Contra Corner; Contrarian Investing is a Sound Strategy

Contra Corner

The greatest ignorance is to reject something you know nothing about. Derek Bok Quotes

Contra Corner; The Contrarian Investing Strategy

Updated Feb 2023

The differences between contrarian investing and mass psychology. Contrarian investing is taking a position opposite to that of the masses, often getting in early based on this approach. Mass psychology involves studying the actions and emotions of the groups before making a move, waiting for a boiling point of euphoria or panic. Very few investors today can genuinely be considered true contrarians, instead falling into the “fashion contrarians” category who want to follow the trend of doing the opposite of what’s popular.

Contrarian Investing: Going Against the Grain

Contrarian investing requires going against the grain and taking positions that oppose the masses. This approach works best when most investors are pessimistic about a particular market and contrarians take an opposing view. However, it is essential to note that contrary investors must have a sound rationale for their decision, as blindly taking positions can lead to significant losses.

Mass psychology is like trying to read a room full of people at a party. You wait for the emotional vibe to hit the boiling point, like when Uncle Bob has had too many and starts dancing on the table. Then you make your move!

Fashion Contrarians vs True Contrarians

But let’s be honest, very few individuals today can call themselves “true contrarians.” They’re more like “fashion contrarians” who just like to do the opposite of what’s popular because it’s hip or something. It’s like going to a party and trying to be the only one not drinking, just for the sake of it. You’re not against the grain; you’re just trying to be cool.

Contra Corner Tip 2: Mass Psychology Holds The Key

Mass Psychology  Improves Contrarian Investing Results. Investors who adopt the doctrine of mass psychology will understand how to use market sentiment to their advantage.  Mass psychology takes the principle of contrarian investing and then pushes it to the next level.  Students of Mass Psychology look for extreme type situations.

In other words, sentiment should not just be bullish before an opposing strategy is put into play; it should be at the boiling point. Only then will the student of mass psychology look for an exit and attempt to take an opposing position to that of the masses.

Bitcoin; a perfect example of Mass Psychology in action

Eventual difficulties have often accompanied the phenomenon of mass involvement in a market. This was evident in the case of Bitcoin, where the general public was overwhelmingly captivated and optimistic about the asset. Predictions of exorbitant price targets, such as $100,000, were made without proper justification, leading to a sense of irrational exuberance.

In a December 4th, 2017 article, the market was characterized as being in a “feeding frenzy” state and prone to correction. This serves as a reminder of the dangers of allowing oneself to become overly invested in the hype surrounding an asset without considering potential drawbacks. Bitcoin had done what precious metals could not.

On the 8th of March 2018, we went had this to say regarding Bitcoin

Despite the heavy beating Bitcoin has taken, the sentiment has not turned bearish, and there are still too many articles being published claiming that Bitcoin is going to surge to 100K and beyond. The statement suggests that these so-called experts spouting outrageous Bitcoin targets are complete charlatans.

They have no regard for actual market analysis and instead rely on sensationalist forecasts to advance their personal agendas. If their predictions don’t come to fruition, they hide behind feeble excuses like market manipulation. The fact that Bitcoin is trading over 50% below its highs does not seem to faze these experts, who are quite resilient and continue to push for targets that border on the fantastic. It’s a disgrace that they continue to mislead the public with their baseless optimism.. Is the Bitcoin Bull Market dead or just taking a breather? 

And the rest, as they say, is history.

Contra Corner Tip 3: Never Follow the Crowd

The focus of a successful investment strategy should not be solely based on the actions of the masses, as they may not have a complete understanding of the market. Instead, it’s essential to pay attention to the emotions and behaviours of key groups within the market, such as the “Gold bugs” who have a strong emotional attachment to the precious metal.

When analyzing the market, it’s crucial to determine if all the committed Gold bugs have already taken positions. If the market has become saturated with these players, the only way to continue its upward trajectory is for momentum traders to jump on the bandwagon. However, it’s important to note that these traders tend to have a short-term focus and can quickly change their positions, which can lead to a painful corrective phase, as seen in the case of the precious metals market 2011.

The lessons from the housing collapse and internet bubble serve as reminders of what can happen once momentum has run its course. It’s crucial to be aware of the market conditions and to make informed investment decisions based on a comprehensive analysis.

Contra Corner Tip 4: Mass Psychology is Dynamic

The study of mass psychology involves constantly evaluating the market, including the behaviour and emotions of its players. This requires a deep understanding of the market conditions and an analysis of any changes in the rules and player behaviour, including the level of aggression or caution.

In contrast to the traditional contrarian approach, mass psychology considers the intensity of emotions among the masses and within the contrarian camp. A more accurate picture of market sentiment can be obtained by measuring the emotional state of all participants.

According to mass psychology, the optimal time to take a position in the market is when emotions reach their boiling point. At this point, investors can choose to go long or short in the market, depending on their risk tolerance and investment strategy.

