When things take a turn for the worst, it is important not to become too emotionally attached to our losers. We need to bear in mind that some things may have happened since we purchased the shares to make us reconsider our position or perhaps we may have simply performed some poor analysis. As share prices fall our process requires us to revisit the stocks and determine whether we still have conviction in our original view. At this point we have the opportunity to buy some more, sell some or just hold onto what we’ve got.

In the same way that we must avoid emotional attachment, we must also be wary of letting the heat of the moment affect our thinking. Being a contrarian is easy if you can time your entry point to perfection. However, it is rarely that straightforward – indeed it is usually the case that a reasonable amount of pain needs to be felt before a purchase comes right. Clearly, unless you are truly masochistic, this pain is no fun but it does ensure that many investors do not become lifetime contrarians.

Even if it was roughly the same amount of pain each time it might be easier to bear; but that too would be too easy. At different times of a market cycle investors react differently to bad news. For example, as the bear market accelerated in 2002 and early 2003 investors became desperate for ‘visibility’ and much less willing to give companies and their management the benefit of the doubt. As the market bottomed bad news almost became an attraction for investors as it brought expectations of corporate activity.