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Learning how to put aside the current and popular views and form an independent opinion is an important part of being a successful investor.

The new year is only a few weeks old, and already, 2015 is proving to be very interesting. We've seen a good deal of volatility in short order, with the prospect of more to come.

Investors need to be skeptical whenever the market goes through one of its wild mood swings. Yes, caution is a good thing. But so too is developing a contrarian mindset.

I've noted before that contrarian thinking is a core feature of the high-net-worth mind. Most successful HNW investors I've met are contrarians: When they put money to work, they usually invest in unloved or beaten-down stocks, bonds, real estate or entire businesses.

I think every investor needs to develop a similar attitude. Learning how to put aside the current and popular views and form an independent opinion is an important part of being a successful investor – and I believe it will be even more important in 2015.

Here are some of the contrarian principles that I have learned over the years.

Embrace the discomfort

The contrarian approach is based on being out-of-step with the consensus. Many times, the contrarian can feel "all alone" when it comes to investment decisions.

That's why the first and most important step to being a contrarians is to be comfortable with being uncomfortable, and to control that basic human impulse to seek the security that comes with going along with the crowd.

Be wary of extrapolation

One of the key problems with the crowd is its tendency to extrapolate. Because an investment idea is working today, many assume it will continue to work in the future. Likewise, because an investment theme or strategy has excellent back-tested performance, investors assume it must be equally attractive today. Contrarians are wary about this kind of thinking.

Focus on getting it mostly right

This is an important point: Contrarians don't worry about capturing every last dollar out of a buy or sell decision. Instead, they focus on capturing 90 per cent of the opportunity (or avoiding 90 per cent of the pain), and leave it at that.

Look for asymmetric opportunities

Successful contrarians are on the lookout for what I call "asymmetric" opportunities: that is, cheap, out-of-favour investments in which the potential upside far outweighs the potential downside, usually by at least three to five times.

For example, a 1:1 opportunity in which an investment could go down 20 per cent or up 20 per cent is of little interest to contrarians. On the other hand, a 3:1 opportunity in which an investment could go down 10 per cent or up by 30 per cent will get their attention. In both cases, the difference between the worst case and the best case is the same, but the level of risk is vastly different.

Right now, I would suggest the Canadian energy sector is an example of this kind of asymmetric opportunity. Yes, it's possible the share prices of energy stocks could go down further. But by now, most of the bad news is already priced in.

When the sector returns to favour (as we believe it will in the intermediate to long term) valuations should rise sharply, and likely to a far greater degree than any drop they may take from here.

Another example is emerging markets, an asset class that has underperformed the S&P 500 by 95 per cent over the past 3 1/2 years. Over the past 13 weeks, investors have withdrawn over $3.2-billion from emerging markets ETFs. This is the making of a classic contrarian opportunity: the point at which the consensus has extrapolated underperformance lasting forever. Could 2015 be another year of disappointment for emerging markets? It's possible. But after three years of poor performance in a row, the downside seems limited.

Thane Stenner is founder of StennerZohny Investment Partners+ within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada. He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors). (www.stennerinzohny.com) The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.

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