Contrarian Investing vs Momentum Investing

There are two common shortcuts made by investor when investing.

First one is called contrarian investing. Also known as:
“What goes up, must come down.” / “What goes down, must come up” /
“rebound” / “correction”

contrarian-etfs.png

Second one is called momentum investing. Also known as:
“What goes up, will keep going up” / “What does down will keep going down” /
“market tips” / “hot tips”

Momentum-1030x509.jpg

Contrarian investing happens when we are used to seeing something at a certain price. For example, if we always see a property selling at RM400/sqft, and then when we see the price drop to RM350/sqft, we will go and buy that property because we believe the price will… rebound.

Momentum investing happens when we are used to seeing prices keep going in the same direction. For example, if we see property prices keep going up and getting more expensive, we will go and buy the property because we believe the price will keep going… up.

Now look at this example. A chart of Public Bank Stock vs Maybank Stock. Which one should you buy?

pic-2

Public Bank Stock keep going up. Maybank stock keep going down.

 

So if you are contrarian, you will think, Maybank stock will rebound up and Public Bank stock will correction down.
Therefore you will buy Maybank.

But if you are momentum, you will think, Maybank stock will continue to go down and Public Bank stock will continue to go up.
Therefore you will buy Public Bank!

This is a common short cut as people don’t have time or interest to study the stock.
But it is obviously a poor shortcut because as I explained in a previous article, most of us humans are really bad at timing.

bad-decision

The common answer provided by an amateur agent to solve this problem is to do dollar-cost-averaging.

dollar cost average.jpg

But as advisors with access to industry best practices and tools, PLUS willingness to use them for the benefit of the client, we can also do cut loss, take profit, rebalance and restructure along with the traditional methods.

So don’t get caught by shortcuts in investing, you might get caught out and get below-average returns.

**The article is written assuming all investments concern is fundamentally solid and resilient. Again to paraphrase Warren Buffet: whatever technique applied to a zero return investment still returns zero.

 

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