What It Takes to be a True Contrarian

When I first decided to make inroads into my investing journey (I don’t think I am that old, so this wasn’t too long ago), I was this fresh-faced newbie soliciting opinions from every man on the street. There was this burning enthusiasm and passion in me which I absorbed from all the investment books I read. And I was sharing this newfound information with everyone I met. However, when the news reached their ears, they didn’t quite share the same sentiments and fervor. 

You could see that their eyes would emit a certain kind of light which I couldn’t tell whether it was a disapproving one or was it like a “say goodbye to all your money, son” kind of glare. And they would carry on by talking about their own experiences getting fingers and toes burnt in the market and telling me why this isn’t going to be easy, how I got to be careful and how treacherous the road ahead will be. 

Argh, what a downer right? Armed with the well-intentioned advice they gave and mental preparation that this is going to be like a video game boss level kind of fight, I still trudged on (with images of uncle Buffett smiling and egging me on in my head), determined and eager to do well. I knew that if I wanted to be different from the warriors who had been conquered by the evil forces before me, I had to do something they didn’t do. I knew I had to be a contrarian and not follow the “naive” herd.

How could I be different and contrarian in this case then? What is exactly being contrarian in the stock market? The initial thought that came to my mind was that being contrarian was not to do what others were doing. Since so many people have been telling me about their bad experiences in the stock market (some even shun the stock market for many years after taking a hit or two), it means somehow in a way or another, they have made wrong decisions most of the time which resulted in so many failures. Hence what I only need to do is to do it the opposite way, yay that’s so simple! So, I thought.

After studying the ins and outs of the stock market for a couple of weeks (I thought it was enough), I decided it was time to move into action and take the contrarian steps I plotted. There were a few occasions when everyone was chasing up the prices of certain stocks, pushing price multiples to exorbitantly high levels amid the lethal combination of market frenzy, media reporting, etc. You could also sense the hype foaming from investing forums, social media and even messaging app chat groups. 

So, what did this “smart guy” (me) do? I stuck to what I agreed on, which was to do the complete opposite. I began buying undervalued and under-performing stocks which people did not take notice of; stocks at very low and cheap price points according to the dated value investing principles. All in the hope that one-day people will start buying it, pushing up the price in the process. I also thought I couldn’t be wrong because I was practicing patience and patience is a virtue in the stock market and life, right?

But I am sure you will be able to guess the outcome in the end. The expensive stocks got higher and higher as time went by and the cheap ones I bought got cheaper and cheaper. DANG!. So, what went wrong here? Reflecting on what happened, I had kept cool and calm during the entire mania and it wasn’t easy to achieve that, to say the least. I also did not buy into the stock everyone was walloping their money into and I bought others that I thought had been of really good value. Stocks that I thought famous investors like Benjamin Graham and Philip Fisher would also have bought (based on their teachings). These companies were trading at super-low multiples anyway, and their profitability data and fundamentals were not too shoddy either, there was nothing much for me to lose, so how and where did I falter?

That was when I suddenly realized this. Wait a minute. If I was approaching the market based on the famous teachings of Warren Buffett, I am pretty sure others are doing the same as well. There might be tens of thousands of people doing this so did I just join another “herd” so to speak? What?! This was distressing and I had thought I made a Buffett-esque move. I had fallen into a self-devised trap. A trap which I assumed everything I carefully planned was different and more superior compared to the people around me. And that was my downfall.

As you can see from my personal experience described above, we are seemingly looking at two types of herd groups. The first is the “hey this hot stock is going up so let’s hit and run” herd and the second is the “we think we are the contrarians” herd. And whilst in no way are we postulating that we should or shouldn’t be like them or following them will not lead to good outcomes, it is important to note that the crux of this is we need to acknowledge the importance of having the ability to think independently in investing. 

It is more important to assess holistically the company you are interested in, considering all pertinent factors relating to the company like business model, scalability, management ability and integrity etc. and making an informed decision rather than to merely decide based on whether other investors are buying. In any case, it should be ingrained in every investor that investing in a company means holding a stake in the company, being a part-owner of the business that is up-and-running and kept alive by employees. So, every investment thesis should be well thought through as a business owner.

I have learnt that we should not try to be contrarian just for the sake of being one or appearing to be one. Being successful in investing is more art than science and all of us should consider deeply how to properly practice and attain contrarianism, that is to have a mind of your own when it comes to investing. And to quote Napoleon Hill who aptly put it, “You have a brain and mind of your own. Use it and reach your own decisions.”

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