What If The Crowd Is Wrong About The Most Important Thing

By Eric Peters, CIO of One River Asset Management

Blindly positioning against the consensus is not a great strategy to pursue all the time. But when investor sentiment reaches extremes, the risk-reward shifts in interesting ways. There is no better extreme to trade than one where the crowd is wildly one way just when the fundamentals are reversing, so that not only are investors overextended, but they are also wrong about their thesis. Such opportunities are naturally quite rare. But because they are so important, we should always be on the lookout to ensure we get ourselves on the right side (and exit the wrong side).

The collapse in global bond markets last year could not have happened without a wildly bullish bond mania that collided with fundamentals that shifted bearish. That trade took a decade or more to set itself up. There are more frequent examples of course, and having taken less time to build, they tend to run less far. The wildly bearish sentiment around big tech stocks early this year collided with AI. The bullish case for oil demand collided with a Chinese economy that reopened but failed to reignite. These things hurt investors but tend to last just a few quarters.