Like it or not, you are a contrarian.
Let’s say you want buy a few shares of Facebook because, for whatever reason, you think it’s a good investment. You can feel confident that the party on the other side of the trade has a considerably different opinion than you. Optimistic about the economy? With little effort you can find dozens of convincing arguments that make a powerful case for another recession. Think the market has plenty of room to rise? A quick Internet search will turn you onto experienced and respected investors who have rational and time-tested reasons for why it will fall.
For every conclusion you have about anything, you can find well-considered, well-argued and substantive arguments that illuminate all the flaws in your thinking. There is no choice in this: Whether you do something or do nothing, you can count on the fact that there are more than a few million people who think you are wrong and are willing to put their money where their mouth is.
Most of you did not wake up this morning thinking you were contrarians. After all, isn’t a contrarian a kind of rare breed of investor; one who is willing to go against the grain of popular opinion and risk perhaps hundreds of millions of dollars of his or her money on what seems to be a risky bet—and perhaps go down in flames if proven wrong?
Isn’t Bill Ackman (down a billion dollars already on his short of Herbalife) an example of a real contrarian? Yes, of course; his short of Herbalife is a very public and extreme example of a contrarian stance, notable because of size, risk and the sensational nature of Ackman’s claims. But note that while he is taking a contrary position to investors who are long the stock, they are taking a contrary position to him. The foundation of a healthy market is laid by investors whose conclusions are contrary to each other. It is our collective differences that create the very attractive environment within which we invest.
Therefore, my fellow contrarians, our only option in this matter is to decide what kind of contrarians we are going to be. And to that end, I’d like to offer some guidelines to help you with your decision.
1. Don’t be stupid. Charlie Munger cuts right to the chase: “It is remarkable how much long-term advantage people like us have gotten by being consistently not stupid instead of trying to be very intelligent.” Of all the mistakes I’ve made in my life, it’s the stupid ones that haunt me—because they were all avoidable. The easiest way to avoid stupid mistakes is to stress-test all decisions with a simple question at a sober moment: “What’s the worst that could happen—and could I live with that?”
Our greatest asset is also our biggest weakness—our own judgment. With just a little care and thought, just by eliminating the stupid mistakes, we can tilt the scales so that our judgment will more likely be an asset. Casinos in Las Vegas rake in billions each year just by having the odds slightly in their favor—an investment lesson all contrarians need to remember.