Meaning of contrarian and averaging down

You may come across discussions about whether or not to engage in namping (averaging down).

In this context, namping refers to a strategy such as if you bought at 300 yen and it falls to 200 yen and stays there with the same number of shares, you consider increasing your position to bring the average down to 250 yen… wondering whether this approach is correct.

Imagine you run a shop selling small items in a shopping street.

Goods you bought expecting to sell well aren’t selling. The same is true in the market. Therefore, the purchase price from wholesalers is also dropping.

“Okay, I’ll increase the inventory!”

The above namping purchase increase is the same idea as this.

The correct approach is to identify products that will sell and, even if it costs more, to purchase them.

While momentum lasts, actively stock up on goods and reap substantial profits—that is the royal road of business.

Applying this correct mindset to trading, in traditional classifications, would be more “trend following” than “mean reversion.”

It is a natural feeling to follow the rising trend and attach yourself to the strong performers.

It is easier to ride already moving stocks than to try to pick the moment when a stock will move.

The “Chugen Sen Tate” (mid-line position-building method) is not a method for selecting stocks, but a method for “fixing the stock and timing buys and sells.” However, the underlying idea is to “follow the trend.”

So, what does it mean to “nampin buy down” with a counter-trend strategy—

In fact, even in a mid-line approach that confirms the upmove has begun, and in the way of buying closer to the low, the aim of “following the uptrend” is exactly the same.

It might be clearer to say the two differ only in the timing of when you start buying.

Buying down with a contrarian strategy means anticipating a slightly ahead upward wave and deciding, “the bottom is near,” and then starting to buy, a high-level technique to improve the average.

In contrast, the earlier rejected approach of “increasing with the same number of shares at 200 yen” means, “I misread the market and went down. I couldn’t do anything during the drop. Maybe I should just buy more…,” which is completely different and many practitioners call it a failed-namping and reject it.

Namping is written as “難平,” and it means to smooth out the adversity.

The basic idea is to improve the average through division (averaging down). In other words, it is an “unsafe driving” approach that avoids letting a single target inflate risk.

If you bought at 300 yen and it fell to 200 yen, at that point the position you hold is a bad position.

To be blunt, it is a dead position, a lousy position.

Increasing it would not smooth out the adversity; it would increase the adversity.

The Lin Investment Research Institute’s periodical ‘Research Club News’ runs a series called “Market Experts Interviews.” The idea is to talk with practitioners who have a strong viewpoint and to glimpse into their inner thoughts. Previously, the system trader Yoshihiro Terunuma appeared in this feature and expressed a very interesting view on taking positions in trading.

Here is a portion where Terunuma and I exchange opinions about trend following and contrarian trading.

Terunuma

“If you approach system trading with the assumption of exit and reverse, you inevitably end up with trend-following. At least, ‘buying low and selling high’ is a big mistake.”

Linh

“So you’d buy strong stocks even if they are expensive, and sell them at even higher prices, right?”

Terunuma

“If you do that, I still think they’re not strong yet. You buy high and then add on another high price.”

Of course, this is not done recklessly. Positions are managed with proper risk controls. Yet he places importance on the opposite of what is called the “clumsy namping” or “scammy namping,” i.e., the feeling of being devastated, which is the opposite of being destructive in namping.

Contrarian trading, and then namping down—

With a craftsmanlike intuition that “this area is the bottom,” one buys in pieces very carefully and with great planning.

In contrast, buying more because the price has broken through the bottom is an unplanned, reckless act.

Also, if you start buying early just because you think you must buy down, you end up holding a “position that moves against you.”

The recommendation is to feel that the price has stopped falling and then cautiously pick up on dips. Therefore, the logic of the mid-line (strength/weakness judgment and split buying) is effective for many people.

Mastering the advanced art of buying down should be considered at the next stage.