Thursday, April 17, 2008

Contrarian Investing

The models I follow and will be using on this blog are based off of what is referred to as a "contrarian" approach to investing. Behavioral finance research and the history of financial markets show that group think ebbs and flows between emotional extremes. The typical person is most extreme at the absolute worst times. The same is generally true for crowds as a whole.

Markets are also fractals, meaning any small time frame or price movement will follow a similar pattern to something seen on a greater scale. So there are little waves of emotion that flow within big waves of emotion.

This blog will take a fairly short term approach to identifying the extremes that occur every couple weeks and then put that in perspective of the larger emotional tides that take months or years to unfold and reverse. The investing approach is to buy short term pessimism in a market that is rising on a longer term time frame. The converse will come into play at times as well.

There is a plethora of useful data availabe both publicly and for purchase from market exchanges. This data can be analyzed statistically and back tested to show predictive value. Then they can also be used to identify extremes in near real time and take advantage of that for investment opportunities.

The site that I find to be most outstanding in this type of analysis is sentimentrader.com. There is a link to this site on the right side of the screen. It is a subscription based service for a very reasonable fee, and would really be for someone who is going to put the information to use.

Hope this is helpful.

Pete

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