Contrarian investing is a vibrant field that is full of conflicting data; one person tells you should do this and another tells you should do that. The funny part is that none of these experts has any notion of what is right from wrong because they are all talk and no action. In other words, the majority of these experts have not followed one piece of their advice. If they had, they most would be bankrupt today, and those that follow them usually end up losing their hard-earned money. These experts fall under the category of “fashion contrarians”, whose only role has been to glamorise this field and cannibalise the meaning of the word “contrarian.”
These fashion contrarians are no different from those investors whose primary driving force is raw emotions. These investors with the mass mindset only imagine that they are doing things differently, but the moment panic or doubt is in the air, they take flight like bandits being chased by the hounds of hell. A real contrarian is familiar with the basic concept of mass psychology. If you are not familiar with these rules, you are doing yourself a disservice and should catch up on them ASAP. The single most important rule of mass psychology is that one should not abandon the ship until the emotions have hit the boiling point and vice versa. For example, if the market is in a bullish phase, you do bail out just because the masses have jumped on the bandwagon. Instead, you wait for them to embrace the market euphorically before closing your positions.
Tactical Investors Stance on Contrarian Investing
While we at the Tactical Investor embrace the concept of contrarian investing our true focus is on the joining the Primary rules of contrarian investing with the powerful concept of mass psychology. The combination of the two methodologies creates an incredibly robust system. Psychology is the key driving force behind almost every human action and understanding it could significantly improve your overall experience and results as an investor. To this winning combo, we add technical analysis, and the end result is an unbeatable system. This is what led us to craft the trend indicator, a tool that magnificently combines the supreme elements of technical analysis with the most compelling elements of Mass psychology.
Key Contrarian Investing Rules
The rules laid out below will provide both the beginner and seasoned investor with ideas that ought to improve his or her trading skills if implemented properly. Discipline and patience are the keys to successful investing; nothing comes quickly, for if it did, everyone would be able to do it.
- Popular media (magazines, news outlets, newspapers, TV stations, etc.) Data from these places should be taken with a large dose of salt. Use these outlets to determine what the masses are frothing about and what you should avoid or start getting out off or into. Emotions should be at a boiling point before you make any move. You do not oppose the masses just because they have jumped on the bandwagon; it’s only when the bandwagon is overloaded and about to buckle under its load that you should look for an exit and vice versa.
- Technical analysis plays a key part when it comes to investing, regardless of whether you choose to be a contrarian investor or not. It is imperative that you take the time to understand the basic tenets of this crucial field. Try not to follow or focus only on the most popularly used Technical analysis indicators. You will be amazed at how effective some of the lesser known indicators are once you get to understand how they function and operate.
- Spend time understanding the markets you are going to target or the sectors of the stock market you intend to play. We have put up an extensive list of resources, all of which are free here. Free Trading Resources
- Formulate a sound plan. Don’t be silly and sit there wishing and hoping to catch a home run. Those that adopt such notions, always catch a falling dagger, a process that is fraught with pain and misery. The plan should include profit targets on each and every trade, and, an exit plan, in case the trade does not work out.
- Do not foolishly embrace Options until you grasp the key concepts of buying and selling stocks. In other words, understand when to buy and when to sell. Make some money first and then attempt your hand at trading options.
- Learn to relax; if you don’t relax it’s hard to win.
- The law of balancing comes into play here. When you win a significant amount of money, help one person in your lifetime, and your rewards will be 100 fold.
A genuine contrarian only jumps into the investment as the asset is trading at mouth-watering levels, and blood is flowing liberally in the streets. Buy when the crowd is paralysed with terror and panic and sell when the masses are jubilantly buying. When you are feeling ecstatic, flee for the exits.
Overconfidence is a sign that you are treading on thin ground. Even the best traders can, and so suffer setbacks, the key is not being too confident or arrogant, as it is very difficult to pick yourself after a fall. Always utilise stops as the markets are currently very volatile.
Contrarian investing is really about emotions. You are overcoming your emotions and preying on the emotions (trepidation or gluttony) of the crowd by taking a far-reaching position that is usually in opposition to that of the crowd.
When you take a position, and people look at you with contempt or disbelief, you know you are doing the right thing. When they tap you on the back and they nod in agreement, then it’s time to flee for the exits. Buy low. Sell high.
Originally published at the Tactical Investor