This post was originally made on July 28, 2006 on a former blog of mine.

After reading this you may think I had too much vodka last night but here goes. From time to time I overanalyze a common market philosophy to death. Many times I come away from that analysis not really having any answers but really only churning up more questions. The idea of being “contrarian” has been a ride down that path for me. Before I start pondering things and making philosophical inquiries here, let’s first look at a few common definitions of what it means to be contrarian.

Investopedia.com - An investment style that goes against prevailing market trends by buying assets that are performing poorly and then selling when they perform well. A contrarian investor believes that the people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. On the other hand, when people predict a downturn, they have already sold out, at which point the market can only go up.

Dictionary.com - One who takes a contrary view or action, especially an investor who makes decisions that contradict prevailing wisdom, as in buying securities that are unpopular at the time.

Wall Street Words - An investor who decides which securities to buy and sell by going against the crowd. For example, a contrarian would tend to purchase the stock of steel companies when steel stock prices are depressed and most investment counselors are advising against them. Contrarians operate on the premise that when stocks are very popular they are overbought and when they are very unpopular they are oversold.

Now, my key issue with all of this is that they all infer “going against the crowd”. How one is supposed to profit from this is unclear to me. What you are essentially saying is that the current market price is irrational. You believe that by buying (or selling) at the current price you will be able to make a profit. If you believe that your new target price is rational (if you don’t then you are irrational and this makes even less sense) then you are essentially betting that the market will suddenly move from being irrational back to rational and move the price back to your target area. I discussed this idea in more detail in my post So what if markets are inefficient. How do you time when, if, or how long it will take for the non-contrarians to get their brains fixed and return the price back to where you think it should be???

My other problem is with the simple notion that being contrarian can even exist. The idea of going against the crowd is a little misleading. If the world was made up of only 10 investors and one of them had 90% of the money would it make any difference what the other 9 thought? Suppose all 10 of you have the same opinion about the market and you decide to “be contrarian”. The room shudders and the oohs and aahs murmur off the mahogany furniture. You are betting the other 9 will eventually change their mind and suppose 8 of them do. Great, you are now “with the trend” and should make some money right? Wrong. If the single investor with 90% of the money still puts his money to work in the opposite direction then you guys will lose. So are you contrarian against people each having a single vote or are you contrarian against the current price?

In order to remove that little mental conundrum we can just say that every individual’s opinion and his relative market strength is reflected in the current price. So what happens on every trade from this point forward? Someone buys and someone sells and exactly 50% of the trade is contrarian to the other 50%. There is no going against the crowd because at any single moment in time there is no crowd. Half the trade goes one way and the other goes the other direction. So who is being contrarian?

Friends have argued that “if the price of the stock has gradually gone down from here then I am being contrarian by buying it hoping it will go back up.” Well, you may think so but I disagree. At each price point there was a buyer and a seller (sound like a familiar theme?) so at that particular point in time 1/2 the people essentially disagreed with each other. There is no moving against a crowd because there is NO CROWD. If you say you are looking at an extended time period to determine whether or not you are contrarian then I scratch my head.

In order for you to believe in contrarianism you must believe that there is a point in time at which the price is at a level where you are ready to buy/sell. In the time before and after that point there are many different types of information being factored into the stock price. So being contrarian at $41.50 does not even mean the same thing as being contrarian at $41.75 (not that it matters). The information embedded in the price is different. You can’t be contrarian to someone working from a different information base than you. You can only say that at this point in time I have a different opinion and if that is the case then your trade will have a taker. He was contrarian to you and you were contrarian to him.

If anyone has any other thoughts or articles on this topic they would like to point me to then feel free to do so. I would be happy to discuss. Until then I am left with the following conclusion: either we are all always contrarian or there is no such thing as being contrarian and using the phrase is meaningless. Either you believe the price is going up or it is going down and in order for the market to be in equilibrium 1/2 the people (shares) have to be buying and selling at the same time.

“I think being different, going against the grain of society is the greatest thing in the world.” -Elijah Wood

“Errr, I’ll take that trade Elijah.” -Jeff Howard

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