How many strategists and managers can be contrarian? Why does everyone want to be one?
As with many principles, the basic idea is easiest to understand by looking at extremes. At market bottoms (or bottoms in specific stocks, commodities, etc.) no one wants to buy. This is a terrific opportunity because the selling is over. Ownership has moved into strong hands. There is no one left to sell, so the stock is ready to rise.
At tops it is the opposite. Think of the famous story about Joe Kennedy and the shoeshine boy who offered him some stock advice. Kennedy famously sold his holdings, avoiding the ’29 crash, since he realized that there was no one left to buy. [I had a close eye on a hotel parking attendant in Denver a couple of weeks ago. He headed for the business center, so I watched to see if he was planning a little online trading. PHEW! He was just checking his email. Don’t laugh. In 1999 I saw CNBC on in parking garages and assorted retail establishments with everyone checking quotes.]
So every hedge fund manager or strategist wants to be a contrarian, since that shows there is a big opportunity. You just have to find something where you can contend that everyone else is wrong and you have a lot of edge.
There is a lot of interest in this topic right now, so I plan a series of posts looking at a framework for analysis, some examples of those who are taking contrary positions, a look at some of the indicators and why they are broken right now, and finally, my suggestion for the best contrarian trade.