On developing a Contrarian Mindset

Original Photo Photo by Masaaki Komori on Unsplash

I’m fascinated by the concept of outsized returns – be it in business, daily life, relationships, investing, or personal happiness – and how they are realised. I believe that to earn an outsized return dictates that you reject the status quo, throw conventional wisdom to the kerb, and embrace the non-obvious. In this essay I’ll make the argument for embracing a contrarian viewpoint and provide a few examples of my own where I believe a contrarian view may lead to a whole set of new opportunities.

“Be fearful when others are greedy and greedy when others are fearful

Warren Buffett – Berkshire Hathaway

“The thing I find most interesting about investing is how paradoxical it is: how often the things that seem the most obvious – on which everyone agrees – turn out not to be true”

Howard Marks – Oaktree Capital

“What important truths do few people agree with you on?”

Peter Thiel – Founders Fund

Buffet, Thiel and Marks are three of the most successful investors on the planet. Buffet has been the controlling shareholder of Berkshire Hathaway for over 50 years, and in that period has overseen its transition from a failing textile company to a $500+ billion behemoth. During his tenure he has acquired many unloved and unsexy businesses, profiting enormously from them as sentiment or fortunes changed. During the 2008 financial crisis he famously purchased stock in the distressed Wells Fargo bank, helping to stabilize the sector and profiting from panic selling that engulfed Wall Street.

Howard Marks identified the impending financial crisis in 2007 and spent the next year raising an $11 billion distressed debt fund in anticipation of the coming crash. He then proceeded to invest half a billion dollars per week during the worst of the financial crisis, picking up distressed assets often at 50 cents on the dollar.

Peter Thiel, the billionaire co-founder of PayPalPalantir Technologies and Founders Fund, famously led Facebook’s seed round of funding, buying 10.2 % of the company for $ 500 000 at a valuation of $ 4.9 million. He has subsequently sold off most of his Facebook stock and has made over $1 billion from this investment.

All three investors credit their outsized returns to taking a contrarian or opposing view to that prevailing at the time. They may look like inspired moves today, but none of these investments would have looked obvious at the time. In 2008/09 the World was in crisis with banks declaring bankruptcy and investors heading for the nearest exit, terrified of further capital losses. When Peter Thiel invested in Facebook, he was the first outside investor to put outside money into the company, backing the then unknown Mark Zuckerberg, and did so in the face of stiff competition from the already established Friendster (2002) and Myspace (2003).  

My Hypothesis

I believe that to generate outsized returns in life one should search out contrarian ideas; and then execute on them while they are still non-obvious. This is applicable not only to financial investing, but career development and your personal life as well.  

By definition: if you’re not taking a contrarian position then you agree with the consensus of the day. The logical expansion of this thinking is that by siding with consensus, you agree with the position taken by the majority, and therefore your returns will always approximate the average.

I believe that identifying outsized opportunities in non-obvious spaces is a key trait shared by high-performing individuals, and one I wish to emulate.

You cannot realistically expect to out-perform the average in every discipline. Seeking contrarian opportunities requires that you are first honest with yourself about your strengths and weaknesses in order to identify areas of natural strength. I believe that I have above average abilities in areas of logic, reasoning, and analytical skills and so look for contrarian opportunities in these areas.

To help cement my logic I have put together a simple diagram consisting of four quadrants in order to categorize opportunities that present themselves.

We’ll examine each of the four quadrants in more detail below.

Consensus Bet with Positive Outcome

Most people are comfortable/happy engaging in consensus-backed opportunities with the expectation that they will play out in a positive manner. Some examples are:

  • Completing a tertiary qualification and working a comfortable corporate job.
  • Investing in an index fund that tracks the market.
  • Going on holiday to a popular tourist destination.

There is nothing inherently negative about pursuing any of these examples. In fact, I can attest to having done every single one! While these opportunities result in a positive return, the return roughly approaches the average expected result. The satisfaction of producing a positive return in the market by tracking an index will never be as satisfying as hand-picking an individual stock that outperforms. Working a corporate job will allow you to live comfortably (and often happily) but may result in you struggling to reach your full potential and feeling undervalued.

Consensus Bet with Negative Outcome

The consensus view is not always correct (thank goodness as it would make the World a boring place to live). There are many examples where the widely held view of the time turns out to be incorrect. Some recent consensus views that didn’t play out as expected:

  • Donald Trump will never be elected as US President.
  • The United Kingdom will vote to remain a part of the E.U.
  • You should buy Bitcoin or else you will miss out on the greatest investment opportunity of our time.

In all three examples the consensus turned out to be incorrect!

