Contrarian Investing is Hard

“If you think like everybody else, you’ll behave like everybody else. If you behave like everybody else, you’ll perform like everybody else”

Howard Marks

What makes contrarian investing so hard? And why does being a value investor and a contrarian go hand in hand?

Being contrarian ain’t easy. Whilst pessimism may be easy, going against the herd is a tough gig. But when is it ok and not ok to be contrarian? Should you go against the flow all, none, or some of the time? How does being sceptical and contrarian relate to investing and how might it help?

Being contrarian is natural for value investing. Because if you follow the herd, you achieve the same. And if you’re going to do that, well you’re probably better off saving time and money through buying index funds which match the market anyway.

Being Contrarian is Hard

Being contrarian is tough. You have to go against the common consensus. Which is not easy when you got every man and his dog giving you their opinion on why you’re wrong.

Being publicly contrarian is hard when you have a natural desire to fit in or not embarrass yourself.
But without risk there is no reward. And being comfortable with failure and being wrong is a key part of investing I think.

Look at the strike rates of successful investors.

If 60% of your investment choices are positive, you’re almost on track to be a GOAT level investor.

To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.” 

John Templeton

Contrarian Investing Risks

Being a contrarian investor holds risks too. 

You obviously have the investment risk. Which is the loss on your capital. But if investing is your day job, there’s career and reputational risk too.

You make one stinker of an investment, and it sticks with you for life (the stigma anyway). Just look at Buffett and airlines. Ackman and Herbalife. Einhorn and Tesla (so far at least). People don’t like to forget others’ mistakes.

They’re only human after all. Nobody is perfect. Not even the Oracle of Omaha. The general public loves building people up. But they love tearing them down too. 

It’s why people are often critical of money managers being closet indexers. There’s a career risk that if they get something fairly wrong, they’re out of a well-paid job that they love.

Safety in numbers.

The good contrarians are only contrarian once in a while when all the stars are aligned and they can really identify why the narrative of common investors is wrong and why their contrarian view would be right in that case. But they are not always contrarian.

Morgan Housel

Howard Marks backs up this with a similar sentiment;

Contrarianism isn’t an approach that will make you money all of the time. Much of the time there aren’t great market excesses to bet against. 

And let’s say your contrarian thinking is right. You’ve found an investment that is criminally underpriced. That doesn’t mean it will appreciate tomorrow. Or the next month. Nor even in the next year. Assets can stay underpriced for years. More than you’re willing to hold on for. As the old adage goes, “The market can remain irrational longer than you can remain solvent.”

It’s enough to drive you crazy.

Value Investing and Contrarian Thinking

Seth Klarman talks about this in his book Margin of Safety. That value investing, in its very nature, is contrarian.

Unpopular securities may be undervalued. But popular securities almost never are.

What the masses buy is deemed as in favour. And those in favour have been bid up in price on the basis of optimistic expectations. Thus are unlikely to represent good value that has been overlooked.

So, value investing comes down to finding those securtities which are deemed out of favour, and more likely to be undervalued.

Klarman also talks about the consensus, and whether it affects the outcome:

“It is always the consensus that the sun will rise tomorrow, but this view does not influence the outcome.”

Okay at first glance, wtf does that even mean? But think about it, does the general view affect the outcome? In investing, the views of the market reflect in their stock prices.

If investors are scrambling to buy tech stocks for example, that consensus view of tech stocks alters the price which alters the risk reward payoff to invest.

The sun doesn’t care what anyone thinks, it’s (hopefully) going to rise tomorrow, whether you believe it will or not. 

Stocks, on the other hand, will chop and change depending on what people feel about them. And something maybe truly undervalued, but if no one else believes it, then the stock price may never reflect reality.

And?

Being contrarian is a tough, lonely gig. But there’s plenty of great info and advice out there from great contrarian investors.

I don’t have the secret sauce for outperformance investing. But I believe having a contrarian streak would be one of the main ingredients.

The most contrarian thing of all is not to oppose the crowd but to think for yourself

Peter Thiel

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