Contrarian Investing

I'm honoured to have been referred to by Alessio Rastani as a "true contrarian" during my time in the investment and trading circles within the blogosphere and social media.

Okay, sounds a bit like an insult right? Nah. It was a compliment because contrarian investing is probably the smartest way to look for value for money in the marketplace.

So what do I mean by contrarian investing? Simply put... you deliberately do the opposite of what everyone else is doing.

Most of the traders and investors in the marketplace, frankly, are idiots. Nasty thing to say? Well sorry, but I'm not sorry. Because it's true.

The worst advice you will get is from a layman who happens to own a few of the most popular investments and presumes to know everything as a result. At least people who are terrified of risk will stay out of the market completely. So the worst advice comes not from people who are too scared to get in, but from people who get in without having any idea of what they are doing, but are also overconfident in their position.

This means that the markets can often be irrational and fallible. Learning to take advantage of the markets inherent faults should be one of your primary priorities.

This is where contrarian investment strategies come into play.

Contrarian investing works because of the way the markets' performance is structured into cycles of expansion and contraction.

We refer to these as, surprise surprise.... market cycles. Here is a rough working image of a standard possible market cycle.

Now, lets say we wish to open a long position and maximise our potential profits.

To get the most profit possible out of our position, we have to think about when to time our entry and, the most profitable time to do this is when everyone else is simply too afraid or incredulous to do the same. I.e. during the "fear" section of the graph above.

In short yes, I am advocating for buying specifically when people are likely telling you not to buy or are dumping their holdings out of fear.

Because this represents bottom of the market. If we assume that the cycle of the market repeats then the long position demonstrated in the graph above would take about 150% profit assuming that you could time your entry at the best possible position at bottom of the market and time your exit at the top of the market (this would likely be when everyone was telling you to buy-in before you miss out).

The same strategy can be applied to short-selling.

In a traditional short, you are looking to profit from the forthcoming collapse of an asset price.

Thus, the most profitable time to short-sell something is... at the very top of the market (during the "delusion" phase on our graph). Again, this would bank about 150% gains if you could time a bet against the market so that your entry coincided with the peak of the market and your exit coincided with the bottom.

Sentiment is thus, very important here and the lesson is ultimately that you should basically aim to do the opposite of what most people are doing. Misery thus becomes a cause for celebration because this is peak buying time. Euphoria becomes a time for wariness as this becomes peak selling time.

Likewise, when you are hunting for assets to invest in, be wary of things that are already doing well. Instead, look for things that have crashed and have already been shorted to rock bottom. This is where you will find potential bargains.

Most importantly, divorce your own sentiments from the sentiment of the market and think in terms of how to maximise your profit margins by doing the opposite of what the vast majority of the market is doing.

This is why I am currently out of stocks (especially stocks, and long on cryptos. Cryptos have already had a very nasty crash and we're pretty much at the fear and stagnation phase. This is prime buying time.