In a brilliant book “The Art of Contrarian Trading”, the author, Carl Futia, writes on his vision of a contrarian trader.

“Why is it important to understand investment crowds? I have argued that large investment crowds are associated with significant market mistakes, situations in which the price of a stock, bond, or commodity is forced too high or too low relative to its fair value. If this is true, then a speculator can potentially earn above-average returns by exploiting this connection. One need only watch for the emergence of an investment crowd. As the crowd grows, it makes sense to invest in harmony with the crowd's investment theme. But eventually the crowd grows so large that it forces the market price well past fair value. At this point the investor needs to either step aside from the crowd's theme investment or even invest in an opposite theme.

This is the strategic vision of the contrarian trader. I use the word trader here instead of the word investor because I believe that market mistakes are generally temporary ones. A contrarian trader does not intend to hold an investment over several bull and bear cycles. Instead he is focused on taking advantage of a market price that is above or below fair value and will later abandon his position when the market returns to its fair value price. There is no such thing as a long-run investment for a contrarian trader. His business is exploiting market mistakes arising from the growth of an investment crowd but then stepping aside from his investment as the life cycle of the crowd inevitably returns price to fair value.

To implement this contrarian trading strategy, one must become skilled in discovering emerging and/or popular investment themes and in evaluating the strength and stage of development of the associated crowd. One must learn to understand the role the news media play in reinforcing and popularizing investment themes. In addition, one must develop the skills needed to place this information in its proper market context. In other words, one must learn to compare the market performance of the investment theme's asset to historical norms and to the performance of other markets.

Why does the contrarian trader have an edge on the average investor? How is it possible for him to earn above-average returns? Why doesn't the No Free Lunch principle apply equally to the contrarian strategy? What is the source of the contrarian trader's or investor's edge?

The simple fact is that a contrarian trader must by definition be a nonconformist to be successful. This is the key to understanding the difficulties and the opportunities associated with a contrarian stance toward markets.

I have argued that every person is born with an instinct to join social groups and cultivate social bonds with other individuals. Such instincts and social skills endow individuals with an evolutionary advantage. For this reason one expects and observes that people are far more comfortable accepting the conventional wisdom of their social groups and acting in accord with such conventions. This is true of investment crowds no less than of groups that form the larger society in which we all live. Yet a contrarian trader must place himself apart from investment crowds. By choice he becomes a kind of social outcast in the world of investments, the very world to which he has chosen to devote so much time, energy, and money. Few people can comfortably live with this sort of emotional dissonance. And this internal conflict is always felt most acutely when the financial stakes are highest, when the groupthink phenomenon associated with investment crowds is most intense.

This is why there are so few contrarian investors, even among professional money managers. Every professional money manager knows that it is better "to fail conventionally than to succeed unconventionally." Why? Because every investment strategy fails on occasion, but if his investment strategy is unconventional as well, its failure will get the manager fired. Nonconformists are always on a very short leash.

It is his ability to suffer the internal conflicts and the social isolation associated with a contrarian investment stance that is the source of a contrarian trader's edge. In economic terminology this is a very high barrier to entry into the speculator's profession. One must be able to think clearly and to act on one's contrarian conclusions in the face of a market that for the moment seems determined to reduce the value of one's portfolio. Very few people can do this. For this reason the No Free Lunch principle does not preclude above-average market returns for the contrarian trader. There are so few contrarian traders that the market returns gained by pursuing this approach will remain above average and will not be competed away as long as society rests upon a foundation of strong social bonds among its members.”