“Central principle of investment is to go contrary to general opinion, on the grounds that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”
- Keynes
Everyone wants to be a contrarian, but it is hard to do. Being contrary is not enough. You have to have a rationale for your difference of opinion. Being contrary by thinking the opposite of convention is a recipe for disaster if it is not grounded in data, facts, and a workable model. Could a trend-follower ever be a contrarian, or is the trend manager the poster child of the anti-contrarian, the lemming?
Since there are always buyers and sellers in markets, perhaps there are always contrarians - every buyer is a contrarian to the seller. The trend-follower as contrarian is actually a key part of what it means to be a trend manager with respect to general opinions. Sounds silly, but it can be true.
The trend manager can be a contrarian to public opinion because the focus is on price and not what others think. If opinions are the same, but prices are doing something different it is worth focusing on what prices are saying. Prices may prove to be wrong, but it the process of being marked to market which tells us that it cannot be ignored.
Price should be the weighted average of all opinions, so it seems odd to think in terms of being a contrarian, but in reality some of the most money made from trends occurs when market views are inconsistent with price. Keynes refers to general opinion but trend-following or systematic managers grounded in just looking at the data can be at odds with general opinions. Systematic managers are focused on data - it could be prices or it could be fundamentals, but the decision process is data driven not opinion driven.
The trend manager can be a contrarian to public opinion because the focus is on price and not what others think. If opinions are the same, but prices are doing something different it is worth focusing on what prices are saying. Prices may prove to be wrong, but it the process of being marked to market which tells us that it cannot be ignored.
Price should be the weighted average of all opinions, so it seems odd to think in terms of being a contrarian, but in reality some of the most money made from trends occurs when market views are inconsistent with price. Keynes refers to general opinion but trend-following or systematic managers grounded in just looking at the data can be at odds with general opinions. Systematic managers are focused on data - it could be prices or it could be fundamentals, but the decision process is data driven not opinion driven.
Look at the simple example of current market pundits and stocks. There is a vocal case for stock over-valuation. The drum beat of valuation has caused many to cut equity exposures, but in reality keeping with the trend has been a more successful strategy. Prices are telling us that current opinions are wrong or at least not valid in the current environment. Opinions may prove to be correct at some time in the future, but trend-following focuses on the here and now presented by price data. It may not be perfect, but it is a decision process that can be structured with precision.
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