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On Contrarianism

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It sure is sexy to call a bottom or a top in a financial market. Great cocktail conversations can be had over why there's a bubble in China, internet startups, or gold. We know of a few heroes of this kind of trade: John Paulson is the most recent, and Warren Buffett is known for his value plays, and you've got others like Roubini, Chanos, and Taleb.

But what makes a true contrarian?

This goes a little deeper in to epistemology-- how do we know things? Essentially, to be a contrarian in the financial market is to make a bet against the current direction of asset prices.

But in order for you to take a thesis in the markets or an opinion in general, you need to ask yourself one thing: "how will you know when you're wrong?"

That's the problem with a lot of these pundits, there's no way to make a thesis invalid. This goes back to how you "know" something is going to happen. The thing is, you can't predict the future, you can only take a reasonable extrapolation based off current data and assign probabilities to it. If you do not know what evidence needs to be presented in order for you to be wrong, just make sure you aren't putting money on the line.

So in that spirit, I'm going to present my "double-contra" list. This list is essentially questions that you should ask yourself based off long-term assumptions that it seems many "contrarians" are making. It's essentially a mental exercise to test your assumptions, and what would happen if the obvious doesn't actually occur. These are the kinds of questions that will cause zerohedgers to foam at the mouth and have many laugh at my clear ignorance of the future of the economy. These are "what if" statements, meaning that they probably won't happen, but it's a good idea to consider the ramifications of these scenarios...just my kind of list.

My Double Contra List

  1. What if the actions of the Federal Reserve were the right thing to do?
  2. What if the debt of the United States never becomes a significant issue?
  3. What if the debt/GDP ratio significantly improves, not because of reductions in spending but because of solid domestic growth?
  4. What if Oil doesn't break above $100/bbl for the next 5 years?
  5. What if the United States ceases military operations in Iraq and Afghanistan?
  6. What if the government actually reduces max leverage for financial firms?
  7. What if the growth in China reverts but we never see a crash?
  8. What if solar and nuke actually become viable energy sources?
  9. What if Japan finances HSR in California and their economy significantly improves?
  10. What if gold has put in a top?
  11. What if the euro goes back to 1.50?
  12. What if Facebook isn't overvalued?
  13. What if the Facebook IPO reinvigorates the IPO market and we see a rush of offerings from names like Skype, Zynga, Groupon, and others?
  14. What is your "what if" scenario? Let me know in the comments section.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/