The average every day investor is likely to follow the trend of investor's market-wide. Most investors look at what the market is doing and will follow the trend. If everyone is buying a stock and the price is rising, people buy. If everyone is selling a stock and the price is dropping, people will sell. With the onset of the popularity of the Internet and real-time quotes at everyone's fingertips, investors watch the market and make snap decisions based on what they see the price of a stock is doing. When the couch potato investor sees the price of a stock rising or falling, they will jump on the bandwagon and do the same thing everyone else is doing. Even the more seasoned investor is more likely to follow the trend of the market in making decisions about buying or selling. They will do the research and watch the price of the stock and buy or sell even though the price might be overvalued or undervalued. I think this might be because they are riding the wave of all the novice investor's and are hoping they are smart enough to jump off the bandwagon before it crashes. Unfortunately, this does not always work, as evidenced by the recent decline in most tech stocks and the enormous amounts of money lost by investing in them. This herd mentality or follow the leader mentality has bred a type of investing that, although not extremely popular, can be very profitable. This type of investing is called Contrarian Investing.
Key Words- Contrarians, buying, selling, stocks, stock-markets, Short Sale Position and Put-call ratio
[...] The successful contrarian investor looks for market tops or bottoms and moves in the opposite direction. What this means is that they might see an irrational jump in a stocks price and instead of buying more to make money, they will sell their shares because they know it will eventually fall. Also, just because a stock price falls, the contrarian does not jump in and buy it until they are sure it will show some projected growth and earnings. Contrarian's usually have valid reasons for the decisions they make and the reasons are based on research and opinions they have collected. [...]
[...] The contrarian investor uses these advisories to establish another theory. If a certain percentage of the Investment advisories say the market will do one thing, the contrarian believes it will do the opposite and they will make decisions based on that. This approach has not always returned the best results because advisories are correct about 50% of the time. This would imply that the opposing strategy of going against the advisory is correct about 50% of the time. The final contrarian theory is the Put-call ratio. [...]
[...] What does this mean in the context of a contrarian investor? The easiest way and the most limited way to view a contrarian is to say they do exactly the opposite of what the market is doing. Contrarians tend to sell when everyone is buying and buy when everyone is selling. In essence, and in almost all cases, the contrarian will do the opposite of what the investing public is doing. This does not mean that contrarians are just betting against what everyone else believes. [...]
[...] Favorable Situations for the Contrarian Investor What the contrarian would see as favorable would differ greatly from most people. Let's say that Apple computer announces that earnings for the year ending December 2000 will fall short of expectations. As a result, Apple's stock price falls. Also, as a result, other companies in the same industry will lose stock value. Dell, Compaq and many others stock prices will fall as well. Most investors see this as a problem and will start selling their shares as well. [...]
[...] According to David Dreman, a well known contrarian in the investment world was a terrible year for contrarian investors, especially his contrarian mutual fund. His fund was down 13% while the S&P rose 21%. The market seemed to favor the advisors and the investment professionals. The one contrary point to this 1999 drop in value is that Dreman's fund has shown an average increase of 17% over the past 10 years whereas the S&P has shown only a 14% increase. [...]
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