The Art of Contrarian Trading How to Profit from Crowd Behavior in the Financial Markets

by Futia, Carl

• ISBN13: 9780470325070
• ISBN10: 0470325070
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-06-22
• Publisher: Wiley

Summary

Why is it so hard to beat the market? How can you avoid getting caught in bubbles and crashes? You will find the answers in Carl Futia's new book, The Art of Contrarian Trading. This book will teach you Futia's novel method of contrarian trading from the ground up.In 16 chapters filled with facts and many historical examples Futia explains the principles and practice of contrarian trading. Discover the Edge which separates winning speculators from the losers. Find out how to apply the No Free Lunch principle to identify profitable trading methods. Learn about the wisdom and the follies of investment crowds - and how crowds are formed by information cascades that drive stock prices too high or too low relative to fair value. Discover the power of your Media Diary - and how to use it to spot these information cascades, measure the strength of the crowd's beliefs, and decide when the crowd's view is about to be proven wrong.You will watch Futia apply these principles of contrarian trading to navigate safely and profitably through the last 26 tumultuous years of roller coaster swings in the U.S. stock market - a time during which Futia kept his own media diary and developed his Grand Strategy of Contrarian Trading. See how this Grand Strategy worked during the Great Bull Market of 1982-2000. Watch the Contrarian Rebalancing technique in practice during the dot.com crash of 2000-2002. Find out when the Aggressive Contrarian Trader bought and sold during the bull market of 2002-2007. Read about the causes of the Panic of 2008 and ups and downs of contrarian trading during that dangerous time.Futia shows you how the market turning points during the 1982-2008 period were foreshadowed by magazine covers and newspaper headlines that astonishingly and consistently encouraged investors to do the wrong thing at the wrong time. By monitoring crowd beliefs revealed by news media headlines - and with the guidance provided by the many historical examples Futia provides - a trader or investor will be well-equipped to anticipate and profit from market turning points.

Author Biography

Carl Futia is a trader who runs a highly rated investment/trading blog (carlfutia.blogspot.com). He provides very specific price forecasts for the stock, bond, and various commodity markets. Futia's main tools are derived from the theory of contrary opinion and box theory. He holds a BA in economics from Yale University, a master's degree in mathematics from the University of California at Berkeley, and a PhD in mathematical economics from Berkeley as well. Futia has published several papers in theoretical economics in scholarly journals.

