Contrarians and the Permanent Bear or Bull Mentality

There is an important difference between a bear mentality and the contrarian trader or investor. A trader with a permanent bear mentality believes that market trends are always downward, even in bull markets. While the view is contrarian, it is unyielding. The permanent bear is right only half of the time.

An equally common problem is found in the overly optimistic permanent bull approach. Like the bear, the bull is right only half of the time and during bear markets, the bull trader is acting in a contrarian manner.

A true contrarian is more flexible than either a permanent bear or a permanent bull.

The contrarian should constantly be in 'evaluation mode' about overall markets as well as individual stocks. All market trends are cyclical, meaning prices rise and prices fall. As a matter of improved timing, a contrarian questions the crowd mentality that follows trends, when timing is invariably improved if you lead rather than follow. A contrarian is not by definition either a bull or a bear, but rather observes the market direction. The key is to identify the direction properly and to note when trading sentiment is moving in the wrong direction. This is most likely to occur at or near the top of uptrends and the bottom of downtrends.

Key Point

Unlike the permanent bull or bear, a contrarian recognizes that opportunities are most likely to occur at the top of an uptrend and at the bottom of a downtrend.

The advice to 'buy low and sell high' has great significance, but only contrarians are able to act on the advice. Because buying activity accelerates as prices top out, and selling activity accelerates when prices bottom out, contrarians have to be able to step back from the emotional investment in a market position, and to make rational observations. By doing so, timing is vastly improved and the contrarian learns to ignore the human instinct to go along with the majority.

Contrarians belong to neither the bear nor the bull camp because they have specific traits:
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2016. Content published with author's permission.

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