The Art of Contrarian Thinking
By Yaser Anwar, CSC of Equity Investment Ideas
A lot of people like to be contrarians, like to think they are right by going against the crowd, but they often fail. Why? In the long-term markets revert back to the mean & are more efficient. The constant short-term news & perceptions, generates a lot of noise & alters people’s perspectives pertaining to the company, industry or country they are following, hence creating anomalies and market inefficiencies.
Warren Buffet: "If Wall Street was efficient, I'd be standing on the road with a tin cup."
"I believe contrary thinking works over time not because the public in general is dumb and always on the wrong side. It works because when a trend becomes mature; that is when the news media picks up on the trend and begins to report. It is then that the uninformed become aware and unfortunately many join the party in its very late stages. Examples: The Internet bubble in 1999-2000 a perfect example; oil in 2006 another. Remember when analysts began recommending internet stocks by multiples of revenue as opposed to earnings, had you ever heard such a thing before?
More recently do you remember the forecasts for $100 per barrel of oil with some going as high as $150 to $200 per barrel? When you begin to hear what a normal person would consider being outlandish forecasts, it's time to begin thinking the other way. Often when markets (stocks or commodities) are making new highs accompanied by outlandish forecasts for where we are going, I begin to think sell. Likewise when markets are declining and the forecasts come in for severely lower prices, I begin to think buy.
Note: I said begin to think, I did not say jump in and buy or run for the exits. Simply adjust your strategy. These are what I like to call a point of recognition- where one recognizes the strong moves in place but begins to ask; is this beginning of the end?" Source: Prudent Trader
http://www.equityinvestmentideas.blogspot.com/
A lot of people like to be contrarians, like to think they are right by going against the crowd, but they often fail. Why? In the long-term markets revert back to the mean & are more efficient. The constant short-term news & perceptions, generates a lot of noise & alters people’s perspectives pertaining to the company, industry or country they are following, hence creating anomalies and market inefficiencies.
Warren Buffet: "If Wall Street was efficient, I'd be standing on the road with a tin cup."
"I believe contrary thinking works over time not because the public in general is dumb and always on the wrong side. It works because when a trend becomes mature; that is when the news media picks up on the trend and begins to report. It is then that the uninformed become aware and unfortunately many join the party in its very late stages. Examples: The Internet bubble in 1999-2000 a perfect example; oil in 2006 another. Remember when analysts began recommending internet stocks by multiples of revenue as opposed to earnings, had you ever heard such a thing before?
More recently do you remember the forecasts for $100 per barrel of oil with some going as high as $150 to $200 per barrel? When you begin to hear what a normal person would consider being outlandish forecasts, it's time to begin thinking the other way. Often when markets (stocks or commodities) are making new highs accompanied by outlandish forecasts for where we are going, I begin to think sell. Likewise when markets are declining and the forecasts come in for severely lower prices, I begin to think buy.
Note: I said begin to think, I did not say jump in and buy or run for the exits. Simply adjust your strategy. These are what I like to call a point of recognition- where one recognizes the strong moves in place but begins to ask; is this beginning of the end?" Source: Prudent Trader
http://www.equityinvestmentideas.blogspot.com/
posted by douglas mcintyre at 4:38 AM
Subscribe
<< Home