The Alchemist: Contrarianism

Posted in Money Matters on September 29, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “Contrarianism.”

The Alchemist: Contrarianism

by Al Thomas


“Mary, Mary, quite contrary. How does your garden grow?

Silver bells and cockle shells all in a pretty row.”


It is obvious that Mary is not growing the same kind of
garden that her neighbors do and that her crop is much more valuable.
Why? Mary is contrary and that has made her efforts more fruitful. She
has departed from what everyone else is doing. She has given a new line
of thought to her gardening. She is thinking outside the box.

If you have made any investments over the years you might
want to go back to see if you are one of Mary’s neighbors or you have
given some original thought to your trading. During the year 1999
everyone was an investment genius, but during 2000 unless you changed
your thinking you lost money. Those who remained with the Buy and Hold
philosophy have only losses in their account. Fortunately, there is a
rally that started last October and some of that money is creeping back
into many portfolios, but will it remain?


Brokers and the talking TV heads are telling us that the
bull is back and next year will see new highs. Now is the time to
examine your garden and start to think as Mary if you want to harvest a
bountiful crop. When everyone is bullish you want to step back and think
on your own.


Why did the market suddenly collapse in 2000? We ran out of
greater fools. People (I won’t call them investors) were buying stocks
with the idea that they would go up and sell them to someone at a higher
price. Their tunnel vision was so fixed that when their stocks started
down they would not sell as they “knew the market would come back”. John
Q. Public had no exit strategy.


Contrarian trading is difficult because you will be doing
something that no one else is doing and those who know what you are
doing will be telling you that you are wrong.


Many times you will be told about a stock that was $5 and
is now trading at $50 and your friend, broker, tipster says it is going
to $100. At some point that stock is going to run out of the value it
had at $5 and the smart money investors will be selling it to the
greatest fools at the top. Remember Lucent at $60 that now trades at $2.
It has lots of company as you know.


Just to be contrary is not enough. You must have a reason
either fundamental or technical to place a trade whether it is a buy or
sell. Selling is the great secret of the stock market and one that is
not taught to brokers or financial planners. If you own a stock or
mutual fund you should know how much of a loss you are willing to stand
as soon as you enter the trade by using a stop-loss order. It could be
10% or 2% or at a particular chart level on the stock’s chart. There
are many web sites where you can learn much about contrarian trading.


To become a good gardener like Mary you will have to study
both standard and contrary agriculture.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.