Contrary To What You Might Think Human reason is such a powerful tool that even our blunders are intelligent. The Freudian slip, which is among the most abundant species of human error, typically contains more information than the statement it mistakenly replaces. What Jimmy Carter meant to say at the 1980 Democratic Convention was the name of the next speaker, Hubert Horatio Humphrey. What he actually said, given that we already knew the gentlemanâs name, was vastly more thought-provoking: ââ¦my good friend and a great American, Hubert Horatio Hornblower.â Some mistakes are even more potent. Loose lips, weâve been warned, sink ships. Of more practical significance, cognitive psychologists have identified the most characteristic form of human confusion, which is also the most elegant; namely, that we tend to do precisely the wrong thing or to perceive the exact reverse of the truth. The most frequent angle of misperception is 180 degrees. Now that takes talent. It also promises invaluable guidance for people who wish to learn from the mistakes of others rather than their own. For investors, it supplies one of the keys to sensing the warp and woof of a market: the contrary indicator. It took the smart-money crowd awhile to figure this out. Not one of the towering geniuses of economics or finance could find a way to make reliable predictions of what the stock market would do next. And yet, toiling for decades in private oblivion, thousands of poor, benighted amateurs were able to foresee the marketâs every gyration with perfect clarity â though, as it happens, upside down. Stunning Reversals What the major market analysts finally realized was that there were people out there who invariably did exactly the wrong thing. Itâs as if no scientist had ever been able to develop a compass that would point north, but some bumbling amateur had managed to make an instrument so defective that it pointed unfailingly to the South Pole. For stock market technicians, just such an inverted divining rod emerged in the hands of the odd-lot short seller, possibly the most cherished and least respected financial mind in the long history of going short. The odd-lotter, the impecunious small investor unable to buy round lots of 100 shares, is presumed to be not only under-capitalized but also under-informed, ill advised, panic-prone, and non-logical. When these chronic bunglers sell short in great numbers, staking their meager assets on a decline in the market, sophisticated investors smile knowingly and proceed to buy with a vengeance. (Iâm using the word âsophisticatedâ here the way it is used by Wall Street advisors: if you are rich, and if I make my living by advising the rich, then Iâll probably call you sophisticated. You, in turn, will prove me correct by hiring so perceptive an advisor. This is the kind of logic that utterly escapes the odd-lot short seller.) How well does this contrary indicator work? When big investors see the odd-lotters selling short and they plunge into the market with billions of dollars, sure enough the market rises. It works splendidly. They may, itâs true, be confusing cause with effect, but thatâs just another illustration of the power of reasoning in reverse. Odd-Lot Paranoia There are other contrary indicators, each relying on the exactly-backwards tendency of mental and emotional processes gone awry. In markets driven by fear and greed, itâs all too easy to get caught off base, being afraid when you should be greedy or greedy when you should be afraid. For the small investor, there is the additional problem of paranoia. And, as Charles Osgood once pointed out, âJust because youâre paranoid doesnât mean theyâre not out to get you.â If we contrary indicators have the feeling weâre being watched, it may be because weâre being watched. It wouldnât surprise me to learn that when I go short on thirty shares of Broken hill Proprietary mines, phones start ringing up and down Wall Street; that the word goes out, amid gales of laughter: âVan Dine thinks precious metals are heading south.â Suddenly, mutual funds and pension funds are pouring their money into precious metals stocks, which of course drives up the prices and scuttles my short sale â and behold, those masters of the self-fulfilling prophesy are right again! As noted by the once-prestigious firm of Simon & Garfunkle, âNo matter how you look at this, you lose.â So the lot of a contrary indicator is an odd, unhappy one. The odd-lotter finds himself irrevocably appointed as the laboratory rat of Wall Street, condemned in perpetuity to choose the electric shock instead of the cheese. His dilemma is twofold. (Arenât they all? Thatâs why dilemmas have horns.) First, there is the problem of keeping oneâs ego intact in the face of being everlastingly wrong. Second, the only escape from this maze is to migrate to the ranks of large investors, which is extremely difficult to do when your every get-rich scheme culminates in catastrophe. Revenge of the Little People There are compensations, of course, one of which is the tremendous power we small investors wield. Without our wrong-headed plunges to show them the (opposite) way, the big institutional money managers would be helpless. Sometimes, just for the sport of it, we stay out of the market for months on end and watch it slide this way and that, rudderless, while once-decisive analysts write plaintive articles in Barronâs, praying aloud for the return of the individual investor. Beyond such mischievous pranks, weâve nursed some hope in recent years for a counter-offensive, using some of the same tactics to which weâve so often fallen victim.