The 'little guy' market investor is often right
The "theory of contrary opinion" relates to the often-heard myth that the small investor is always wrong. The small investor is typically one who trades in odd lots -- that is, fewer than 100 shares. The idea that the "little guy" is always wrong is a leftover from days before institutions controlled so much of the market. In today's markets the individual investor is likely to do better than many professionals.
Although the big money managers operate from pools of information supplied by researchers and analysts, they are often bound by their funds' sheer size from performing much better than market averages. Individual investors move into and out of specific stocks with ease and flexibility. Typically, the usual consensus is shaped by the actions of major funds. People who operate contrary to the consensus are "contrarians," who practice the "theory of contrary opinion."
A contrarian swims against the tide -- buying when others are selling and vice versa. Generally, there is a reasonable basis for actions. When "everybody" believes the market will continue to drop, it frequently rises. Or, when there appears to be no limit on how high market averages will climb, it can be a good time to sell and get out.
Contrary opinion also functions in the selection of issues. When gold prices were dropping in 1976 and reached a low of $103 an ounce in August, few investors were willing to buy gold mining shares. But those who did saw their investments quadruple in value. Now, steel issues are going begging, along with auto and housing shares.
One of the well-documented sources of contrarian data is "Contrarian Investment Strategy -- The Psychology of Stock Market Success," by David Dreman (Random House, New York). James Michaels, editor of Forbes magazine, says, "Dreman convincingly shows how the individual investor can achieve superior results by playing against the experts." Stop orders
Stop orders interested one "Moneywise" reader. A stop order is one form of limit order. It is shorthand for "stop loss" sell order. A limit order may also be a buy order.
Typically, a stop order is an open order placed with a broker to sell a specific number of shares if the price should decline to a specific dollar per share value. For example, XYZ Corporation stock may be selling for $50 a share. The owner of 100 shares may have bought them at $25 a share and wants to ensure a profit. Perhaps he is going on vacation and won't be in a position to watch price fluctuations regularly. He may enter a stop (limit) order to sell if the price drops to $45 a share.
The broker lists the order with the specialist in XYZ Corporation stock on the New York or other exchange. The specialist notes that 100 shares are available at $45. If he has other orders at the same price, they will be listed as received. If XYZ shares drop to $45, the first offered shares are sold first and may include the 100 shares in this example. But there may not be enough buyers for all of the shares at $45 a share. The price could drop to $44, at which point the 100 shares are sold -- not at $45 but at $44 a share. This is one chance the owner takes by entering a limit order.
Limit orders are available only on exchanges where a specialist keeps book on specific stocks. You cannot enter a limit order for an over-the-counter stock.
You may benefit from a stop order if a stock declines when you're not watching. But a stop-loss order placed too close to a typical trading range may be tripped off by a quick dip, after which the stock rises again.Sharp sell-offs during one day are sometimes accelerated as prices reach limits, shares are sold , and prices drop even lower to trip other shares in a chain reaction. Purchases may be made at stops along the way down from previously entered limit "buy" orders.
When using stop orders, keep at least 10 percent and usually more between a trading range and the limit price. Use limit orders selectively. They are not a device for everyone and certainly not for every stock.