Think Differently, Not Opposite, About Markets

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  • on October 22nd, 2010

In order to force myself away from the computer, I like to take time out of every day to read a classic market book.  No offense to the media, but if I find 20 minutes to step outside and read, it’s not going to be about today’s economic data or a piece about potential legislation.  You know what those do?  They heighten emotional attachment to near-term outcomes at a time when I want a more open mind in planning out my next set of moves…the exact opposite prescription.

No, stepping away to read a timeless collection of insights is not only relaxing but a far better use of my time.  It may be a fundamentally-driven book like Ed Easterling’s Unexpected Returns.  It may be a few pages of Brian Shannon’s Technical Analysis Using Multiple Timeframes.  This week it’s been Humphrey Neill’s The Art of Contrary Thinking.  Listen to the wisdom from 1954 in passages like the following:

“In the use of contrary opinion it is a great temptation to force opposite viewpoints in order to support personal opinions.  If a person has pre-established views on an economic trend he is likely to turn to contrary opinions merely for corroboration.”

In case you doubt that people do this, the appearance of election season is always a good reminder in just how biased we can be.  But that’s (mostly) harmless…imposing our opinions on what the market “ought to be doing is a recipe for missing opportunity at the least and going broke at worst.  Leigh Drogen covered that here, I’ll use his words as mine regarding opinion.

But collective investor opinion does matter, and is the source of our edge as market speculators.  I’ll share the following passage from Neill’s book regarding market perception:

“It is not enough for us to know the statistical setup of the moment, or even the probable statistical outlook.  We need more importantly 1) To know how consumers and businessmen look upon(react to) these statistical reports and probabilities and 2) we then need to consider a contrary opinion on trends thus commonly accepted.”

As individual operators, we obviously have the ability to shift course much easier than “the market”…so why stay attached to our primary thesis instead of planning for the full range of possibilities?  Being “caught off guard by that rally” can be replaced with “wow, I’m surprised but impressed” if we simply recognize that our smallness is our edge.  I think the differentiating word in Neill’s statement is consider…notice he didn’t say “impose” or “force”.

That’s where I sit today…surprised but impressed.  The rise from the August lows was fairly obvious…the uninterrupted steamroll into late October a little shocking.  Sure, there is evidence of divergent breadth and volume, but rather than get steamrolled by a freight train because it looks empty, I bring it back to the simple advice of “innocent until proven guilty“.

I know exactly what I want to see before declaring a shift, but have no idea when it will come.  That’s not an IF…it will come but I try not to waste time worrying about its eventual arrival when I need to use my energy acting on pullbacks within the trend.  Doesn’t mean I won’t butcher the entries and exits, but generally I’ll stay in gear with the tide and stay away from fighting for the sake of my opinion.  It’s not that I don’t have one, it’s that I have a thousand and they could all make a decent case for up, down, or sideways.  The best advice is to use contrarian thinking to open our minds rather than close them.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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