Underdog or Favourite?
Peter Katevatis - Aug 13, 2018
It was a toasty Sunday afternoon in the summer of 2004, when then dominant soccer nation of Portugal was playing in the UEFA Euro final at home against a dream opponent, Greece. Greece was playing in their second European Championship ever, so when
It was a toasty Sunday afternoon in the summer of 2004, when then dominant soccer nation of Portugal was playing in the UEFA Euro final at home against a dream opponent, Greece. Greece was playing in their second European Championship ever, so when Angelos Charisteas scored in the 57th minute, the defensive-heavy team defied the odds and won 1-0. We all love an underdog story and Greece’s 2004 win is one of the greatest in recent history.
If you had wagered (legally, of course) on Greece you would have been picking the underdog with 80-1 odds. In market parlance we would call this contrarian investing. If you had selected Portugal, we would call this trend investing.
A contrarian investor will look at the cover of The Economist, read the headlines of the Wall Street Journal, or watch the lead story on CNBC, and do the exact opposite of what they recommend. Contrarians base their investment decisions off of the idea that trends tend to revert to the mean, so if we reach extreme over-bought or over-sold situations you can profit from the mean reversion. Most contrarian investors seem to be more comfortable investing in value ideas.
A trend investor prefers avoiding the risk of potentially catching a falling knife and would never sell something breaking new highs. A trend investor believes that the “trend is your friend” and would more likely hold on to winners and sell companies that are going down. They tend not to focus on valuation and prefer growth and positive tailwinds.
In the summer of 2018 we have seen many opportunities for both contrarian and growth investing. With potential global trade wars escalating we have seen value opportunities arise overseas and in some precious metals sectors. With the “big getting bigger” we have also seen some growth technology names report strong earnings and push to new highs.
To be comfortable with your investments, they need to match your personal style. We can help you determine your style by answering a few questions, but I find it works best face-to-face. Our determination of risk tolerance and investment suitability is often solidified by what is NOT said rather than what is written down. Feel free to schedule a time to get together and determine whether you need to be focusing on the underdog or the favourite.