Ritholtz: Beware of Naive Contrarianism
Barry Ritholtz has a great post on being contrarian:
One thing you should consider when betting against the crowd: They tend to be right most of the time. There are a several things I disagree with in Surowiecki’s The Wisdom of Crowds, but the basic idea that crowds can determine outcomes is undeniable.
Indeed, markets are essentially the net result of the behavior of crowds. When asked why stocks were going down, the old trading desk joke is “More sellers than buyers.” That is as good a definition of a crowd as I’ve seen.
To better explain contrary thinking, I like to describe Wall Street and Markets as a sports stadium filled with fans. The better the team does, the louder the crowd cheers. The louder they cheer, the better the team does. Hence, markets have a large degree of self-fulfilling prophecy in the way they respond to crowd behavior.
Call it what you like — sentiment, reflexivity, feedback loop — for most of the time, the crowd not only determines market direction, IT IS market direction.
The secret to being a true contrarian is identifying when this excited (but orderly) crowd of cheering fans becomes a an unruly mob; Determining the point at which the fanatics become hooligans. Not throwing paper cups on the court, but overturning cars; When the Wisdom of Crowds becomes the Madness of Crowds.
That is when you short a raging bull market, buy into a crash. You hold your nose and make the purchase.
You can read the full post here.
Tags: contrarian, investing, sentiment
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