I don’t watch much tv, but when I get time, I love watching a good movie. Something I watched recently (for the third time) is Lucky Number Slevin. This film is great for a number of reasons – the cinematography, Morgan Freeman, Ben Kingsley, just watch it - but the best part is a scene with Bruce Willis, where he does what is known as the ‘Kansas City Shuffle’. As many good things tend to, the Kansas City Shuffle traces back to jazz – deriving from a song which states:
‘It’s a blindfold kick back type of a game
Called the Kansas City Shuffle
Whereas you look left and they fall right
Into the Kansas City Shuffle
It’s a they-think you-think you don’t know
Type of Kansas City Hustle’
I know what you’re thinking;- uh oh, Burrito boy - here you go again, off on a tangent. But here’s the wrap – the key and the kicker to the Kansas City Shuffle is one of the pillars of financial markets: sentiment and contrarian logic. If everyone is expecting a move in one direction, the exact opposite tends to happen.
This is why I think sentiment is so compelling. If everyone is bullish about a certain asset - be it gold, oil or toilet paper – it is a good time to sell it, as there is no-one left to buy. And on the flipside, if everybody hates a certain asset (like natural gas last year), surely it can only go up because all the haters (I really, really don’t mean to sound like a rapper) have already sold it? There are obviously going to be exceptions to this rule (most prominently, momentum trading), but for the most part, sentiment puts forward a credible case.
Sentiment levels are essential to watch because markets turn when they reach extreme levels (just as volatility highlights turning points). Contrarian investing is absolutely not just about going against the grain, swimming against the tide, or dissenting. It is about understanding when a trade is overcrowded, when pessimism or optimism in an asset is overdone, and when a break in trend is long overdue.
Life is based on emotion, and markets are often driven by emotional responses rather than rational calculations. Emotion is not rational, so it is impossible to deny that markets are not oftentimes irrational; the bubble-and-bust history of financial markets is living proof of this. And that is why they are the coolest thing ever, as irrationality is impossible to predict. We can never truly win.
I may have to disagree that “irrationality is impossible to predict”. Per Dan Ariely, a professor at M.I.T., “our irrational behaviors are neither random nor senseless – they are systematic. We all make the same types of mistakes over and over.” (as do markets, I presume) I will agree with you wholeheartedly , however, that “we can never truly win”.
I am not too sure that the exact opposite tends to happen, rather this is the feeling one can be left with when the larger number of participants in the overcrowded trade become thwarted.
Ever sat on a stationary train and had the train on the adjacent platform start moving, giving the feeling that you are moving in the over direction whilst, in fact, you are stationary?
If the expected outcome doesn’t happen then there can be a tendency to assume that the oppostie has happened, that the contrarian view has prevailed, and frequently this is not the case.
I agree too that we can tuly never win; if we could, where would be the fun in all of this?
Some valuable comments there, erm, Mr Diggler. I especially like the train analogy. All this anti-contrarianism talk gets my cogs turning for another post at a later date – much appreciated.