Investing Strategies: Contrarian Versus The Crowd Consensus

Crowd consensus is the broader sentiment of the current market. In more simple terms, crowd consensus is how the general population feels about the economy. Does the overall population feel that there is a positive outlook for the future (bullish market), or that the economy is headed towards a recession/correction (bearish market).

There are many styles of investing, and you need to look within to see which style fits you best. Investing in the market when the sentiment is positive, is a style called momentum investing. Investing when the overall market sentiment is negative, is called contrarian investing. There are several measures that can help an investor understand where the current market consensus stands. One can look to the volatility index (VIX), the fear and greed index, watch the most recent Fed board meetings (posted on youtube), gauge the national unemployment rate, and keep an eye on other financial market benchmarks or leading indexes.

fear and greed index

(Fear and Greed Index dated 4/27/18)


Investor Business Daily (IBD) often writes about the CAN SLIM method of stock analysis. CAN SLIM is a growth stock investing strategy formulated from a study of stock market winners dating back to 1953.


C – Current quarterly earnings per share. An investor should check that the most recent quarterly earnings have increased sharply from the prior year’s quarter earnings (of the same month or year over year analysis).

A – Annual earnings have dramatic increases over the past five years. All companies that are traded on the stock market are required to file quarterly and annual reports. Familiarize yourself with these earnings statements, and watch a stock over time to understand the company’s business practices.

N – New products, management, and other new events. The market and investors are subject to their emotions and sudden events can cause short-term excitement (propelling a surge of optimism within the market) causing prices to have an uptick. On the other hand, negative news (like a scandal, product defect, or recall) surrounding a company can cause investors to lose confidence in the firm’s future which can cause a decline in the stock price.

S – Scarce supply, coupled with a strong demand for the company’s stock. The equilibrium of any commodity, product, or stock rests at the intersection of their supply and demand curves. Investors should pay attention to companies buying back their stock, and be on the lookout for low debt-to-equity ratios.

L – Leading over laggard stocks within the same industry. Use the relative strength index (RSI) as a guide to study up on how companies within in the same industries compare. The RSI ranges from zero to 100. An RSI indication above 30 suggests a buying opportunity (bullish), while above 70 signifies a chance to sell (bearish).

I – Institutional sponsorship. Look to see where the big money players are placing their bets. If a stock catches your eye, check to see if large mutual funds hold that stock as one of the top 10 holdings within their fund. Be cautious of stocks that are overly owned by institutions, because if a large institution sells its shares in the stock, it can have a negative impact on the stock’s price due to the increase in shares (high volume) that hit the market all at once.

M – Market direction. Review daily market averages by using Yahoo Finance. You can compare several stocks against one another, and against indexes or other market benchmarks. Another good indicator is to apply the 50 and 200 moving day average lines to the graph. A few common market benchmarks are the Dow Jones Industrial Average (a price-weighted average of 30 blue chip stocks listed on the NYSE), S&P500, and Russell 2000. These benchmarks measure the overall health of the U.S. economy and are also a good indicator of investor sentiment.

Warren Buffett is one example of a contrarian investor who is a value buyer. He famously said, “Be fearful when others are greedy, and be greedy when others are fearful.” Ray Dalio, the CEO and founder of Bridgewater, says that uses algorithms to betting against the majority and hopes that he gets it right.

If you are interested in a particular stock, add the ticker symbol to your watch list and subscribe to receive their company news. There are many ways to make money in the market. I want to know how you feel about the different pros and cons of these two styles of investing. Which do you prefer and why? Comment below!


Photo credit Fear and greed index

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