Investment style: Going Against the Grain

February 12, 2023

Investing is a complex and multifaceted field, with various methods and strategies to choose from. Among the popular approaches are mass psychology and contrarian investing, which are based on completely opposing philosophies. In this article, we will delve deeper into both methods and analyse the core differences between them.

Mass psychology investing is a style of investing that takes into consideration the emotional and psychological state of the masses. This approach is based on the notion that market movements are driven largely by the masses’ emotions and collective behaviour, and that these emotions can be used to forecast market trends. Investors who follow this style will often wait for a peak of panic or euphoria before making a move, either buying when prices are low or selling when prices are high. This approach has been utilised extensively by individuals such as Sol Palha, William J. O’Neil, etc who have written extensively on the topic.

Contrarian investing, on the other hand, is an investment style that entails going against the flow and taking positions that are contrary to those of the masses. This approach is founded on the belief that the masses are frequently wrong, and it is possible to profit by taking positions that are opposite to their beliefs. Contrarian investors often enter positions early, before the masses have fully embraced a particular market, and they are willing to hold these positions even as the market moves against them. Prominent investors like Warren Buffett and Benjamin Graham, who have shown that a contrarian approach to investing can lead to long-term success, have popularized this investment style.

So, what distinguishes mass psychology and contrarian investing? The key difference lies in the fact that mass psychology investing is based on the masses’ emotions, while contrarian investing is based on taking a position opposite to the masses. Another critical difference is that mass psychology investors often wait for a boiling point of panic or euphoria before making a move, while contrarian investors enter positions early and are willing to hold them even as the market moves against them.

In conclusion, both mass psychology and contrarian investing are valid investment styles, and both have proven effective in specific market conditions. However, it’s crucial to remember that no single investment style is always the best, and the ideal investment style will depend on several factors, including your personal investment style and current market conditions. If you are thinking about adopting one of these styles, it’s essential to do your due diligence and seek the advice of a seasoned investment professional. Remember, your investment style should align with your goals, risk tolerance, and personality.

References:

These articles provide a comprehensive overview of Mass Psychology and Contrarian investing, explaining the key differences between the two approaches and the pros and cons of each. Additionally, they provide examples of how these approaches are applied in the real world and offer insights into how you can use these strategies to achieve your investment goals.

Mass Psychology in Investing” by Richard Smitten https://www.investopedia.com/articles/investing/021915/mass-psychology-investing.asp

Mass Psychology; the missing ingredient to Financial Success by Sol Palha: https://tacticalinvestor.com/introduction-to-mass-psychology

Contrarian Investing: The Pros and Cons by Haris Anwar https://www.investopedia.com/articles/investing/101015/contrarian-investing-pros-and-cons.asp

Contrarian Investing: What It Is and How to Do It by Nicholas Rossolillo https://finance.yahoo.com/news/contrarian-investing-what-how-130157151.html

The Psychology of Mass Movements in Investing by Daniel Cross https://www.mybanktracker.com/blog/investing/mass-movements-investing-psychology-4626

Contrarian Investing: Capitalizing on Fear and Greed by Billy Duberstein https://www.thebalance.com/contrarian-investing-capitalizing-on-fear-and-greed-2465369

O’Neil, William J. “How to Make Money in Stocks: A Winning System in Good Times or Bad.” McGraw-Hill Education, 2009.

Buffett, Warren E. “The Essays of Warren Buffett: Lessons for Corporate America.” Council Oak Books, 2008.

Graham, Benjamin. “The Intelligent Investor.” HarperBusiness Essentials, 2006.