Contrarian Funds: Charting Their Own Path

Warren Buffett best described how to be a contrarian investor: "Be fearful when others are greedy, and greedy when others are fearful." In other words, move counter to the crowd. Investors like Buffett are proof that a contrarian approach can reap big rewards. But in recent years, most contrarians have underperformed as a small group of popular, fast-growing tech companies have fueled stock market gains.

Consider: Standard & Poor's 500-stock index climbed 13.7% annualized over the past 10 years, while Amazon.com, for example, returned 37.0% and Netflix returned a whopping 47.8%. The lengthy economic recovery and the persistent growth of trends such as cloud computing and streaming video have "pulled all the indexes up, making a high hurdle for contrarians to overcome," says Bruce Kaser, head of stock research at the Turnaround Letter, a contrarian investment newsletter. (Returns and other data are as of September 6.)

That said, a smart investor would do well to give stock funds with a contrarian approach a closer look, given their recent underperformance. There's reason to believe this investment style will