Business & Investment

Contrarian Investing: What you need to do to run a salmon run and counter the crowds in the market

Salmon Is the common name for ray-finned fish in the family Salmonidae. They are born in the freshwater of rivers and move to the sea to develop and grow. And they breed hundreds of miles back in freshwater.

Even more fascinating is the completion of this determined journey of salmon moving against the flow of the river. This trip to swim in the river against the flow Salmon run..

Fish use their skills, environment, and perfect timing to accomplish this feat. First, use the high tide of the sea to approach the river, smell it, and return to the entrance of the river. They also time to swim upwards while measuring the flow of the river. The difficult part is the waterfall that you meet during your trip. But fish manage them with skill and timing.

Salmon can bend and leap over 10 feet in the air. It timed the jump and uses a strong upward current generated when the falling water replaces the water beneath it. Combined forces work to allow the fish to clear obstacles and reach their destination.

Against the flow of the market

One species of investors, like salmon, who show similar skills and grit in the market is “Opposition Investors‘. They go against the flow, take a consensus-free position, and time deals when the crowd is panicked or euphoric.Most people define Contrarian investment Buy when many others are selling, sell when the crowd is buying. This is a reflection of the actions taken, but certainly not the idea behind opposition investment.

The crowd is not always wrong. And opposition investors are not always stubborn opponents of market opinion. In the stock market, we often hear that “the people are right during the trend, but the end is wrong.” The crowd is wrong at the turning point, which is the exact point at which opposition investors seek to position and take advantage of possible changes in trends.

Opposition investors strive to identify areas of the market where the crowd has overreacted and to be in a position to profit when the market becomes aware of the mistake. There is an Old French saying about the investment “buy with a cannon and sell with a trumpet”. It suggests that people buy when they panic in a war-like situation or crisis and overreact to the downside, thereby creating a good opportunity to invest. On the other hand, when the war is over and the era of peace rules (the trumpet blows to mark the end of the war), people tend to be euphoric and begin a buying frenzy. They tend to be good opportunities to make a profit.

Origin of Contrarian investment

Proponents of the Efficient Market Hypothesis believe that people act rationally in making investment decisions.

  • Fully incorporate new information into the price (using Bayes’ theorem).
  • They make the best allocation decisions (based on calculated expectations or efficient frontiers).

They also believe in the wisdom of the crowd:

  • Individuals may suffer from some prejudice in decision making, but crowds do not. When different individuals interact in the market, their errors cancel each other out, so the price is closer to their basic value.
  • If there is an undeniable net bias, there are arbitrators who trade in a way that reduces risk, reduces profits and returns prices to base prices again.

In reality, people are not very good at dealing with complexity and uncertainty. Individual investors are not completely rational in their financial decisions and are subject to bias. As mentioned earlier, in most cases the crowd can be right.

However, the crowd is influenced by the story and often extrapolates recent trends to the future and ignores regressions to the mean and base rates. This can lead to imitation in the crowd and can lead to the crowd. Grazing destroys market diversity and creates market prejudice.

A feedback loop set that further pushes market prices in the direction of bias and strengthens trends. Behavioral economists have shown that in such situations the arbitrator cannot actually influence the price. The crowd is ultimately positioned on one extreme side of the market (optimism or pessimism and overreaction). This is an opportunity for opposition investors. Opportunity to buy from pessimists or sell to optimists.

Path challenges

Life evolves cyclically, but people project it in a straight line. Even in the market cycle, the boom is followed by a bust, and excess sows a reversal.Opposition investors understand this and are making great profits from now on Behavior cycle.. Unfortunately, this road is not without obstacles.

  • Requires knowledge of basics and psychology: To understand whether market prices are unreasonable in either direction, opposition investors need to properly handle what their reasonable value is. It is important to understand the intrinsic value of a security or asset before falsely claiming it is overvalued or undervalued. Investors also need to understand the market behavior cycle. Many investors are trend followers, so they may rush to join the bubble and expand further.
  • Timing is important and difficult. “The market can remain irrational longer than it remains in solvent.” Opponent investors disagree with the crowd, but need to know when to act on that discrepancy. Investors may have to wait a long time after establishing a position. The crowd may take a long time to finally change course. Keep in mind that due to the structure itself, opposition investment is about early.
  • Difficult to stand alone: Being an opposition investor goes against our natural reaction. Resisting the temptation to join or obey the majority, standing alone against the crowd, betting on what appears to be obvious, etc. are psychologically difficult to maintain. It takes courage and patience.

Set up correctly

The strategy is correct. Opponent investors buy when prices are low and sell when prices are high. Logically, there is a lot of money to make. It sounds simple, but it has its own challenges. Maintaining the right settings can help you effectively implement your opposition strategies. Some of these ideas may help:

  • Take a screener to look for opportunities for contrarian.
  • Create a checklist of conditions to help you qualify your investment.
  • Build your position slowly because you cannot predict the exact top or bottom.
  • You, your clients, your management, and your sponsors – you need patience.
  • Get ready to look stupid until you look intelligent! You may have to lose the battle to win the war.

Contrarian Investing: What you need to do to run a salmon run and counter the crowds in the market Contrarian Investing: What you need to do to run a salmon run and counter the crowds in the market

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