Glossary
Contrarian
An approach that deliberately goes against prevailing sentiment, buying when others are fearful and selling when they are greedy.
A contrarian is an investor or trader who takes the opposite side of the prevailing mood: looking to buy what most people are dumping and to trim what everyone is chasing. The idea rests on a simple observation. When nearly everyone is already bullish, most of the buying has happened, and when nearly everyone is bearish, most of the selling has.
How contrarians decide
Contrarians try to measure the crowd rather than guess at it. Common gauges include:
- Sentiment surveys of individual investors and newsletter writers.
- Positioning data, such as a very high or low Put-call ratio or large Short interest.
- Volatility, where a spike in the VIX signals fear.
- Flows and headlines, such as record fund outflows or magazine covers declaring a sector dead.
Where contrarian thinking goes wrong
Going against the crowd is not a strategy on its own. The crowd is right much of the time: a stock falling because its business is shrinking may keep falling, and a market that looks "too popular" can stay popular for years. Good contrarians pair the sentiment read with Fundamental analysis or price evidence and size positions to survive being early. A buyer who steps in after a 30% fall still faces the risk of a 60% one, as the Dead Cat Bounce reminds traders. Value investing has a contrarian streak, but the two are not the same thing.