Why Contrarians Make Money And Trend Chasers Lose Money

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April 17, 2009 10:59am ETF BASIC NEWS

arrowsSalmon have a reputation of “swimming against the stream.” This often makes them easy prey for bears. Contrarian investors on the other hand are some of the few who’ve pocketed gains over the past months. What makes contrarians so successful? Is it too late to become a contrarian? 
 
Don’t you hate being left out? Going against the grain is usually the unpopular direction to go. Nobody likes to be the oddball out. For the sake of popularity, humans tend to conform to the general trend eventually, especially if the trend continues to persist.

As it turns out, when it comes to investing, being the oddball is much more profitable. Oddballs in the investment community are considered contrarians and contrarian investors have been one of the few to actually book profits over the past year or so………

………….Broad index funds such as the Dow Jones (NYSEArca: DIA), S&P 500 (NYSEArca: SPY) and Russell 1000 (NYSEArca: IWB) lost over 50% from top to bottom. Most actively managed mutual funds did even worse. Why? Because fund managers based their decisions on positive news.

In the fall of 2008, the Federal Pension Benefit Guaranty Corporation shifted most of its $65 billion in assets from bonds to stocks and real estate. This move came just before the bear’s attack intensified.

In 2007, companies belonging to the S&P 500 index spent a record $590 billion repurchasing their own shares. On average, this buy-back decision resulted in a 50% loss. Index components like General Electric (NYSE: GE) and JP Morgan (NYSE: JPM) did much worse than the broader market.

Full Story:  http://www.etfguide.com/research/159/8/-Why-Contrarians-Make-Money-And-Trend-Chasers-Lose-Money/



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