Contrarian Thinking 1 - One Of The Reasons Why Investing Is So Hard
One of the problems with making money in the markets is that the obvious is often wrong, and this usually plays havoc with our psychology. Especially as paradoxically after the event that which was not obvious now becomes agonisingly obvious.
This and the next page of the newsletter are going to highlight two excellent examples of contrarian thinking in the markets. The two articles are designed to highlight the importance of always looking at an investment idea from the supposedly wrong angle because that's often where some serious money is made.
If you like the idea of contrarian investing don't forget to check out Page 3 of this newsletter as we look into an interesting trade setting up with Sterling against the US Dollar.
The Gulf War Mark 1 - 1991
One of the most explosive examples of this whole contrarian phenomenon happened around 17 years ago during the first Gulf War. At this time I was working as a commodity broker and we had a client, a family shipping firm located in New York, which was run by two young brothers - the family patriarch had retired but was still keeping half an eye on matters.
One day during the initial Allied bombing campaign the Father called in wanting to sell short 25 lots (a 'lot' is another name for a 'contract') of Crude oil futures, ie this position would make money if the market fell. Obviously at the time the market was extremely volatile, often with daily moves of over $3-$4 a day (today a move of over $1 a day would be considered large).
A $1 move in Crude futures is worth $1,000, so the position would be making/losing $25,000 for every $1 movement.
Not only did the majority of our broking desk think he was mad to sell short oil ('everyone' was sure that once the ground fighting started the price of oil was sure to explode on the upside) but so did his two sons.
The price of crude (from memory) was ranging somewhere between $30-$40 around this time.
About a week after the initial sell order with the market moving against him (ie higher) the Father sells another 25 lots short. And this continued over 2-3 weeks until he had 100 lots short (risk was now $100,000 for every $1 it moved against his average price).
The Troops Go In - All Hell Breaks Out In The Markets
When the bombing campaign stopped and the go ahead for the troops was signalled the majority of market participants were not only left stunned but seemed to be nursing very heavy losses.
Why, because ALL the markets did exactly the opposite of what the majority had been expecting. For example, the price of Oil cratered and global stockmarkets went through the roof. See the Crude Oil chart below and apologies because it was the best one we could find.
