Momentum Trades and Contrarian Trades

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Intuition tells us that the right way to bet is to go with the way things have been going, so as not to miss out. Dotcom stocks are going up. Well then, buy some! Get yourself a piece of that action.

This FOMO intuition is also known by the more dignified term, "momentum trading."

Instinct also tells us that the right way to bet is to go against the way things have been going. After all, if red keeps coming up then black must be due to come up soon.

This is sometimes known as "contrarianism."

I can think of nothing that so illustrates the bankruptcy of appeals to "common sense." Both contrarianism and momentum trading wrap themselves in the garb of common sense. They do so quite naturally.

Yet one of them must be wrong. And, at least if adhered to with any consistency, each of them is wrong.

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