As the U.S. Dollar keeps making new multi-year highs against all major currencies around the world, everyone see what they want to see. Those who are long still see many skeptics and point out that every sustainable trend needs to climb a wall of worry. Those who are short or on the sidelines see too many bulls and ask who’s left to buy?
People tend to confuse confirmation bias with contrarianism.
Confirmation bias is the tendency to search for or interpret information in a way that confirms one’s preconceptions and current market positions.
Howard Marks is as contrarian as they make them. Here’s his take on the subject:
• Contrarianism isn’t an approach that will make you money all of the time. Much of the time there aren’t great market excesses to bet against.
• Even when an excess does develop, it’s important to remember that “overpriced” is incredibly different from “going down tomorrow.”
• Markets can be over- or underpriced and stay that way—or become more so—for years. • It can be extremely painful when the trend is going against you.
• It can appear at times that “everyone” has reached the conclusion that the herd is wrong. What I mean is that contrarianism itself can appear to have become too popular, and thus contrarianism can be mistaken for herd behavior.
• Finally, it’s not enough to bet against the crowd. Given the difficulties associated with contrarianism just mentioned, the potentially profitable recognition of divergences from consensus thinking must be based on reason and analysis. You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong.
Source: Marks, Howard (2011-04-19). The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing) (p. 94). Columbia University Press. Kindle Edition.
