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


Contrarian theory in investing and trading is based on the ideathat markets are driven in large part by crowd behavior. Whencrowds form around investing themes in the stock market, they pushstock prices too high or too low relative to fair value.Contrarians hold that if investment crowds are responsible for thepricing mistakes made by the stock market, it logically followsthat you can do better than buy-and-hold if you can detect thosesituations in which an investment crowd has driven the stock markettoo high or ...

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Contrarian theory in investing and trading is based on the ideathat markets are driven in large part by crowd behavior. Whencrowds form around investing themes in the stock market, they pushstock prices too high or too low relative to fair value.Contrarians hold that if investment crowds are responsible for thepricing mistakes made by the stock market, it logically followsthat you can do better than buy-and-hold if you can detect thosesituations in which an investment crowd has driven the stock markettoo high or too low relative to fair value. The Art ofContrarian Trading shows how to take advantage of the crowd'speriodic bouts of enthusiasm and fear, and make wise investmentchoices that most others may think are ill-advised.

Veteran trader Carl Futia explains the contrarian trader'sprincipal tool: his media diary. Since major market turning pointsare almost always foreshadowed by magazine covers and newspaperheadlines that turn out to be completely wrong, by monitoring crowdbehavior through both quantitative indicators and news mediaheadlines—and with the hindsight of historicalexamples—a trader or investor will be well equipped to profitfrom market turning points. Futia shows specifically how theinformation contained in a media diary can be interpreted and thencoordinated with a statistical view of a market's current and pastswings. By looking back at the bull market of 1982–2000, the2000–2002 bear market, the bull market of 2002–2007,and the crash of 2008, he reveals how his own media diaryeffectively identified the many valuation mistakes the stock marketmade during those years. In addition, he explains the developmentof the theory of contrary opinion, highlights the contributions keyindividuals made to the theory, briefly discusses several booksevery contrarian should read, and offers a quick primer on valueinvesting for the contrarian trader.

The contrarian trader, says Futia, is not in the business ofpredicting stock market highs and lows or of making correctforecasts of any kind. Instead, his focus is on a singleobjective—that of achieving a higher return than that earnedby the buy-and-hold strategy. This book will show you how toachieve this elusive goal.

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Product Details

  • ISBN-13: 9780470325070
  • Publisher: Wiley
  • Publication date: 7/7/2009
  • Series: Wiley Trading Series, #388
  • Edition number: 1
  • Pages: 226
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.00 (d)

Meet the Author

CARL FUTIA is a trader who runs a highly rated investment/trading blog ( 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.

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Table of Contents


CHAPTER 1 Can You Beat the Market?

The Speculator's Edge.

Lending a Helping Hand to Investors.

Uncovering Market Mistakes.

Looking at the Evidence.

Market Timing.

Catch 22.

CHAPTER 2 Market Mistakes.

Efficient Markets.

Roller Coasters and Stock Markets.

Do Stock Prices Fluctuate Too Much?

A Look at Behavioral Finance.

Behavioral Finance and Exploitable Market Mistakes.

No Free Lunch Redux.

CHAPTER 3 The Edge.

A Theory of Market Mistakes.

To Get Along, Go Along.

Go Along and Create a Mistake.

The Social Calculus of Crowds.

The Vision of a Contrarian Trader.

CHAPTER 4 The Wisdom and Follies of Crowds.

Can a Crowd Be Wiser Than Its Members?

The Need for Collective Wisdom.

Independent Decisions in the Financial Markets.

Forecasting Market Psychology.

Information Cascades into the Whirlpool of Speculation.

CHAPTER 5 The Life Cycle and Psychology of an InvestmentCrowd.


The Cycle of Birth and Death.

The Stock Market Bubble of 1994-2000.

It's Different This Time: The New Information Economy.

Shattered Dreams: The Bear Crowd of 2001-2002.

Popular Instincts and the Search for Certainty.

The Pied Pipers of Investment Crowds.

The Mental Unity of Investment Crowds.

Suggestibility, Volatility, and Disintegration.

CHAPTER 6 The Historical Context for Market Mistakes.

Mature Investment Themes and Market Crowds.

Mistakes versus Fair Value.

Market Data Sources.

The Deadly Mistake.

When Is the Stock Market (Extremely) Overvalued?

