Media effectively calls market tops, or bottoms, because it is an information sponge. When reporters call the so-called experts, the experts pontificate. This is a type of show business. The same market commentators are often quoted over and over by the financial press. This is one reason why many financial stories are similar in tone, and thrust. This is why it is important to look for the footprints in the market that pave the way toward consensus which, history shows, inevitably collapses under its own weight.
One could write a book about market indicators, and some have, but at some point one must take a stand or fall victim to having so much information as to be able to justify or rebut any point of view. Shiller’s bubble checklist is a good starting point, but the best contrarian indicator is common sense. Common sense is usually the most uncommon virtue among investors.
When John Paulson, at the time an unknown hedge fund manager, began questioning the rapid rise of U.S. housing prices in 2005, people thought he was nuts. When he made $4 billion in a year, people thought he was brilliant. His journey from ass to Adonis is the perfect parable for investors developing a contrarian discipline.
Paulson made the single and perhaps greatest contrarian investment in the history of the free market because he did not believe Wall Street’s status quo opinion that U.S. housing prices never experienced a nationwide decline. He decided to check it out for himself. He ...