Contrarion vs smart money investors

1. It takes courage and patience to be a contrarian but as a follower, we need to make sure we follow the right investors in guiding us to the market's direction.
2. Can we trust what analysts say as they always make mistakes in their forecast?
3. Investors are often torn between whether to follow the analysts or to do the opposite, as some analysts seem to make mistakes in their forecasts.
For example, when certain analysts were quite bullish about the stock market, the market suddenly underwent a correction. When analysts said the market would crash soon, the market moved up even higher.
This has caused some confusion to a lot of investors on whether to listen to analysts or not.
4. We can choose to be either a contrarian or a follower of the smart money investors. Being a contrarian, you assume that everyone else is stupid, so you will do better by doing the opposite of what the majority of investors are doing.
When the investors are selling stocks in panic, you will be buying because you believe that the market will recover soon.
However, as a result of greed and fear, not many investors can be contrarians, especially when investors are highly influenced by what they read in the newspaper.
When a market crashes, most investors do not have the courage to buy shares because they fear that the shares that they purchase today may get even cheaper tomorrow. During the market crash in the year 1997/98, our market dropped for about 18 months from March 1997 to September 1998.
Unless you have plenty of bullets to continue averaging down your purchases, it makes more sense to start purchase stocks only when the market is on the way up rather than trying to average down your costs when you unable to see the bottom.
During a bull market, a contrarian will continue to sell stocks when the majority of investors are chasing stocks. If the market continues to go up, he will blame himself for selling stocks too early.
He will get very uneasy, especially when he has sold out most of his stocks, yet there are no signs of a market correction. Most of time, the moment he starts to buy back his stocks, the market collapses.
Hence, that is the reason why some investment gurus say a contrarian is only correct at the turning point of a market, but is always wrong the rest of the time.

Follow the smart money investors
In order to not regret, some retailers like to follow smart money investors’ movements. In theory, smart money investors are those who have certain privileged information that the majority of the general public do not.
Bond, currency and commodity traders are smart money investors because they have certain key financial information that the general public do not have access to.
To a lot of retailers, the Government-related fund managers or foreign fund managers are seen as smart money investors. They will buy shares whenever these fund managers are accumulating stocks.
They feel that these smart investors know what they are doing, so they should “jump on the bandwagon” while there is still time.
However, these fund managers do not make the right investment decisions all the time as they also make mistakes in timing their purchases.
Retailers need to be careful when they follow smart money investors as these investors have plenty of cash to average down their purchases. Besides, they have the discipline to cut losses, which a lot of retailers lack.
Lastly, bond, currency and commodity markets are more efficient as not many retailers are involved in these markets.
According to Eugene F. Fama, an efficient market is a market where the values of all assets and securities at any time fully reflect all available information.
Hence, we should view seriously whenever there are any big price movements in bond, currency and commodity.
For example, if there is a sharp drop in oil prices in the near future, there is a likelihood that we may fall into a global recession as it confirms the decline in global demand for oil.