The Reason Why Mr. Market Often Tops Mr. Contrarian

As the judge in the Court of Investor Opinion, you don’t have a gavel or a sheriff…

But you do have a computer mouse. And that’s all you need to hear this case…

You’ll be evaluating evidence presented by Mr. Market and his adversary, Mr. Contrarian. You need to make a ruling. And then, you need to enforce it when you click to trade.

The trial starts with the presumption of correctness for Mr. Market.

Like a prosecutor, Mr. Contrarian has the burden of proof. If he fails to offer sufficient evidence, Mr. Market will win.

To many investors, the idea of Mr. Market winning sounds like a no-brainer. (“The trend is your friend.” “Don’t fight the Fed.” “Don’t try to catch a falling knife.”)

But for the folks in Mr. Contrarian’s corner, this concept is blasphemy. (“Buy when others are fearful.” “Buy when there’s blood in the street.”)

Neither side will be right all the time. It’s about which side is likely to win more often. And frankly, Mr. Market usually comes to court much better prepared than Mr. Contrarian.

Let’s dive into the reason why…

Revered gurus like Benjamin Graham and Warren Buffett despise Mr. Market.

They invented him as a mythical person with mixed emotions. They accuse him of one day making exorbitant bids to buy your stocks… and the next day wanting to sell at depressed prices.

But folks, things are different today. There’s a massive amount of information available…

This information elevates Mr. Market above where he was generations ago. He’s much different from when Graham and Buffett first discussed his emotional, irrational behavior.

Just consider some of the evidence Mr. Contrarian is up against when he opposes Mr. Market nowadays…

Mr. Market has annual reports, quarterly reports, and price action on his side. He knows all about insider buying, fundamentals, and hundreds of other data points. And don’t forget sentiment-related data – such as short interest, earnings surprises, and estimate revisions.

So as you can see, Mr. Contrarian faces a very formidable adversary.

Mr. Market puts that information to good use, too. Eventually, everything leads to buying and selling. That’s what causes stock prices to behave the way they do. And it’s what we see in the charts.

Price charts aren’t random. And they aren’t like reading the tea leaves, either. They simply depict what Mr. Market – the investment community as a whole – thinks after digesting all the available information and analysis.

That’s not all… Stock prices are determined by supply and demand for shares. So when Mr. Market forms an opinion about a stock, it’s backed by a lot of money being put to work.

With all that said, I need to see convincing evidence to rule in favor of Mr. Contrarian.

A generic “go against the crowd” argument simply won’t cut it. As the judge in the Court of Investor Opinion, I insist on hearing specific reasons why I should rule against Mr. Market.

But if you appreciate the underdog, take heart. Tomorrow, I’ll explain potential paths that could lead Mr. Contrarian to victory.

Until then, approach each stock with the presumption that Mr. Market has it right.

Good investing,

Marc Gerstein

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