The Gold Bugs are a classic example of contrarian investing gone awry.

Gold investors witnessed a dramatic shift in sentiment over the past several years, moving from euphoria to disappointment and, eventually, pure misery. Despite the creation of trillions of dollars since 2011, the price of gold plummeted from the 1800 range to the 1000 range, leaving many investors scratching their heads. It recouped and traded to new highs, but if inflation is factored in, Gold has been a bad investment since 2011.

This experience is a cautionary tale for those relying solely on contrarian or sentiment-based investing strategies. Such strategies may provide short-term gains but can also result in significant losses if broader market conditions are not considered. The bearish sentiment towards gold is palpable, reminiscent of the 2003 market conditions, but from a long-term perspective; this could present a compelling buying opportunity for the astute investor.

Taking a comprehensive and well-informed approach to investing is crucial for those seeking to navigate the financial markets. This means incorporating multiple factors, such as market trends and economic conditions, into decision-making. As always, the key to successful investing is to remain vigilant and well-informed.”

The Difference Between Mass Psychology and Contrarian Investing

Sentiment-based investing is a sophisticated approach considering the masses’ emotions and beliefs when making investment decisions. This approach can be seen as an extension of traditional contrarian investing, which involves taking positions opposite those of the dominant market participants. However, sentiment-based investing adds a layer of nuance by waiting until the collective sentiment reaches an extreme level before taking action.

It is important to note that sentiment-based investing is not a one-size-fits-all strategy and requires careful consideration of market conditions and a deep understanding of market psychology. Additionally, less attention on sectors such as precious metals may present an opportunity for long-term growth and diversification.

Investment strategies considering market participants’ collective emotions and beliefs have garnered attention recently. This approach involves waiting until the sentiment reaches an extreme level before taking action and is not a one-size-fits-all strategy. Sentiment-based investing requires careful consideration of market conditions and a deep understanding of market psychology to achieve successful outcomes.”

 Contra Corner: Navigating the Opposite Viewpoints in Investing: Overview

In investing, it’s essential to consider multiple perspectives before making decisions. This is where the concept of “contra corner” comes in.  Here we consider and analyse opposing viewpoints before planning a course of action. In investing, it’s easy to fall into the trap of confirmation bias, where one only seeks out information that supports preconceived notions. By exploring the “contra corner,” investors can challenge their own assumptions and make more informed decisions.

The article discusses the concept of contrarian investing, which involves taking positions opposite to most investors, and how mass psychology can improve results in this strategy. The author notes the difference between true contrarians, who have a sound rationale for their decisions, and “fashion contrarians,” who do the opposite of what’s popular to seem cool.

The article uses Bitcoin as an example of mass psychology in action, warning against becoming overly invested in the hype. The author emphasizes the importance of analyzing market conditions and making informed decisions based on comprehensive analysis while also being aware of the dynamic nature of mass psychology.

FAQs on Contra Corner Article

Q: What is the difference between contrarian investing and mass psychology?
A: Contrarian investing involves taking positions opposite to most investors, while mass psychology involves studying the actions and emotions of groups before making investment decisions.

Q: How does contrarian investing work?
A: Contrarian investors take positions that oppose the prevailing market sentiment. This approach can be successful when most investors are pessimistic about a particular market. However, it is crucial for contrarian investors to have a sound rationale for their decisions to avoid significant losses.

Q: What is mass psychology?
A: Mass psychology involves analyzing the emotions and behaviours of groups in the market before making investment moves. Investors wait for the collective sentiment to reach extremes, such as euphoria or panic, before taking action.

Q: What are fashion contrarians?
A: Fashion contrarians are individuals who want to follow the trend of doing the opposite of what’s popular without genuine contrarian reasoning. They may adopt a contrarian stance to appear cool or hip rather than based on sound investment analysis.

Q: How can mass psychology enhance contrarian investing results?
A: By incorporating the principles of mass psychology, investors can use market sentiment to their advantage. Mass psychology takes the concept of contrarian investing to the next level by seeking extreme situations and waiting for sentiment to reach a boiling point before taking an opposing position to the masses.

Q: Can you provide an example of mass psychology in action?

A: Bitcoin serves as a perfect example of mass psychology. During the Bitcoin boom, the general public exhibited overwhelming optimism and made exorbitant price predictions without proper justification. This irrational exuberance eventually led to a correction, highlighting the dangers of getting caught up in hype without considering potential drawbacks.

Q: Why is it important to consider market conditions and conduct a comprehensive analysis?
A: Market conditions and comprehensive analysis are crucial for making informed investment decisions. Relying solely on sentiment-based or contrarian strategies may result in short-term gains but can lead to significant losses if broader market conditions are not considered.

Q: How does mass psychology differ from traditional contrarian investing?

