Contra fund has its genesis in the popular saying, “when others zig you zag”.
It basically takes contrasting positions and consciously does not flow with the tide at all times.
Let me explain you through a story.
There was a boy Jay travelling with his family.
They met with an accident in which he lost all his family members. He became orphaned. His relatives turned away from him.
- Ram a friend of Jay’s father who knew the family was very fond of Jay.
- He liked him because he was cultured, well mannered, very studious and always a topper in his class.
- He knew Jay had the talent to become a very successful person.
- He therefore without any hesitation took Jay under his shelter.
- He nurtured and educated him sparing no effort.
- As expected, Jay grew up into a very smart, intelligent and successful person.
When Ram started aging and becoming weak it was Jay who stood by him as his shield. He ensured that Ram had all the comforts that he needed.
From a Contra perspective one can say that the bet Ram took on Jay was a contra bet. He backed him at a time when others were avoiding him. He did it because he had a clearer understanding of the intrinsic qualities of the boy. He always knew it would be worth his while to help Jay in the long term.
Similarly, a Contra fund manager looks for bad news and searches for opportunities within the bad news. He identifies companies being shunned by investors due to overall mood and picks them into his Contra basket.
And as we saw in the case of Jay, such companies also may take some time to bounce back. Therefore, as an investor one needs to have patience when investing in a contra theme.
The tale of Jay pictorially is Helpless Jay after the accident & Successful Jay once grown up.
A contra Mutual Fund invests against the existing market trends and purchases stocks which are not performing well currently.
This was the story of Contra investment. Remember it takes patience for the investment to play out.