Con-trar-y – adjective. 1) Opposite in nature or character. 2) Opposite in direction or position. 3) Being the opposite one of two: I will make the contrary choice. 4) Unfavorable or adverse. 5) Perverse; stubbornly opposed or willful.
When my boss called me “jaded” after I (once again!) disagreed with the opinion of a well-known and highly intelligent market forecaster, I decided that I need to set the record straight. Although I often take the opposite side in discussions (with just about anyone, it seems) about “big picture” issues such as the economy, currency markets, interest rates or the stock market, I do not do this just because I’m contrary. It’s actually more of a learning style, along the lines of the Socratic Method (“a form of inquiry and debate between individuals with opposing viewpoints based on asking questions and answering questions to stimulate rational thinking and to illuminate ideas.” – Nebraska Department of Education.)
By taking the other side I can actually test the solidity and rigor of an opinion. I may not actually disagree with the opinion, but if the opinion could affect my investment decision-making process, I need to be sure it can stand up to scrutiny and criticism. So, I am not a grumpy old man; I just act like one sometimes.
Con-trar-i-an – noun. A person who takes an opposing view, esp. one who rejects the majority opinion, as in economic matters.
Now we’re getting closer. This really sounds like me. So, why would I appear to be so anti-consensus when it comes to economic and stock market opinions (which really are forecasts)? In part, it is because in the perverse logic of the stock market, the consensus is often either wrong or already discounted in the prices of stocks. Much of the commentary and academic research out there supports the idea of contrarian investing. Some studies suggest that 80% of all investors consider themselves contrarian. Besides being mathematically impossible, I truly doubt that contrarian investing could ever be that popular. Why? Because it’shard to do.
In many of life’s endeavors, being in the middle of the pack offers great rewards. Listening to popular music or watching popular TV shows can provide a person with a common link to others. The same can be said about going to restaurants, clubs, concerts and other places frequented by a lot of people. The entire fashion industry is based on the premise that a certain style of clothing is “in.” “Keeping up with the Jones” and “being a team player” are just two of many idioms which celebrate the idea of being a part of the crowd.
In equity investing, going against the grain can lead to above-market gains, but it is never easy to do. Imagine resisting the universal euphoria associated with the “paradigm shift” in the late 1990s. Imagine ignoring the huge housing boom of the last few years. Imagine selling oil stocks last summer when all the “experts” were forecasting oil prices to move as high as $250/barrel. Imagine wanting to buy stocks in early March of this year instead of selling them. With 20-20 hindsight, all of these moves may seem obvious now, but in the heat of each particular moment, they would have been very hard to do.
The ultimate downside to contrarian investing comes when the consensus view proves to be correct. This means that the contrarian investor was not only doing something that seemed illogical, misinformed and even a bit crazy, but it turns out to have been obviously the wrong thing to have done. It makes the contrarian look not only wrong, but stupid as well. It takes only a few of these experiences to test the mettle of a contrarian investor.
But in the final analysis, being a contrarian investor may not be a choice, but more of a personality type, or maybe like being left handed. Sure, the contrarian investor can develop and improve technical skills, but at the core, the contrarian needs to be solid and unwavering to the concept and the practice of going against the grain. It may be hard, but in my opinion, it is certainly worth it.