Contrarian-ism in the Financial Markets

Many traders and investors start out optimistically, ready for some hard work. We listen to the experts, we listen to the financial media. We become ‘informed.’ In time however, we find this does not work. In time, if we persist, we find contrarian-ism in the financial markets works wonderfully well.

Contrarian-ism has two main forms-

  1. Having a view of the markets contrary to the mass media or market ‘sentiment’. For instance, when the media says the world is about to end, you sell to more experienced traders or investors, who know better.
  2. Being contrary to the ‘expert’ view of a particular market. For example, attending an investor workshop and finding the expert speaker believes a certain stock is likely to fall, only to find out it rises strongly over coming months.

Both these forms of contrarian-ism require us to be independent. To find, and then use with discipline, a robust trading or investing methodology is key. This is very hard work. Most ‘experts’ fall short, including economists. Not only is finding a robust methodology hard, implementing it consistently is harder. Two recent case studies will make this, and the case for contrarian-ism, clear.

Let’s take a trading example first. The British Bound before the last Brexit Deadline of 31 October 2019. I was at the coalface of this market from the 1st of the month expecting explosive, yet tradeable patterns. As the mass media spoke of near Armageddon and the unlikelihood of Boris Johnson getting a deal or extension, despite all of this uncertainty, which is traditionally bearish, the GBP/USD and GBP/JPY both rose strongly ahead of the deadline.

A second example is for investors. Examine the indices, particularly the ASX SP200 (XJO) from about 8 October 2018 to 24 December 2018. Most people expected the traditional Christmas Rally usually from November. Yet we found a prolonged bearish wave occurred right up to Christmas Eve. After Christmas Eve, those who chose to work were rewarded with a belated strong rally to about 14 January 2019. ‘Experts’ would have told us to take the Christmas Rally. Seasoned investors or traders were thinking for themselves and took an opposite view.

The insight here is not just to take a contrarian approach in all situations. This is like taking a sledgehammer to the markets. The insight is to devise a higher form of analysis and rely on different, tested data sources. For example, coupling Seasonal data with Market Correlation data, or seeking out a Pure Value Investing approach are good first steps for traders and investors. In all cases be independent. Think creatively. Think through a critical, contrarian lens.

A business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling…Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right…Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett.

By Lee Spano, Creatness International