargain left in it.

So the reading skill is simple to say and very hard to do: look at what the crowd is running away from, and ask if the thing itself is still good. If a fine business is being sold cheap only because people are scared or bored of it, that is a contrarian's chance. If a weak business is being bought dear only because people are excited, that is a contrarian's warning.

illustrative Imagine a made-up company, Sturdy Cement. It makes cement - a boring, useful thing that builders always need. In a calm year its share is worth about ₹300 if you look at it carefully.

Now a bad year comes. Building slows down for a while, a monsoon floods some roads, and the newspapers write gloomy stories: "Cement companies in deep trouble." Scared people sell. The price of Sturdy Cement falls all the way to ₹180. Nothing about the factory has changed - the kilns still work, builders will still need cement next year - but the mood has turned dark. At ₹180 the crowd hates it. This is exactly when a contrarian like Naren gets interested: a ₹300 thing on sale for ₹180.

Two years later the building work comes back. Cement is in demand again. Now the newspapers cheer: "Cement is the hot sector!" Everyone rushes to buy Sturdy Cement, and the price climbs to ₹420 - above its calm value of ₹300, because now the crowd loves it too much. This is when the contrarian quietly sells the thing he bought in the gloom. He bought at ₹180 when it was hated and sold near ₹420 when it was loved. He did not predict the exact months. He only bought cheap-and-hated, and sold dear-and-loved - and let the crowd's swinging mood do the rest.

Cheap can get cheaper, and stay cheap for a long time. Just because a price has fallen does not mean it must bounce back soon. A contrarian buy can look wrong for months, even years, before it works - if it works at all. You need great patience, and the willingness to feel foolish while friends laugh at you.

Sometimes the crowd is right. Not every hated thing is a hidden bargain. Sometimes a company is being sold cheap because it is genuinely dying - the factory is old, the product is no longer wanted, the debts are too big. Buying that is not brave, it is a mistake. Cheapness alone is never enough; the thing being sold cheap must still be a good thing underneath. Telling a true bargain apart from a true trap is the hardest part, and nobody gets it right every time.

Being contrarian just to be different is silly. The point is not to disagree with everyone for the fun of it. Sometimes the crowd is buying a good thing at a fair price, and there is no cleverness in fighting that. A real contrarian goes against the crowd only when the price has clearly parted from the value - not simply to look bold.

In India you can see this everywhere, and you do not need a share market to practise the eye. Watch the vegetable mandi: when tomatoes flood in after a good harvest, the price crashes and traders grumble, yet the tomato is as good as ever. Watch how woollen sweaters go cheap in April and dear in December. The umbrella, the sweater, the tomato - all teach the same lesson your grandmother already knows: buy the useful thing when nobody wants it, not when everyone is fighting for it.

But carry one warning with you. A cheap sweater in April is still a good sweater. A cheap share is only worth buying if the business behind it is still good. So a young reader in India can safely learn the feeling of this idea from the mandi and the monsoon - walk towards the gloom, be careful in the cheer - while remembering that judging whether the business itself is sound takes years of careful study, and even then, no one is right every time.

• Notice your own feeling first. If buying something feels safe and happy because everyone is doing it, the price is probably high. If it feels scary and lonely, the price may be low.
• Separate the mood from the thing. Ask, "has the business actually got worse, or have people just got frightened and bored of it?"
• Look where the crowd is running away. The best bargains hide inside gloomy news and falling prices, not inside cheering headlines.
• Check that the thing is still good. Cheap is only a bargain if the business underneath is sound - cheap-and-dying is a trap, not a gift.
• Be ready to wait and look foolish. A contrarian buy can stay wrong for a long time before it turns right, so buy only what you can hold patiently.
• Sell into the cheer. When a thing you bought cheap becomes loved and dear, that admiration is your signal to let it go.