Jan

30

If you look at it in a slightly different way could it not also suggest that you buy stocks NOT based on publicly available information on some upcoming near-term changes (that if you are not yourself privy to some difficult-to-get information) but instead based on negative sentiment coupled with some well-known value parameters.

How can that be an advantage for individual investors? I am sure many contrarian funds also do that. They have the advantages of visiting the company, calling the CEO and analyzing the entire industry for instance, which are only possible for perhaps large investors but clearly not possible for the ordinary individual investors.

Gary Rogan writes:

An individual investor isn't "graded" every quarter, he/she may hold forever instead of trying to get in and out. There is a well-known asymmetry (in individual investors' favor) that for many institutional managers constantly approximating the metrics they are graded against is preferable to swinging for the fences because reliable mediocre performance isn't likely to result in two or more bad quarters in a row that may get the manager fired. This may or may not be relevant in this case, but if a manager can figure out what everyone else is doing it may be in his interest to just follow that. Also the point is, that after a long time the bet may stop being contrarian and with enough diversification the portfolio starts behaving more index-like but with a built-in positive bias that may take years to play out. The survivorship bias also will eventually favor the winners over the losers, if there are enough of both. Over the long term at least.

The individual investor doesn't get hit by additional decision-making without much information. And finally, negative sentiment is sometimes more powerful than all the buying by all the contrarian funds put together.


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