Morgan Housel at Fool have a good piece on people trying to be contrarian. It’s a good piece in that if you prowl the investment chat rooms or Facebook groups enough, everyone seem to have an idea.
50% perhaps will be long. 50% will think otherwise. Who do you listen to?
"I felt the need to use restraint," Shiller said in Dan Gardner’s book, Future Babble. "The consensus in the group was that there was no bubble and no need to raise interest rates. To suggest otherwise was distinctly uncomfortable. I [made my point] very gently, and felt vulnerable expressing such quirky views."
Shiller summed up the experience perfectly: "Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated."
Robert Shiller was on the advisory board to the Federal Reserve much during 1999-2004 when, if he has seen the potential housing bust with his data and competency, He should have sound a LOUDER warning.
In the 1950s, Solomon Asch brought a group of students together and asked them to solve a set of problems, such as whether two lines were the same length. These were simple problems with obvious answers. But several of the students weren’t trying to pick the right answers. They were actors working for Asch, purposely giving the wrong answers in front of their peers.
Asch repeated the study with varying numbers of actor-students blurting out the wrong answers. His conclusion: Three-quarters of the test subjects went along with the actors’ wrong answers at least once. In any given experiment, at least one-third of test subjects ignored the obvious answer and followed the actors. Just one in four consistently gave the right answer even when their acting peers disagreed with them.
Even when everyone around you is giving an obviously wrong answer, your tendency to second-guess yourself, not want to embarrass yourself, and your natural desire to fit in can trump every bit of rationality you think you have.
Rather than assuming you can be a contrarian investor, and learning the hard way that you can’t, I think it’s better to put your finances on some form of autopilot, especially if you can build a contrarian bent into that system. It’s how you become a smart investor while taking emotions out of the equation.
How powerful is group think and confusion. And we have market actors that can be very powerful sometimes.
Perhaps a best plan is that, if you know its gonna happen, but you don’t know when, plan out how much to invest in that scenario. Some folks I know wants to always remain 100% invested. I can’t help you there if that is your strategy.
But like project managers, we have a risk table where we have different risks, their probability of happening. And correspondingly what is our game plan then.
When the shit hits, you execute the plan and roll with it.
This level of dollar cost averaging game plan above that Mr Housel highlighted is also one.