The contrarian's heart skips a beat when consensus forms. Nothing makes me more nervous than when everyone agrees—especially in markets where being right often means being alone, at least initially.
I've been covering financial markets for long enough to develop a healthy twitch whenever unanimity breaks out. And boy, is my eye twitching now.
Look at this fascinating piece of data: the percentage of consumers expecting a stock market decline has dropped to its lowest level in years. Virtually nobody is anticipating a downturn. The crowd has spoken, and it's singing "Happy Days Are Here Again" in perfect harmony.
Which, historically speaking, is exactly when you might want to start humming a different tune.
Consumer sentiment has this funny way of working as a contrary indicator. Back in April, the percentage of folks expecting market trouble was among the highest on record—right before markets went on a tear. Now we're seeing the opposite extreme. Everyone's optimistic, which paradoxically gives the thoughtful investor pause.
There's a model I think about here: the sentiment pendulum. Markets rarely find equilibrium; instead, they swing from excessive fear to excessive greed, pausing only momentarily at rationality along the way. Right now, that pendulum has swung decidedly toward the "greed" side of the spectrum.
Why does this happen? Partly because humans are social creatures. We derive comfort from agreement. When your neighbor, your barber, and your second cousin twice removed are all bullish, it feels safe to be bullish too. It's when you're at a dinner party and mention you're holding cash, only to have everyone look at you like you've just admitted to still using a flip phone.
The market's job, in a sense, is to make the majority wrong at extremes. It's almost poetic.
I was at a conference last week where a veteran fund manager (who'd rather I not use his name) whispered to me over disappointing coffee: "When consensus gets this strong, I start looking for the exits... not to leave, mind you, just to know where they are."
This doesn't mean a crash is imminent—timing markets based solely on sentiment indicators is a fool's errand. But it does suggest that risk might be higher than perceived. When nobody sees danger, nobody prepares for it. Hedges become cheap, protection gets discounted, and leverage looks tempting.
Taking a look at some popular names: NVIDIA (NVDA) continues its astonishing run, with seemingly everyone convinced AI will mint money forever (it might, but forever is a long time). Palantir (PLTR) has become a retail darling again, with message boards lighting up about its AI prospects. Then there's AI Fund (AIFU), Rapport (RAPP), and Circle (CRCL)—all riding high on what feels increasingly like a sentiment wave.
I'm not saying these companies lack merit. But when price movements start resembling vertical lines rather than the jagged patterns markets typically produce, it's worth asking whether fundamentals alone are driving the bus.
Actually, let me back up a sec. I remember covering the dot-com boom in the late '90s—yeah, I'm that old—and seeing the same pattern. Solid companies with genuine innovation got swept up alongside absolute garbage, all rising together on a tide of uncritical enthusiasm. Then... well, we know what happened then.
The contrarian playbook doesn't necessitate selling everything—that would be an overreaction in the other direction. Rather, it suggests some portfolio pruning might be prudent. Maybe take some profits. Perhaps add some hedges while they're cheap. Possibly hold a bit more cash than feels comfortable.
After all, the time to buy insurance is before the hurricane, not during it.
Warren Buffett's famous dictum comes to mind: "Be fearful when others are greedy, and greedy when others are fearful." With consumer confidence in markets at multi-year highs, it might be time to introduce at least a modest dose of fear into your investment thinking.
Or as another market sage once put it: when the shoeshine boy starts giving stock tips, it might be time to reconsider your positions.
The most dangerous words in investing remain: "This time it's different." It rarely is.
But hey—what do I know? I'm the guy who thought Bitcoin looked expensive at $1,000.