A: Mass psychology considers the intensity of emotions among market participants and waits for sentiment to reach extreme levels before taking action. This approach provides a more nuanced understanding of market sentiment than traditional contrarian investing, which focuses on taking positions opposite dominant market participants.

Q: Where can I find more information on contrarian investing?
A: You can find more information on contrarian investing in articles such as “Contrarian Investing: A Beginner’s Guide” by Investopedia, “7 Rules for contrarian investing” by TheTactical Investor, and “Contrarian Investing: Betting Against the Crowd” by The Balance.

Q: Are there any other articles that can provide insights into market psychology and investment strategies?

A: Several articles can offer insights into market psychology and investment strategies. Some examples include “How to Build Wealth in 6 Steps,” “The Difference Between Great and Mediocre Comes Down to Freedom,” “Fake News is Only Real News for Stupid People,” “A Clear Illustration of the Mass Mindset in Action,” and “Inductive Versus Deductive Reasoning.” These articles cover various topics related to investing, psychology, and decision-making in financial markets. Conduct thorough research and consult with a financial advisor before making investment decisions.

Q: What is the concept of “contra corner” in investing?
A: “Contra corner” refers to considering and analyzing opposing viewpoints before making investment decisions. It helps investors challenge their assumptions and make more informed choices by avoiding confirmation bias, where one only seeks information supporting preconceived notions.

Q: How can sentiment-based investing be beneficial?
A: Sentiment-based investing, which considers the emotions and beliefs of market participants, can provide valuable insights. Investors can capitalise on market trends and opportunities by waiting for sentiment to reach extreme levels before taking action.

Q: Where can I find additional resources on market psychology and investment strategies?

A: Besides the articles mentioned, several resources are available to explore market psychology and investment strategies further. Some reputable sources include books on behavioural finance and investor psychology, academic research papers on market sentiment, investment forums and communities, and reputable financial websites that provide insights and analysis from industry experts. It is recommended to seek information from reliable sources and consider diverse perspectives to gain a comprehensive understanding of market psychology and its implications for investment strategies.

Q: How can investors differentiate between true contrarians and fashion contrarians?
A: True contrarians are investors who take positions opposite the masses based on a sound rationale and analysis. They have a genuine understanding of market dynamics and are not motivated solely by going against the trend to be different. On the other hand, fashion contrarians are individuals who adopt contrarian strategies without a solid basis, merely following the trend of doing the opposite of what is popular. Differentiating between true contrarians and fashion contrarians requires evaluating their reasoning, track record, and consistency in their approach to investing.

Q: Can you explain the concept of mass psychology and its relationship to contrarian investing?

A: Mass psychology involves studying the actions and emotions of market participants as a whole before making investment decisions. It takes the principle of contrarian investing and further emphasizes the importance of extreme sentiment levels. Contrarian investors analyze market sentiment, waiting for a boiling point of euphoria or panic before taking an opposing position to that of the masses. Mass psychology provides insights into market participants’ collective emotions and behaviours, which can enhance the effectiveness of contrarian investment strategies.

Q: What can be learned from the example of Bitcoin and mass psychology?
A: The example of Bitcoin demonstrates the influence of mass psychology on market dynamics. The general public became overwhelmingly optimistic during the Bitcoin hype and made exorbitant price predictions without proper justification. This irrational exuberance was a result of extreme sentiment levels. It serves as a reminder of the dangers of getting overly invested in the hype surrounding an asset without considering potential drawbacks. Understanding mass psychology can help investors recognize such situations and make more informed decisions based on a comprehensive market sentiment analysis.

Q: How can investors incorporate mass psychology into their investment approach?

A: Investors can incorporate mass psychology into their investment approach by studying market sentiment and identifying extreme sentiment levels. This involves analyzing the emotions and behaviours of market participants, monitoring media coverage, and observing trends in investor sentiment indicators. By combining this understanding with comprehensive analysis and risk management techniques, investors can make more informed decisions and potentially benefit from contrarian strategies based on extreme sentiment levels.

Q: How can investors mitigate the risks of contrarian and sentiment-based investing?
A: To mitigate risks, investors should conduct thorough research and analysis, diversify their portfolios, and adhere to proper risk management techniques. Having a well-defined investment strategy and avoiding impulsive decisions based solely on sentiment is important. Setting realistic expectations, maintaining discipline, and staying informed about market conditions are key factors in mitigating contrarian and sentiment-based investing risks.

 

Although originally published in 2016, the contents of this article have been updated to ensure that the information provided is current and relevant.

Other articles of interest: 

How to build wealth in 6 steps  (March 28)

The difference between great and mediocre comes down to freedom (March 24)

Fake News is Only Real News for Stupid People  (March 20)

A Clear Illustration of the Mass Mindset In Action

Inductive Versus Deductive reasoning