When is the Stock Market Undervalued?

The Peak Oil Bubble.

CHAPTER 7 How Crowds Communicate.

What Do Information Cascades Tell Investors?

The Role of the Mass Media.

A Word about Personal Flexibility and the Future of Media.

Monitoring the Markets.

Studying the History of Bubbles and Crashes.

CHAPTER 8 Constructing Your Media Diary.

Gaining the Edge.

How My Diary Made a Difference in 2002.

Get Ready to Cut and Paste.

Excerpts from My Media Diary: November 2005.

Excerpts from My Media Diary: June 2006.

Interpreting Magazine Covers.

CHAPTER 9 Important Investment Themes.

Telling the Market's Story.

New Eras.

Effect of War and International Political Crises on the StockMarket.

Financial Crises Create Crowds.

New Industries and Companies.

Commodity Booms.

Interest Rate Movements and the Bond Market.

Using Your Media Diary to Track Investment Themes.

CHAPTER 10 Interpreting Your Diary: Market Semiotics.

Media and Information Cascades.

Your Media Diary: A Living History of Information Cascades.

Semiotics: The Study of Signs.

The Most Important Sign: The Price Chart.

Magazine Cover Stories.

Newspaper Headlines.

Front Page Stories and Editorials.

Crystallizing Events.

The Weight of the Evidence.

More on Market Semiotics.

CHAPTER 11 The Grand Strategy of Contrarian Trading.

Contrarian Investment Planning.

Contrarian Trader's Investment Portfolio.

The Investment Goal of the Contrarian Trader.

A Warning about Capital Gains Taxes.

Contrarian Trading Strategy #1: Don't Speculate.

Contrarian Trading Strategy #2: Don't Invest with the Crowd.

Contrarian Trading Strategy #3: Contrarian Rebalancing.

The Aggressive Contrarian.

A Long-Only Strategy for the Aggressive Contrarian Trader.

More Aggressive Contrarian Trading Strategies.

CHAPTER 12 The Great Bull Market of 1982-2000.


The 1987 Crash.

Interlude: The 1929-1932 Crash and Bear Market.

The S&L Crisis, the 1987-1990 Bull Market, and the 1990 BearMarket Crowd.

Rally without Joy, 1991-1994.

The Stock Market Bubble Inflates, 1995-2000.

The Aggressive Contrarian Faces the 1987 Crash.

The 1990 Low.

Long Term Capital Management Goes Bust.

Chapter 13 Collapse of the Bubble: The 2000-2002 BearMarket.

The End of the Great Bull Market.

Contrarian Rebalancing during the 2000-2002 Bear Market.

The Long Way Down Again.

Contrarian Rebalancing during the Crash.

The Aggressive Contrarian During the 2000-2002 Bear Market.

A Wall Street Wreck.

The Summer Rally.

The March 2001 Plunge.

Terrorists Attack on 9/11.

End of a Bear Market.

Transition to a New Bull Market.

CHAPTER 14 The Postbubble Bull Market of 2002-2007.

Escaping the Bear's Claw

What Bull? Looking for Signs of a Bullish InformationCascade.

The Story of Google's IPO.

The Housing Bubble.

Aggressive Contrarian Trading during the 2002-2007 BullMarket.

April 2005—A Buying Opportunity.

June 2006—Another Buying Opportunity.

Aggressive Contrarian Trading in Early 2007.

July-October 2007.

CHAPTER 15 The Panic of 2008.

The Conservative Contrarian during the Panic.

The Mortgage Mess.

The Debt-Deflation Spiral Takes Hold.

Lenders of Last Resort.

The Credit Crisis and the Contrarian Trader.

Bull Market Top and the First Step Down.

The Bear Stearns Failure.

Fannie and Freddie.

The Crash: Bankruptcy of Lehman Brothers.

CHAPTER 16 Vignettes on Contrarian Thought andPractice.

The Psychology of the Stock Market.

The Godfather of Contrary Opinion.

Opinion Polls: What Do You Think?

Is The Odd Lotter Always Wrong?

A Forecasting Giant of the Past.

Paul Montgomery, The Magazine Cover Contrarian.

Irrational Exuberance and Other Bubbles.

Value Investing—A Back of the Envelope Approach.

About the Author.


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