For some reason, the idea of contrarianism has popped in my head these past few days (probably from something I read but can’t remember what). The idea of a contrarian view gets tossed around a lot in investing.
Understandably, if you want to outperform most investors you need to invest differently, independent from most investors. You’re betting against the crowd, which is not an easy thing to do. It can feel like you’re trying to walk into a stadium just as the game is letting out. Most people understand this concept, but few actually follow through with it successfully because they give up before they get to their seat.
Of course, just betting against the crowd is not enough. Playing devil’s advocate with your money, for the sake of it, is dangerous.
Finally, it’s not enough to bet against the crowd. Given the difficulties associated with contrarianism just mentioned, the potentially profitable recognition of divergences from consensus thinking must be based on reason and analysis. You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong. – Howard Marks
Marks’ quote offers a hint into his contrarian thinking. The work to reach reason and analysis is something the crowd doesn’t do. This leads to part of my point. There are two things that always seem to pop up in finance – the constant need for short-cuts and the push toward complexity.
The market for “hot stock tips” always exists in some iteration. The current version is being socialized and mobilized for easier access and to avoid work. The rise of index funds, ETFs, and the cookie cutter portfolio is built on the same idea. Chasing hot stock tips rarely works out. Whether the increasing use of index funds and cookie cutter portfolios will lead to underperformance, or more precisely a lowering of the average, is yet to be seen.
Complexity has risen again, this time via smart beta. What once was a tilt toward low P/B or P/E (a typical value fund) has turned into an algorithm only a Ph.D. would understand. Big data makes it easier to backtest thousands of strategies in seconds. The fruitless search for the holy grail of investing strategies is neverending. “Beware of geeks bearing formulas” is more true today than ever before.
The best contrarian view, I believe a smart one, is to actually do the work and do it simply.
- Indecision: An Investor’s Biggest Adversary – MicroCapClub
- Keeping Things Simple and Tuning out Folly – Farnam Street
- Is He Selling You a Stock? Or a Big Fat Lie? – Bloomberg
- Forewarned is Forearmed on Investment Expenses – R. Ferri
- A View From the Top on Preventing Financial Valleys – C. Richards
- Don’t Sell During Volatility – L. Swedroe
- Howard Marks on the Importance of Realistic Investor Expectations (Video) – GreatInvestors.tv
- Dhandho Holdings/Pabrai Funds Annual Meeting Notes – BitsBusiness