Don't Buy The Dip

The Dangers of Contrarian Investing

We’ve all seen them—especially in the past few weeks. The finfluencers and Substackers, all chanting the same familiar mantra:

The time to buy is when there’s blood in the streets...

Yep, guilty as charged.

Because yes, markets tend to self-correct over the long run. And yes, historically, buying the dip has often been a great move. That, in a nutshell, is what contrarian investing is all about.

Contrarian investing is the art of going against the grain. Where the crowd buys into euphoria and sells into fear, the contrarian does the exact opposite: buying when everyone’s panicking, and selling when champagne corks are popping. The logic? Markets tend to overreact. And it’s in those overreactions that opportunity hides—if you’ve got the guts to take it.

If you scroll through the Notes tab here on Substack, you’ll notice something pretty quickly: contrarian investing is having a moment. It’s being treated like gospel—like it’s the ultimate hack for smart investors. And to be fair, there’s a lot to like about it.

But here’s the thing: even this strategy has its blind spots. And those blind spots? They’re not talked about nearly enough.

That’s why today, we’re doing something a little different. We’re going contrarian... on contrarian investing. Because what’s more fun than poking holes in one of the most beloved dogmas in finance?

Will it hold up under pressure? Let’s find out.

Not All Dips Are Deals

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Contrarian investing is all about going against the grain—buying when others are selling, and leaning into panic when most are running for the exit. But not all contrarian strategies are created equal. And while the appeal is obvious (be bold, beat the herd), the actual execution? Way more nuanced than most people admit.

“Buy low, sell high.” Easier said than done. Getting in at a low point is critical for strong returns—but let’s be honest, almost no one can pinpoint the exact bottom of a drawn-out market downturn. Get in too early, and you risk catching a falling knife while the market keeps sliding.

There’s a well-known saying:

“The market can stay irrational longer than you can stay solvent.”

In other words, the herd might be wrong in the long run—but they can still win in the short term. As long as optimism dominates, prices can keep climbing. A contrarian who sells too early—or worse, shorts—can miss out on continued gains while the bull market charges on. On the flip side, a stock might be truly undervalued, but stay that way for a painfully long time if market sentiment remains in the gutter.

To properly break down contrarian investing, I’ll walk you through four different strategic approaches—each with their own strengths, risks, and misconceptions.

Let’s break it down.

Be Contrarian Without Being Clueless

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The simplest—and riskiest—form is what’s often referred to as knee-jerk contrarianism. This is where you buy a stock just because it’s down. The logic is seductive: prices have dropped, so upside must follow. But here's the catch—sometimes prices fall for a reason. Structural problems, broken business models, or permanent shifts in demand can all create value traps. And if you're buying just because something is cheap, without any further filters? You're basically gambling that the market’s wrong, without a shred of evidence to back it up.

A step up from that is technical contrarianism. Here, you're not just reacting to falling prices—you’re waiting for some kind of signal that the tide may be turning. Think volatility indexes like the VIX, or sentiment indicators that suggest extreme fear. This adds a layer of discipline, but it’s still imperfect. Signals are messy. What looks like a reversal to one investor may seem like noise to another. If you know your way around technical analysis, it can be a useful tool—but it won’t save you from buying bad businesses in bad industries.

Then there’s constrained contrarianism. This is where things get smarter. You start with a universe of beaten-down stocks, but then filter them through a set of fundamental quality screens—profitability, balance sheet strength, you name it. The goal? Separate the truly undervalued from the deservedly cheap. It’s a way to avoid the classic value trap: buying something that looks like a bargain, only to watch it get cheaper… and cheaper… and cheaper.

And finally, we arrive at opportunistic contrarianism—the gold standard, but also the hardest to pull off. In this approach, you maintain a watchlist of high-quality businesses you already want to own. And then? You wait. You wait for the market to lose its mind—panic, crash, correction—and finally hand you those same businesses at a discount. This method is about discipline, timing, and deep fundamental conviction. You’re buying greatness on sale, but only when the sale is real — and it’s crucial to reassess the businesses themselves after an external shock, to ensure their fundamentals remain intact.

Why is this approach so powerful? Because it creates true asymmetry. You’re not just betting on a bounce—you’re buying quality that’s temporarily mispriced. But here’s the kicker: it’s rare. These moments don’t come along every month. Most of the time not even every year. And that brings us to one of the biggest dangers in contrarian investing.

It’s not the market.

It’s you.

The Ultimate Contrarian

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Contrarian investing is brutally hard.

It’s not just buying when markets drop. It’s a constant, disciplined search for quality companies. It’s knowing how to value them properly. It’s being able to judge whether the panic—whether it’s tariffs, COVID, or the next Black Swan—actually affects those businesses, and if so, how severely. It’s layers upon layers of thinking, and even more layers of patience.

That’s why I want to wrap up this section by laying out what kind of mindset—and traits—you actually need to pull this off. Because being a real contrarian isn’t just about doing the opposite of what the crowd does. It’s about thinking better, deeper, and longer.

Here is what it takes:

Discipline and resilience
True contrarians need unwavering discipline. When the market—and often everyone around you—is telling you you're wrong, it takes serious mental strength to stay the course. If you can’t handle pressure, doubt, or the loneliness of going against the crowd, this strategy will chew you up.

Patience (and then some)
Contrarian investing doesn’t pay off instantly. You often need to wait months—or even years—before the market catches up to your thesis. If you’re expecting instant validation, you’re in the wrong game. The biggest rewards come to those who wait.

Spotting herd behavior
Markets aren’t solely rational; they’re also emotional. People chase hype and flee fear. That’s herd behavior, and it creates bubbles and crashes. The contrarian investor watches for extremes—when everyone is euphoric, or when doom is the only narrative left. Think record fund inflows, non-stop bullish headlines, or mass panic sell-offs. Those are your signals. Not to follow, but to question.

Seeing through cognitive biases
It’s not just about spotting the crowd’s blind spots—you’ve got to check your own. Confirmation bias, overconfidence, recency bias—these mental traps distort your thinking and make you believe you’re right, even when you’re not. A successful contrarian knows these biases are always lurking, and builds systems to guard against them. You’re not just betting against the crowd—you’re trying to exploit their mistakes, without falling into your own.

Mastery of valuation and fundamentals
At the end of the day, this isn’t just a mindset—it’s an analytical game. You need to be able to value companies properly and understand when prices have deviated too far from fundamentals. That means diving deep into balance sheets, cash flows, business models, and long-term outlooks. Cheap isn’t always undervalued, and pain isn’t always temporary. If you can’t separate a value stock from a value trap, you’re not contrarian—you’re just guessing.

Contrarian investing demands more than bravery—it demands clarity, discipline, and relentless curiosity. Otherwise, you’re just another voice yelling “buy the dip” into the void.

Closing Remarks

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Being a contrarian isn’t about being loud or edgy. It’s about being precise. It means thinking independently without falling into the trap of reacting reflexively. It means questioning not just the market, but yourself. When done right, contrarian investing can create some of the best risk-adjusted returns out there. But when done wrong, it turns boldness into blind spots. So be careful. Be curious. And if you’re going to go against the crowd, make sure you’ve done the work first.

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📢 What’s your take on contrarian investing? Have you tried it—or been burned by it? Drop a comment below and let’s open up the floor.

🔔 Part II of our Amazon Deep Dive drops this Sunday. If you enjoyed this one, hit that subscribe button so you don’t miss what’s next.

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📚 Quick shoutout to Professor Aswath Damodaran, who recently dropped a brilliant piece on the dangers of contrarian thinking. A lot of what you have read here was inspired by his take.

Here’s the link to the video:

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