Some say that contrarian investing _ investing that goes against prevailing market trends _ is playing with fire. The very few others, who are successful contrarians, simply take it in their stride and enjoy their achievements. You have often heard me say that the only constant is change. When it comes to investing, many individuals have trouble dealing with change; they are too subjective about their asset allocations and what they ought to be doing. In this respect, you can actually be your own worst enemy. Failure to constantly monitor your portfolio to ensure that change is accounted for can be fatal.
Psychologically we see losses emotionally and gains logically. This means that we are able to count gains and quantify them, making us understand the realities of what is happening. However, when it comes to facing losses we use a different part of our brain _ the emotional area. This starts a diverse response within our thinking and magnifies the facts way beyond logical thinking. This phenomenon, known as loss aversion, explains why people do not make changes within their portfolios when necessary.
Now take this logic and project it forward rather than looking at these factors historically. We are usually so averse to suffering losses that we become conservative with investment strategies in a practical sense. This leads to our making the wrong decisions at the wrong times, resulting in losses when there really would be no need to make any. This behaviour is simply following the herd.
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