Table of Contents

Preface	p. xi
Can You Beat the Market?	p. 1
The Speculator's Edge	p. 1
Lending a Helping Hand to Investors	p. 2
Uncovering Market Mistakes	p. 4
Looking at the Evidence	p. 5
Market Timing	p. 6
Catch-22	p. 7
Market Mistakes	p. 9
Efficient Markets	p. 9
Roller Coasters and Stock Markets	p. 10
Do Stock Prices Fluctuate Too Much?	p. 12
A Look at Behavioral Finance	p. 14
Behavioral Finance and Exploitable Market Mistakes	p. 16
No Free Lunch Redux	p. 17
The Edge	p. 19
A Theory of Market Mistakes	p. 19
To Get Along, Go Along	p. 21
Go Along and Create a Mistake	p. 22
The Social Calculus of Crowds	p. 25
The Vision of a Contrarian Trader	p. 27
The Wisdom and Follies of Crowds	p. 31
Can a Crowd Be Wiser Than Its Members?	p. 31
The Need for Collective Wisdom	p. 32
Independent Decisions in the Financial Markets	p. 34
Forecasting Market Psychology	p. 36
Information Cascades into the Whirlpool of Speculation	p. 38
The Life Cycle and Psychology of an Investment Crowd	p. 43
Prologue	p. 43
The Cycle of Birth and Death	p. 44
The Stock Market Bubble of 1994-2000	p. 46
It's Different This Time: The New Information Economy	p. 48
Shattered Dreams: The Bear Crowd of 2001-2002	p. 49
Popular Instincts and the Search for Certainty	p. 51
The Pied Pipers of Investment Crowds	p. 54
The Mental Unity of Investment Crowds	p. 55
Suggestibility, Volatility, and Disintegration	p. 59
The Historical Context for Market Mistakes	p. 61
Mature Investment Themes and Market Crowds	p. 61
Mistakes versus Fair Value	p. 62
Market Data Sources	p. 63
The Deadly Mistake	p. 64
When Is the Stock Market (Extremely) Overvalued?	p. 65
When Is the Stock Market Undervalued?	p. 67
The Peak Oil Bubble	p. 70
How Crowds Communicate	p. 71
What Do Information Cascades Tell Investors?	p. 71
The Role of the Mass Media	p. 73
A Word about Personal Flexibility and the Future of Media	p. 76
Monitoring the Markets	p. 76
Studying the History of Bubbles and Crashes	p. 77
Constructing Your Media Diary	p. 79
Gaining the Edge	p. 79
How My Diary Made a Difference in 2002	p. 81
Get Ready to Cut and Paste	p. 83
Excerpts from My Media Diary: November 2005	p. 86
Excerpts from My Media Diary: June 2006	p. 89
Interpreting Magazine Covers	p. 92
Important Investment Themes	p. 97
Telling the Market's Story	p. 97
New Eras	p. 98
Effect of War and International Political Crises on the Stock Market	p. 100
Financial Crises Create Crowds	p. 102
New Industries and Companies	p. 104
Commodity Booms	p. 106
Interest Rate Movements and the Bond Market	p. 107
Using Your Media Diary to Track Investment Themes	p. 107
Interpreting Your Diary: Market Semiotics	p. 109
Media and Information Cascades	p. 109
Your Media Diary: A Living History of Information Cascades	p. 110
Semiotics: The Study of Signs	p. 110
The Most Important Sign: The Price Chart	p. 112
Magazine Cover Stories	p. 114
Newspaper Headlines	p. 116
Front Page Stories and Editorials	p. 118
Crystallizing Events	p. 118
The Weight of the Evidence	p. 119
More on Market Semiotics	p. 120
The Grand Strategy of Contrarian Trading	p. 123
Contrarian Investment Planning	p. 123
Contrarian Trader's Investment Portfolio	p. 125
The Investment Goal of the Contrarian Trader	p. 126
A Warning about Capital Gains Taxes	p. 128
Contrarian Trading Strategy #1: Don't Speculate	p. 128
Contrarian Trading Strategy #2: Don't Invest with the Crowd	p. 129
Contrarian Trading Strategy #3: Contrarian Rebalancing	p. 129
The Aggressive Contrarian	p. 130
A Long-Only Strategy for the Aggressive Contrarian Trader	p. 131
More Aggressive Contrarian Trading Strategies	p. 134
The Great Bull Market of 1982-2000	p. 137
Prologue	p. 137
The 1987 Crash	p. 138
Interlude: The 1929-1932 Crash and Bear Market	p. 140
The S&L Crisis, the 1987-1990 Bull Market, and the 1990 Bear Market Crowd	p. 141
Rally without Joy, 1991-1994	p. 143
The Stock Market Bubble Inflates, 1995-2000	p. 145
The Aggressive Contrarian Faces the 1987 Crash	p. 147
The 1990 Low	p. 149
Long Term Capital Management Goes Bust	p. 150
Collapse of the Bubble: The 2000-2002 Bear Market	p. 153
End of the Great Bull Market	p. 153
Contrarian Rebalancing during the 2000-2002 Bear Market	p. 154
The Long Way Down Again	p. 154
Contrarian Rebalancing during the Crash	p. 155
The Aggressive Contrarian during the 2000-2002 Bear Market	p. 157
A Wall Street Wreck	p. 158
The Summer Rally	p. 160
The March 2001 Plunge	p. 162
Terrorists Attack on 9/11	p. 164
End of a Bear Market	p. 164
Transition to a New Bull Market	p. 166
The Postbubble Bull Market of 2002-2007	p. 169
Escaping the Bear's Claw	p. 169
What Bull? Looking for Signs of a Bullish Information Cascade	p. 170
The Story of Google's IPO	p. 172
The Housing Bubble	p. 175
Aggressive Contrarian Trading during the 2002-2007 Bull Market	p. 177
April 2005-A Buying Opportunity	p. 181
June 2006-Another Buying Opportunity	p. 182
Aggressive Contrarian Trading in Early 2007	p. 183
July-October 2007	p. 186
The Panic of 2008	p. 189
The Conservative Contrarian during the Panic	p. 189
The Mortgage Mess	p. 191
The Debt-Deflation Spiral Takes Hold	p. 193
Lenders of Last Resort	p. 194
The Credit Crisis and the Contrarian Trader	p. 195
Bull Market Top and the First Step Down	p. 195
The Bear Stearns Failure	p. 198
Fannie and Freddie	p. 199
The Crash: Bankruptcy of Lehman Brothers	p. 201
Vignettes on Contrarian Thought and Practice	p. 205
The Psychology of the Stock Market	p. 206
The Godfather of Contrary Opinion	p. 206
Opinion Polls: What Do You Think	p. 207
Is the Odd Lotter Always Wrong?	p. 209
A Forecasting Giant of the Past	p. 211
Paul Montgomery, the Magazine Cover Contrarian	p. 212
Irrational Exuberance and Other Bubbles	p. 212
Value Investing-A Back-of-the-Envelope Approach	p. 214
About the Author	p. 218
Index	p. 219
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