The Effective Contrarian

Investing
History
By
Sarah F. Roach, Vice President

The word “contrary” doesn’t usually have particularly positive connota­tions.  It may bring to mind that guy who always takes the opposite view just to be ornery.  Or the person who seems to argue about minutia while ignoring the big picture just to be, well, contrary.  These are people who often make life just a little uncomfortable for those around them.  However, there are some contrarians who are not disagreeable curmudgeons without valid points to make, but rather people who are a bit more insightful than most.  These are brave people, because it takes a unique type of person to espouse unpopular ideas and act on them.

Insightful contrarians are able to endure a degree of social ostracism and disapproval.  They are willing to take one for the team, as it were, while others cling to common­place ideas and interpretations.  Conventional wisdom is a potent force and very difficult to oppose.  The mere fact of its conventionality brings with it the implication of correctness.  In bucking this assumed correctness, contrarians may be accused of being wrong, crazy or stupid, and few of us—from childhood onward—like such harsh accusations.

Cornell University psychology professor Robert Sternberg has found that some contrarians tend to be intelligent, counter-intuitive thinkers who have a different perspective on life than more conventional thinkers.  He suggests that creativity can go hand in hand with a contrary outlook, and that contrarians are able to use knowledge they amass to independently assess current thinking, then introduce new ideas.  As Mahatma Gandhi wore down conventional thinking and the status quo in colonial India, he famously said, “First they ignore you, then they laugh at you, then they fight you, then you win.”

In investing, blindly adhering to conventional wisdom can be a great way to fail.  A contrarian outlook is far more conducive to successful investing, as illustrated by some of the greatest:  Warren Buffett, Sir John Templeton, Benjamin Graham and a host of others.  We’ve sometimes employed a contrarian view in our investing, and we want our clients to understand the basis of our outlook—so they don’t succumb to the doubts and fears instilled by the conventional thinkers around them.  But as in other aspects of life, being a contrarian thinker in investing is easier said than done.  Contrarian investing is not point­lessly argumentative; it’s independent and analytical—able to recognize and accept conventional wisdom when it’s accurate.  Contrarian investors thoroughly analyze, develop reasoned conclusions and have the strength of character to act on their beliefs—even when it may appear for a time that they’re acting alone.  Investor Seth Klarman stated it this way:  “Successful investors tend to be unemo­tional, allowing the greed and fear of others to play into their hands.  By having confidence in their own analysis and judgment, they respond to market forces not with blind emotion but with calculated reason.”

Finally, patience is one of the hallmark characteristics of the contrarian investor—the quality that truly allows us to reap the rewards of our work.  Investor Howard Marks said that “…in the world of investing, being correct about something isn’t at all synonymous with being proved correct right away.”  Or as Warren Buffett succinctly put it, “No matter how great the talent or efforts, some things just take time.  You can’t produce a baby in one month by getting nine women pregnant.”