The most important question that I ask myself before I add to a position after a major pullback—10 percent or more—is this: If I didn't own the stock already, would I initiate a new position in it?
If the answer is yes, then I give myself the green light to buy on the dip. If I say no, then I would sell it. If I feel I don't have strong enough of a view and if I don't need to make the decision immediately, I'll take some time to reevaluate corporate news, fundamentals, and monitor upcoming news.
The fact is, sometimes stocks drop for the right reason and sometimes for the wrong reason, and the difference is not always clear-cut. But if you are a contrarian, you must be willing to sit on a position that could be dead money for a while and be willing to monitor corporate developments. (I am talking about contrarian in terms of long-term investing, by the way. For a trader, if the answer to the above question was a "no," I'd be a seller right away. Plus, my 20 percent would be more like 2 percent to 5 percent.)
Read More2014's top sectors: Time to take profits?
It is the most awful thing to hear a well-intentioned investor say, "The stock is down; I should buy more" or "If everyone is selling, then I'll buy." This is a sign of laziness. One must explore the reasons for the retreat in the stock. I always have stocks in my book of business that are down from where I bought them. But if they pull back and the reasons for my original purchase are still intact, then and only then do I buy more.
Just to be sure we're on the same wavelength, I am talking strictly about contrarian investing in the context of long-term investing. For disciplined day traders, they'd be long gone well before a stock retreats 10 percent. A contrarian is looking to stick with a stock through cycles that include momentum and stagnation because, with a longer time horizon, your odds are higher that you'll realize the full benefit of your reasons for buying in the first place.
How much time is too much time? When I initiate a contrarian-type investment, I give it two years to start seeing results. Why? Because from my experience, that is how long it takes for management to draw its plans and for employees, customers, vendors, restructuring activities, analyst ratings and shareholder perception to all come on board. If it happens sooner and that has often been the case, great. But if it takes longer, then I have to start questioning whether or not the management plans are still relevant.