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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The guiding light of investment contrarianism is not that the majority view the conventionalContrary Opinion Mobs in their emotions are much like children, subject to the same tantrums and fits of fury. Euripides (408 BC) A skeptical attitude is vital. It is the underlying concept that can help us think straight and use common sense, perspectives of what the pundits are saying. As corporate concentration in the media increases, the diversity of ideas and opinions expressed in newspapers, magazines, or on TV becomes less every day. Therefore, the ability to think contrary is much more important today than it was when I wrote my first book on bear markets nearly 40 years ago. The need to think contrary has increased exponentially in the last 10 years of mass mind murder by the media. Its difficult to define contrary opinion. It isnt simply the contradiction of every opinion encountered. Neither is it safe to assume that the majority are wrong all the time. They are most likely to be wrong when there appears to be no division of opinion, and particularly at major turning points in stock market action. The best definition of contrary opinion I have seen was in an article published in Barrons in September 1987. In it John Schultz wrote: The guiding light of investment contrarianism is not that the majority viewthe conventional, or received wisdomis always wrong. Rather, its that majority opinion tends to solidify into a dogma while its basic premises begin to lose their original validity and so become progressively more mis-priced in the marketplace. We saw this dogma principle in action soon after George W. Bush was elected. After 8 years of a Clinton White House assuring the public that they had found the key to permanent prosperity, George Bush was soundly condemned for suggesting there were some weaknesses in the economy, in the belief that saying it would make it so. In a more rational time, the public would have been pleased that weaknesses had been pointed out in order to prevent them getting worse, or at least prepare for them. But in 2000 nobody wanted to listen. The logic behind contrary opinion is that life is an ever-changing, highly complex, and dynamic process. An opinion or perspective that is totally sound at one point in time becomes outdated, so that by the time everybody has come around to believing it the set of circumstances that originally gave rise to that opinion have changed. Also, mass thinking is always tinged with exaggeration, and tends to become extremist (dogmatic) thinking. This suggests a reaction to that concept is close at hand, to erase the extreme and restore balance. STOCK MARKET APPLICATION There is within all markets a group of savvy, experienced traders and investors who see buying (or selling) opportunities first, and they act. Soon, others see stocks beginning to move, although they dont necessarily know why stocks are moving, because the good economic news that drives stocks has not yet shown up in the published data. But, it feels right, so they will buy to get in on the action. Gradually, more and more people see what is happening and, probably by this time, the reasons for the move are known (e.g., higher earnings or a drop in unemployment). Eventually, a majority has been convinced that a major bull or bear market is under way and climbs aboard. It is at this point that the experienced traders decide that, as they have profits and the bandwagon is getting crowded, they will get out. And/or maybe even a bit of bad news has leaked out to those in the know. Soon, others follow and so the trend reverses. This creates a continual flow of people opinions, first in one direction then another. Obviously, those who act first make the most money. The art of applying contrary opinion to the market, therefore, is to gauge at what point the technical and fundamental reasons are so obvious that they can be seen by anybody. That is the point at which the most skilled take their profits, and so should you. Although this theory is known as thinking contra, this is not strictly true. What one aims at is, rather, to think before the crowd, and this is usually synonymous with thinking contra. But, you ask, hasnt the age of instant communications destroyed this ebb and flow in markets? My answer: The reverse is true. During the buying frenzy in 1998 and 1999, insiders in Silicon Valley were warning that many of the high-tech start-ups were based on unsound business principles and, though their young CEOs became billionaires overnight, most of those who bought stocks in these companies would be left holding the bag. But the voices of sanity were drowned out by the irresponsible TV financial news networks, who told ordinary investors what they wanted to hear. That is, that markets would go on rising, that the new economy had superseded the old economy, and that none of the former rules by which one judged the economic health of a company were valid any more. Modern communications make the extremes of euphoria and panic greater than they were even 20 years ago. Euphoria travels fast and furiously. HISTORICAL EXAMPLES OF CONTRARY THINKING There are great names in history who wrote about this approach: Goethe, the poet-philosopher, I find more and more that it is well to be on the side of the minority, since it is always the more intelligent. Walter Lippmann, Where all think alike, no one thinks very much. Jean