Contrarian Investing Strategy - What Would a Contrarian Investor Do Now?

Analysts are currently predicting a stock market pullback for a number of reasons. The recent earnings disappointments of Alcoa AA and Bank of America BAC have investors bracing for an earnings season that is far below earnings estimates. Furthermore, the recent fiscal tightening taking place in the U.S. and China is causing analysts to rethink their sales forecasts. Volatility is expected to return to the marketplace and bears are expected to awaken from hibernation. It's important to keep in mind that the prevailing market wisdom is normally wrong. Not even the best prognosticators can time the movements of the stock market. While everyone is reacting out of panic to market movements, here are four things a contrarian investor would do. 1. Buy quality companies Earnings season may present a great opportunity for contrarian investors, who can use short-term weakness to buy shares of companies that they have been waiting to own. Investors often discard quality companies along with junk companies because of disappointing short-term earnings. Look at the recent selloff in shares of Google GOOG as an example. Wall Street tends to overreact to short-term news and punish the stock price of a fundamentally solid company. 2. Sell some commodities Lots of financial experts are on the commodities bandwagon right now. In fact, there are calls for $200 oil and $1,600 gold prices, despite the fact that gold, oil, and many commodities have been on a tear over the past year. Everyone is looking for increased prices in both markets over the next year. But contrarians would view oil over $110 as a very risky trade. Oil does have the potential to rise, but the smart money would be on a pullback. Rising gas prices over $4 a gallon would be viewed as unsustainable on a long-term basis. 3. Load up on high yielders Contrarians always want to make sure that they are protected in the event that their investing thesis is wrong. One of the ways that they can be sure that their investment will generate some return during a market dip is by having a good dividend stock investing strategy. A high yielder will have a yield of at least 4% and will get even cheaper as its price declines. These yields will make owning equities a smart move even if the United States's economic growth declines. 4. Buy United States government debt The ultimate contrarian trade right now is to buy any debt that is issued by the United States government. Investors are terrified of investing in bonds because of the threat of inflation. Massive amounts of money are pouring out of Treasury bonds. When Bill Gross is short selling Treasuries, buying them is definitely the contrarian investors play. Short term and intermediate term United States Treasury bond funds will provide a positive return for investors. Final Thoughts Contrarian investors are always in search of growth and income during good economic times and during bad ones. They have the ability to look at the same conditions as everyone else and invest against the grain. Doing this can lead to positive returns at a time when everyone else is watching their portfolios shrink. What else would you invest in now if you were a contrarian? Mark Riddix, founder of New Horizons Financial Management, writes investing and personal finance content on Money Crashers, one of the top personal finance sites. He also contributes a weekly column for Benzinga each Wednesday.