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Are spread betters contrarian by nature?

Contrarian Trading
Written by David

No, financial spread betters traditionally aren’t contrarian since research has concluded that the majority of opened spreadbets are long positions.

A lot of investment and trading decisions come down to a simple dilemma: should you follow the herd or strike out on your own? These days we hear plenty about the benefits of investing against the prevailing fashions of the time, and some fund managers love to describe themselves as contrarian, although most of them are aware that they will be judged by their performance against a benchmark.

In reality spread betters make up a diverse group of traders and investors spanning different employment types and with different trading objectives. One of the advantages of spread betting is its flexibility as it is as easy to open short positions as it is to buy i.e. open long positions, so contrarian speculators along with people with other outlooks do spread bet.

Some spreadbetters will stick to mainly opening bullish positions while others will look for opportunities to open short trades. And of course the very fact that you can bet on rising or falling markets makes it so much easier to be a contrarian. However the choice is up to the client and statistics show that most opened positions are long trades.

A number of spread traders do attempt to try timing the top or bottom of a market but experienced traders know that this is a tricky game and for the occasional time that you’ll call it spot on, there’s a handful times you’ll end up getting burnt. Most spread traders are in essence trend followers and try trading market trends. Being a successful contrarian demands that, in time, others come round to your way of thinking. It is also undeniable that many find it safer to hunt with the pack. If a company, sector or region is on the up, and a wall of money is being poured into it, it’s tempting to join the party. It may be a bubble, but bubbles often go on much longer than sensible people expect, and in the meantime you can benefit. For instance most people thought Facebook was ridiculously overvalued at $15 billion when Microsoft invested $240 million for a 1.6% stake back in 2007 but in hindsight today most see it as a shrewd move from Bill Gates.

Of course taking popular decisions that most traders and investors support doesn’t require a lot of chutzpah. On the other hand taking a contrarian approach and standing behind a position in the face of adversity is the stuff that some great traders are made off.

It is often said amongst the trading community that when the whole world is bearish and despair stalks the globe, that is usually the time to buy – if you have the nerve! One benefit of employing a contrarian approach is that you would have avoided investing in tech stocks in 2000, UK property in 2007, or tulip bulbs in 1636.

The problem is of course that when things look rosy and Price/Earnings are high, you’ve generally missed the boat.

When was investor confidence at its highest in the last decade? When was unemployment lowest and PEs high? Early 2000… 2007…

When were most people were writing off the economy? When was confidence at its lowest? When did the unemployment rate look bleak? 2003… 2009…

When would it have paid to be bullish, when everything looked great, or when the mainstream press were still banging the doom drum? Short high and sell low, unfortunately, would require you taking the opposite view to the mainstream press. The good news? We get the chance to identify those peaks and troughs before the market fully reacts — but you can’t wait for clear skies on these things. Robert Peston isn’t going to tell you that in 2009 while he’s pacing up and down in front of the BBC cameras lol

It is human nature to not want to dwell in misery for too long, where excess pessimism suddenly turns into optimism, and over optimism is often short-lived. This translates itself in predictable patterns of behavior when multiplied into the mindset of mass-psychology and ‘crowd’ behavior. It is this predictability, engineered and quantifiable, which is at the heart of what we have achieved – what seems like such a simple oscillator it is hard to believe.

Note: Let’s also consider how some traditional investors are sometimes blinded. They buy into a good story… but don’t take into consideration the likelihood of it happening and don’t understand why some would take an opposite view. But one has to keep in mind that when you buy a security – who do you think is selling? It is normally sophisticated investors and insititutional holders who are doing the opposite… they are much more likely not to trade based on news and normally they tend to get the upper hand on small investors. In fact normal ‘private investors’ are usually quite good at losing! A dart-throwing chimpanzee can make better calls as it doesn’t have the false bias of ‘news’ to consider. Private investors also tend to sell ‘winners’ and hold onto losers for far too long… Of course, uncertainty isn’t necessarily bad…but it needs to be cheap and risk-assessed… a clear future in the markets is more expensive than an uncertain one.

About the author

David

I first cut my teeth in the Square Mile in the winter of 2002. I was young, fresh-faced and straight out of university; keen but maybe a little naïve about the way the investment world really worked… A few years ago I discover a whole new world of opportunity: spread betting on the financial markets.

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