Thinking like a Contrarian

Some investors work on the theory that if everybody thinks something is guaranteed to happen, then the opposite is most likely to occur. At present, everybody believes oil prices will stay high at best and, at worst, go up to record levels.

Trouble is, when everybody thinks something, their expectations quickly become priced into an asset. Therefore, the only surprise is a negative one, which inevitably causes panic and pushes prices down.

As a result, canny investors can let the laws of probability work in their favour by betting against the majority, where the potential returns are considerably higher than going with the masses.

Baron Rothchild left us with some timeless investment advice: “Buy when the cannons are booming and sell when the violins are playing.”

One should not be contrarian purely for the sake of it, of course, but there is definite merit in studying why nobody likes a particular asset that looks cheap or loves one that seems ruinously expensive unless the absolute best-case scenario pans out.

It is refreshing to see one expert predict that the price of oil is likely to fall to about $US35 a barrel over the next few years and push petrol back down to a little over $1 a litre. Associate Professor Anthony Owen at the University of New South Wales is reported as saying the world has plenty of oil and it is only a matter of time before production and refinery capacity increase to meet growing global demand.

NZCity