My Tao - Trend Chasers and Contrarians

There are two types of speculators. The most common is the trend chaser who will latch onto a trend and ride it to its conclusion. The other is the contrarian, making bets contrary to the average consensus. While both strategies can have some success, both break down over time. Trend chasers are always late to the party because trends take time to develop. By the time a trend is established, a great deal of the potential is already taken out. Correspondingly, trends are not broken before a great deal of the gain is lost. Trend chasers leave the party too late with little to no gain.

Contrarians have a similar problem. While they sometimes get the timing right, this happens relatively rarely, and when it happens they tend to leave before the full potential of their bets are taken out. They too end up with little to no gains. Neither trend chasers nor contrarians win because investing is not about timing. It's about positioning and time. Trying to spot a trend or the inevitable end to a trend is a fools errand unless this is done in the historic context of super-cycles that take decades to pan out.

Successful investors look like contrarians close to major super-cycle turning points. During major ups and downs, these same investors look like trend chasers. They ride the cycle up or down, only to turn contrarian when the trend nears a turning point. To aid them, they use historic data.

The hardest part of this is the abandoning of long strong moves in favor of trends that have yet to develop. However, this is an essential part of investing. Old trends have a tendency to break violently, and no-one wants to be surfing the wave when that happens. Similarly, new trends have a tendency to sneak up on investors before suddenly gaining strength, and no-one wants to be left out when that happens. It's well worth under-performing the markets for a few years every now and again to avoid being caught off guard when the trend turns, because that's when profits are either made or lost.

In the end, what separates successful investors from speculators is that investors position themselves for waves they know to be on the way, while speculators jump from one hot-spot to another in the vane hope of making a quick buck. As a result, speculators stumble and fall where investors go for long smooth rides.

By Bengt Nyman from Vaxholm, Sweden - IMG_8762, CC BY 2.0, Link