The Art of Contrarian Trading: How to Profit from Crowd Behavior in the Financial Markets
Contrarian theory in investing and trading is based on the idea that markets are driven in large part by crowd behavior. When crowds form around investing themes in the stock market, they push stock prices too high or too low relative to fair value. Contrarians hold that if investment crowds are responsible for the pricing mistakes made by the stock market, it logically follows that you can do better than buy-and-hold if you can detect those situations in which an investment crowd has driven the stock market too high or too low relative to fair value.The Art of Contrarian Tradingshows how to take advantage of the crowd's periodic bouts of enthusiasm and fear, and make wise investment choices that most others may think are ill-advised.Veteran trader Carl Futia explains the contrarian trader's principal tool: his media diary. Since major market turning points are almost always foreshadowed by magazine covers and newspaper headlines that turn out to be completely wrong, by monitoring crowd behavior through both quantitative indicators and news media headlines—and with the hindsight of historical examples—a trader or investor will be well equipped to profit from market turning points. Futia shows specifically how the information contained in a media diary can be interpreted and then coordinated with a statistical view of a market's current and past swings. By looking back at the bull market of 1982–2000, the 2000–2002 bear market, the bull market of 2002–2007, and the crash of 2008, he reveals how his own media diary effectively identified the many valuation mistakes the stock market made during those years. In addition, he explains the development of the theory of contrary opinion, highlights the contributions key individuals made to the theory, briefly discusses several books every contrarian should read, and offers a quick primer on value investing for the contrarian trader.The contrarian trader, says Futia, is not in the business of predicting stock market highs and lows or of making correct forecasts of any kind. Instead, his focus is on a single objective—that of achieving a higher return than that earned by the buy-and-hold strategy. This book will show you how to achieve this elusive goal.