Finding yourself on the wrong side of the bet will result in you taking a loss, but it will be a consensus loss which allows you some comfort in the fact that “nobody could have seen this coming”. Psychologically, it is much easier to take a consensus loss than a contrarian loss as it is much easier to justify your misjudgment of the situation; as it was a widely held belief.

I think this could be the main reason that few people break with consensus: more often than not the consensus view produces a return that is acceptable. And in the cases where the consensus view was incorrect, there is some comfort in the fact that your mistake was a common one. There is a certain safety in the consensus and our fear and pride often keep us from entertaining non-consensus ideas/approaches.

Contrarian Bet with Negative Outcome

These are instances where you take a contrarian position which turns out to be incorrect. This can be a lonely space as the poor outcome is yours and yours alone to bear. Some examples may be:

  • Going short the S&P 500 during a strong bull-market while the market continues to climb.
  • Buying property in an “up and coming neighborhood” that degenerates rather than improves with time.
  • Dropping out of college or leaving a stable job to pursue a start-up which subsequently fails.

There is always a loss involved by ending up on the wrong side of a contrarian bet. However, taking a loss on a contrarian position doesn’t have to be a wholly negative experience. These can prove to be fantastic learning experiences if you allow yourself to conduct a thorough post-mortem after the loss. Here you can examine your assumptions, your reasoning when taking the contrarian viewpoint, and then the circumstances that prevailed which led to the contrarian view being proved incorrect. This will teach you so much about yourself and how you think – and may end up being far more valuable than the loss that you incurred by being incorrect. You could even think of this as paying your “school fees” for a valuable learning experience.

Depending on how vocal you have been about your contrarian view, the obscurity of your bet may actually shield you from the pain/embarrassment you would otherwise encounter. A contrarian position that isn’t playing out as you hoped can leave you in a very lonely place, but keep in mind that placing the bet required lots of courage in the first place. You cannot realistically expect to always be right when betting against consensus; think of venture capitalists who place many small bets and then derive the bulk of their return from one or two outliers while seeing no return from the majority of the companies they’ve invested in.

Contrarian Bet with Positive Outcome

When a contrarian view produces a positive outcome, the results can be a life-defining outsized return that propels you to new heights. At the very least, a positive contrarian outcome will beat the average return that you would have achieved by going with the consensus view.

For example:

  • Going to work for Facebook/Google/Airbnb while still each company was still an unknown startup.
  • Naspers Ltd purchasing a 33% stake in Tencent for $33 million in 2001.
  • Buying Bitcoin while it was still an obscure digital currency for geeks.
  • Asking that girl on a date, the one who you didn’t think you stood a chance with, and she accepts.
  • Writing this article rather than sitting on the couch watching Netflix.

The reward for choosing a contrarian path which plays out in your favour is more nuanced than just the obvious return that you get from being on the right side of the bet. Developing a contrarian mindset helps you to challenge the status quo, to question the current state of the art, and to identify opportunities when others can’t.

Being contrarian is rarely easy. By its very nature, you are pursuing a path that is unconventional, often misunderstood, and perceived to be highly risky. You should expect to get a lot of push-back from those who are more comfortable firmly embedded in the consensus view. You will probably begin to hear people close to you saying things like, “You shouldn’t start a company as 9 out of 10 companies fail”, “restaurants are terrible businesses”, “airlines can’t be profitable”, “why would people want to rent out a room in your house” when you present your ideas for the first time. You’ll have to get used to hearing this – in fact comments like these should excite you as it shows you that you may be on the right track! If the biggest opportunities were obvious then they wouldn’t be big opportunities at all as they would have been capitalized on already.

An immediately obvious opportunity is rarely a great one – the best opportunities are those which make you stop, question your assumptions, and leave you feeling just a little bit uncomfortable.

Risk Management

It is important to mention here that pursuing contrarian opportunities without an appreciation for the risks associated with those opportunities is foolish. For example: investing all your money in unknown startups or highly speculative investments may lead to an outsized return – but the risk that the investment will leave you broke would massively outweigh the potential return. Another example may be the idea to drop out of college and start a company. Just because that worked for Mark Zuckerberg and Bill Gates doesn’t mean that it will work for you. History only remembers those outliers who succeed, and not the scores that fail.

You should always attempt to quantify the risk-reward ratio before embarking on a contrarian bet, and then adjust your position accordingly. Perhaps it is better to complete your degree rather than dropping out of college? Maybe you should keep 90 % of your investments in index funds and only 10 % in risky start-up investments? There is no single answer to the question of risk management – each person has their own risk tolerance and should apply this to their own situation.

The important lesson here is that it is essential to quantify and understand the risk before diving in and executing on that contrarian bet.