Jacques Rousseau, Follow the course opposite to custom and you will almost always do well. William Stanley Jevons, As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing. Sir Francis Bacon, Doubt all before you believe anything! Watch your idols! The majority were certainly wrong in the stock market in the late 1920s. Babson in 1927 wrote that 98% came out of the market poorer than they went in. And the crash that really wiped out fortunes was still 2 years away! APPLY CONTRARY OPINION EVERYWHERE You can best apply contrary opinion in the stock market if you form the habit of applying it in every area of human activity. The imminence of an event such as war and perhaps future acts of terrorism of the magnitude of September 11, 2001 are good examples. Though I may live to eat these words, logically it would seem that no matter how big and well organized the global terrorist network is, one large reason September 11 was possible was because nobody was prepared for it. It is fairly safe to say that, even if bin Laden and his cohorts had the same hatred for Europe as they apparently do for America, the hijacking of several passenger aircraft to be used as megaton bombs would have been far more difficult in Europe because Europe has had over 30 years experience with dealing with terrorist groups of one sort or another. If the US had had the same level of airport security and police awareness that Europe has had for decades, it is possible, even probable, that the hijackers would have been apprehended before they even got on the planes. Yet, Americans are far more fearful today than they were prior to September 11, instead of feeling safer that counter-terrorism measures are being taken. Thats because the panic/fear Americans feel is social, more than economic. Y2K was another example, when many expected our computerized society to freeze up from a combination of outdated computer programs and hackers taking advantage of a weakness in the system to make matters worse. It didnt happen, not because there wasnt a problem, but because the problem was identified well in advance of the event, and dealt with. And security was beefed up so that would-be terrorist hackers had no window of opportunity to act. Lets go back a few decades. For many years at the height of the Cold War, we lived in fear of an unprovoked Soviet nuclear attack, and some built fall-out shelters expecting the worst. But it didnt happen. It is when we believe we are invulnerable that we are the most vulnerable of all. What all this teaches us about markets is that, when a majority seems convinced that almost nothing can go wrong, the seeds of destruction are already eating away at the underbelly of the market. Later, when things appear to not be able to get any worse, the recovery is beginning, because people are already taking counter-action. FOSTERING ROBOT THINKING Mass communication is at best a mixed blessing. We all read the same press reports, watch the same TV news programs, read the same magazines. We watch television news programs with the mistaken idea that we are gaining a pretty good total view of what is happening, instead of merely a few sound bites of news that if reported in its many faceted totality would take several hours. This atmosphere of sameness tends to shape our views of the world and give us nearly identical reactionsif that is largely what we base our opinions on. Its natural. It seems so convenient when we find our neighbor agrees with our views; we dont bother with probing the origin and soundness of our own ideas or our news sources. As governments grow bigger, and media outlets merge into conglomerates, the messages that bombard us are ever more like those coming from a superstate propaganda machine. Even nonpolitical and nonpartisan thought becomes stereotyped and we feel we should believe it. After all, doesnt it come from people who are said to be experts in these matters? ACQUIRE A SKEPTICAL MIND I said at the start of this chapter that being contrary to every opinion is extreme. However, it keeps you in training, mentally, to say, Oh, yeah? to all the pronouncements of leaders and journalists reporting on business and government. Remember the self-interest behind them. More often than not, they contain such slanted information that you are generally ahead of the game if you reject it, not as being all false necessarily, but as being a distorted or overly simplistic image of the true picture. A half-truth can amount to a lie. Any form of contrary opinion is healthy for the mind. Of course, before you invest or sell on the basis of contrary opinion views, you must be sure you are dealing with the truly majority view, and not just contrariness on your part. STEP UP YOUR THINKING POWER Thinking is hard work; the very hardest, some say But its necessary work if you want to survive and prosper in todays world. And clear thinking automatically calls for original premises, which can never come from just accepting what others are telling you to think. When you put these two facts together, they speak for themselves: 1.Most people remain no better than middle class in every country, alltheir lives. 2. Most people think for themselves, instead of simply absorbing the prevailing opinions, less than 1% of the time. And contrary thinking gives freedom to thought and loosens it from the chains of simple acceptance. So, in this sense, contrary thinking is an essential part of freedom. |
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