Understanding Contrary Opinion

One of my favorite books is Investment Psychology Explained: Classic Strategies to Beat the Market by Martin J. Pring. Pring was the publisher of the newsletter, The Pring Market Review, and a respected commentator on the market. I respect Pring because he nailed the essence of successful investing. As Pring saw it, "All of us are comfortable buying stocks when prices are high and rising and selling when they are declining, but we need to develop an attitude that encourages us to do the opposite." (page 1) John D. Rockefeller understood the point. In the later part of his life, he said that one should only buy stocks on down days and sell on up days. Hmmn.

The following are a few points that Pring observed about contrary opinion:

1. The practice of contrary opinion is an art and not a science. (page 110)

2. To be a true contrarian involves study, creativity, wide experience, and above all, patience. (page 110)

3. Investors tend to move in crowds that by nature are driven by herd instincts and the desire for instant wealth. (page 111)

4. When virtually everyone has taken the position the market is headed in a certain direction, there is no one left to push the trend any further. (page 111)

5. Contrary Opinion requires us to go against our natural instincts--a difficult task indeed. (page 113)

6. We need to be skeptical of the headlines and must try to identify the reasoning behind them. (page 124)

7. It is better to be early and right than late and wrong.

8. Don't extrapolate the future from the present. (page 127)

9. People like to conform. (page 130)

10. If an argument appears in the popular press, you can be sure that everyone who wants to buy is already on board. (page 132)

I leave you with this thought on Saturday morning--The Federal Reserve started buying bonds and treasuries on Friday. (Quantitative Easing II). The market did not go up on Friday. It fell. "A fully positioned condition by the majority of participants is revealed when a news event, supporting their position, fails to move prices in the expected direction" R. Earl Hadady, Contrary Opinion:Using Sentiment to Profit in the Futures Market, pages 63-64.

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