Contrarian successes become consensus

Another important trend to remember is that something that starts out as contrarian will inevitably become consensus as the contrarian position is proven correct. Airbnb was highly contrarian when it first launched but today it is widely accepted as the easiest way to book a room in a foreign city. Cloud computing was viewed with much suspicion when it first launched with companies declaring, “it’s far too risky to place my company confidential information on a server outside my organisation.” Now it is viewed as risky NOT to keep your data stored in the cloud.

As an idea gains momentum and acceptance, it gradually moves from the contrarian quadrant to the consensus one. The idea is still a winner – it is just the return (and risk) that reduces with time.

A few of my Contrarian Ideas

I’m going to come back to the Peter Thiel interview question now and will expand on a few of my own thoughts that I believe to be contrarian today:

“What important truths do few people agree with you on?”

Peter Thiel – Founders Fund

1. It is better to remove rather than to add

It’s human nature to always want more rather than less. However, I believe that if you want to be happier, it is often better to remove rather than to add. A house that is too big feels empty, too many clothes make it hard to find what you’re looking for. A larger TV means that you’ll spend more time glued in front of it and less time interacting with those you love.

The same is true of business. Try to simplify your offering to what customers actually need and fight the temptation to fill your product with additional fluff. A great piece of software can be ruined by adding too many features that distract from the core purpose of the package. Understand your core mission and focus on solving that problem better than anyone else. In a world where everyone thinks they want more, giving people exactly what they need and no more, will differentiate you and give you an edge.

2. Powerful narrative trumps technical brilliance

As an engineer I always try to remember this: I believe that the mistake a lot of technical people make is that they over-estimate the importance of their own contribution and underestimate the importance that telling the story of the product/company has in the success or failure of the venture. I’m not saying that world class technology is not important when building a technology product; but it is short-sighted to believe that the best product (best technology) always prevails in the market. We humans are emotional beings and we don’t always behave in a rational manner which implies that people may buy one product or service over another because of the story and not the technology. The iPhone is not necessarily a better piece of technology than the equivalent Samsung smartphone, but people buy the Apple product because of how it makes them feel, and how they believe they are perceived in the World as a result of their phone choice.

3. Knowledge should be shared (given away) at every opportunity

Before the internet came of age, knowledge was power. What you knew, and the skills you possessed, was what differentiated you and made you valuable. This is not the case anymore. We live in an age where most of the World’s information is available instantly and on demand. If you believe that by holding your knowledge tightly to your chest, you will be successful (indispensable) then you are in for a shock. The truth is that you will be far more valuable if you become the person that shares his/her knowledge freely. You will become liked, depended on, and seen to be more valuable. Also, by giving away your knowledge the chances are that the person you are helping will reciprocate and share some of her knowledge with you. In this way you build your network, and also learn new skills at the same time. Some of the more traditional companies have not yet understood this; and often older employees hold onto their knowledge very tightly, inadvertently damaging the organisation. Give away your knowledge and watch how you become more indispensable and not less so.

4. Optimize for more time and not more money

I believe that many people make the mistake of trying to generate as much money as possible without due consideration of the time expense that may be required to generate that money. Time is a non-renewable resource and therefore precious as none of us know how long we have to live. More money can always be made, and once you start chasing money, you’ll find that you never have enough. This does not mean that one shouldn’t aim to make money. Having enough money to pay for shelter, food, and a comfortable life is clearly important – your basic needs must be met if you are to begin to self-actualise and realise your full potential. However, as one accumulates wealth, there are diminishing returns on the additional utility and joy that further wealth brings. Once you are making enough money to comfortably live the life that you would like to live, the next step should be to use some of the money you are making to try and create more time for yourself to pursue your passions and dreams. Happiness comes from setting and achieving goals, realising dreams, and being exposed to new experiences, not a large bank balance.

Wrapping Up

In summary; I believe that developing the ability to identify and seek out contrarian opportunities today will pay massive dividends in the future – provided of course you have the courage to execute on them and the conviction to see them through. Living and operating within the prevailing consensus view will always be more comfortable but will yield an average return on your investment, be it in time, money, or your relationships. Developing a contrarian mindset requires practise and patience, but I believe it is a hallmark of many of the most successful people in the World today, and a valuable tool that you can use to view the World through a different lens.

If you have manged to get to this point, then thank you for reading all the way to the end. I’m still learning to identify and apply contrarian thinking in my own life but am excited to see where it will take me and what outsized opportunities will come my way as a result. I’d be very interested to hear your thoughts on applying contrarian thinking and behaviour to the situations you find yourself in – shoot me a message in the comment section below.

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