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

Contrarian investing is based on taking a position that is opposite to that of the masses. In general contrarian, investors get in an investment too early as their analysis is based on doing the opposite of the masses.  In contrast mass psychology dictates that you wait for the emotion to hit a boiling point, euphoria or panic before a position is taken. Mass psychology involves the actual study of what the masses are doing as opposed to just determining that their current action is wrong and using that information to take a position in the opposite direction.

Contrarians only take a position that is contrary to the masses, and that about wraps up the ideology of being a contrarian today. Very few of today’s contrarians are true contrarians; they fall into the category of fashion contrarians.

Contra Corner Tip 2: Mass Psychology Holds The Key

Mass Psychology  Improves Contrarian Investing Results. Investors that adopt the doctrine of mass psychology correctly 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 and 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

This is what we stated On Jan 24, 2018:

Whenever the masses fully embrace a market, trouble is usually close at hand, and that’s what occurred with bitcoin.  The masses were completely enamoured with Bitcoin. The masses were euphoric and were expecting bitcoin to soar to the next galaxy. Wild targets of $100,000 were being issued that sounded more like the ravings of a lunatic than of an expert. In an article published on the 4th of December 2017 we made the following comments:

Bitcoin, on the other hand, is now in the feeding frenzy stage, so this market is ripe for a correction.  Tactical Investor

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 have too many articles being published on a weekly basis claiming that Bitcoin is going to surge to 100K and beyond. Do these experts ever bother to look at the charts before issuing such targets or do they do so after ingesting some toxic substance? We will never know the answer to that question, but what we do know is that in most cases they have no idea of how high or low the market is going to go.

They issue lofty targets that have a very low probability of being hit because if the market trades to these levels, they become instant heroes.  If they miss they can push some convoluted theory, for example, market manipulation to justify the bad call.  The fact that Bitcoin is trading over 50% below its highs does not seem to faze these experts.  They are quite resilient and continue to push for targets that border on the fantastic. 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

Ignore the masses for they know nothing. Should one really care what the masses are doing that much or focus on the Gold bugs (the group) that are emotionally tied up with Gold?  The masses in general, will not embrace Gold fully until it becomes fashionable. And by then a large portion of the Bull Run will be a thing of the past. In the last Gold Bull Run, the masses did not even know what was going on, let alone take a position in this sector. So one measure would be to determine if all the people who believe in Gold have already taken positions.  If they have then the market has become saturated. The only way the market can continue its upward run is for momentum players to jump on the bandwagon.

These players have very short time spans of concentration, and thus, they jump in and out very fast. Once they decide to bail out the corrective phase could be very painful as was the case of precious metals topped out in 2011.  The housing collapse and internet bubble serve as two stark reminders of what happens once momentum has run its course.

Contra Corner Tip 4: Mass Psychology is Dynamic

Mass psychology is the constant analysis of the playing field to determine how the game is being played. Are the rules changing? Have the players become more aggressive or docile. Is the playing field soft, rocky or worse yet on the extremely high and treacherous ground?  One has to take measures at different levels and then compare it the pattern you have already established from past observations.

Mass psychology is dynamic compared to the methodology most contrarians put into play. Contrarians do not measure their position relative to those of other contrarians.  They only measure their position relative to that of the masses; in doing so, they fail to obtain a vital piece of data.  In, other words, they do not measure the intensity of emotion in their own camp.  Mass psychology states that one should wait for the emotions to surge to the boiling point. After that, one can short or go long the market.

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

They moved from the Euphoric phase to the having found religion period, to the gnashing of teeth and pure misery phase, as they watched Gold plunge from 1800 ranges down to the 1000 ranges.  They still cannot fathom why this happened, especially in light of the fact that trillions of more dollars have been created since 2011. The Internet boom lasted one-year longer after all the TA and contrarian indicators were in the extremely bearish zones. Euphoria for this sector was running sky-high.  If one had shorted the markets based on contrarian factors only one would have been blown out of the water and roasted alive.

Gold bugs should have banked some of their profits. Instead, they continued to plough money into Gold and as it pulled back they jumped in joy and added even more. Once the correction moved from the mild to the wild phase, they panicked and started to pray. Today the sentiment is almost as bearish as it was in 2003.  From a long-term perspective, a great buying opportunity could be at hand.

The Difference Between Mass Psychology and Contrarian Investing

Mass psychology takes the concept of sentiment level to the next level. Contrarians, on the other hand, start to look for an exit the moment the masses show interest in a given investment. Students of Mass psychology, on the other hand, wait until the given sentiment has hit the point of no return.  For example, if the trend is bullish, then investors should only look for an exit when the crowd is ecstatic and not before that point.

Investing based on psychology amounts to not only taking a position against the masses but also against the fashion contrarians.  Once sentiment has reached the boiling point, one should go into cash; risk-takers can consider shorting the markets.  Finally, less attention is being given to the precious metals sector, so establishing a position now could be viewed as a prudent long-term investment.


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