Sometimes The Crowd Is Right

I find that when sentiment is extreme it generally pays to fade the crowd. There will be times when this strategy fails but far more times when it succeeds. Times like late 2008 and early 2009 are the exception, not the rule. One must accept that at times it will prove to be a losing strategy and the losses might not be small. But over the long haul I believe it is the best strategy out there despite it going against all trading conventional wisdom.
  • The trend is your friend
  • Dont fight the tape.
  • Cut your losses.
  • Don't try and pick bottoms.
  • Etc. etc.
Even if one decides to be a contrarian it is  a lot easier said than done because one really needs to believe in this strategy in order to execute it. Most of the time one will not catch the exact bottom or top and the trade is likely to start out with a loss as momentum rules in the short term. The reason there will be a strong consensus is because the arguments will sound so good. It is very difficult not to get sucked in, especially because we are just overgrown primates hardwired with a herding instinct.

Another challenge of the strategy is that it is very difficult to gauge sentiment. There is no perfect indicator out there so one must always be on the lookout for clues. Sometimes an indicator won't work, so one must weigh the weight of all the evidence and not get stuck on a single indicator. Because there is a large amount of subjectivity involved it is difficult to make sure that ones bias is not coloring their outlook.

Yes, when there is a strong consensus the crowd is sometimes right. But I'll take the other side of that trade any day.


CP said...

Uh oh! Barton Biggs has turned bullish again!!!

“This is not a time where you want to be underinvested,” Biggs said on Bloomberg Television yesterday. “The odds of a significant slowdown are one in five, pretty remote.”

Anonymous said...

That is indeed a powerful sell signal.

Tsachy Mishal said...

I watched the interview. He actually sounded very unsure of himself. I would bet that he reduced his risk since the early August top as he didnt state it this time.