It’s Time To Be a Contrarian Investor

Wednesday, December 9, 2009

1197684_different_is_greatAs I mentioned on Monday, I believe we are at an important turning point. Not all the data is in, but we don’t need it. Applying what we do know, the economic trend looks to be changing. But, if we wait for “the dust to settle,” prices will have adjusted and we will miss the opportunity. So, now is the time to be a contrarian investor…

What does it mean to be contrarian?

Being contrarian isn’t the same as being contrary (i.e., perverse). Rather, it is adopting a position opposite to prevailing beliefs. In investing, this means buying when most are selling and vice versa.

But, doesn’t investing with the trend produce gains?

Yes, it can. However, no trend lasts forever, and prevailing beliefs and actions can get carried away. Like a flame that brightens just before going out, investors are most committed just before the pendulum swings.

Wouldn’t it be better to wait until the trend tops or bottoms out?

No, for three reasons. First, the change is only obvious after the fact because price volatility and media “noise” hide the shift. Second, riding the trend keeps your mindset with the crowd. It’s important to adopt a contrarian attitude through action. Third, it is extremely rare to hit a trend top or bottom. Better to follow the actions of wise investors who attribute their success to buying or selling “too soon.”

Aren’t today’s trends based on sound reasoning?

In investing, there is never a single possible outcome, no matter how well formulated the underlying rationale. As I have been describing in many of my postings, there are facts or considerations currently not being highlighted. This is typical of a strong trend, where the focus is on supporting information. Trend beliefs can become ingrained, and it is important to break away. To help mentally deal with a popular trend, remember this poem:

A trend is a trend is a trend.

The question is, will it bend?

Will it alter its course, through some unforeseen force,

And come to a premature end?

Sir Alec Cairncross, chief economic advisor to the British government

To me, the most important words here are “unforeseen” and “premature.” ALL established trends seem to end too soon, with the avid supporters then saying, “No one could have seen that coming.”

So, try on the contrarian hat. Be willing to consider doing the opposite of what is popular today. There are sound reasons for doing so, and the potential profits from acting “too soon” is a key one.

Tags: ,

Leave a Reply

You must be logged in to post a comment.


John Tobey on Seeking Alpha

Seeking Alpha Certified

December 2009