My So-Called Life (as a Contrarian)

Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference

Robert Frost


Life is hard enough. But some of us seem to magnify its difficulty in a variety of ways. Me? I have held views about the markets and the economy that were/are not only in the minority, they were/are deeply unpopular. Being a contrarian inherently means that a (usually vast) majority of other people think you are stupid. As if that were not bad enough, when you are a contrarian during good economic times (and particularly economic bubbles), people can actually be hostile to the content of what one has to say.

Accordingly, I am used to being a social pariah by now. During the late 90's through the turn of the millennium I would attend a variety of casual parties and social events. While most people would prattle on excitedly about XYZ.com and the dramatic gains they were realizing, I would be the dour-faced attendee warning people of a crash that was quite likely in the offing.

Flash forward five years. The same cocktail parties and the like. Now it is ebullient discourse concerning the real estate market. Oh, the glory of zero-down payments, retirement homes, vacation properties, remodeling, buying up, flipping, etc. It was all so intoxicating. Money had never been so easy to make (and the quantity of cash-out home-equity loans evidenced that). But morose Mark was there trying to take away the punch bowl, worrying about such inconvenient things as household indebtedness, variable-rate mortgages readjusting at higher levels, unsustainable price gains, and overinvestment in residential housing. It was the social kiss of death. Indeed, one woman stopped seeing me after we had a tiff over whether her planned condo purchase would be a good investment.

But this social phenomenon actually speaks to a very important investment principle - one must not let emotion cloud analysis and judgment when it comes to investing. I think it is a basic tendency in most human beings to be generally optimistic. I actually view myself to be of this ilk. Accordingly, when presented with the same bullish drivel that has been rife in the financial and popular media for roughly the last 20 years, or analysis that warns of bad economic tidings, it is more comfortable to focus on the former and write off the latter.

Great investors simply perform risk/reward analysis. It is very similar to seeing somebody with an umbrella under there arm on a cloudy, yet presently dry, day in Seattle. It is safe to say that the typical person in that situation is not hoping it will rain. Rather, it is more likely that the person checked the forecast and discovered that rain was likely.

Similarly, I cannot imagine any investor that actually hopes for an economic crisis such as one we find ourselves in today. After all, it is far easier to make money when asset prices are increasing. However, if rigorous analysis indicates such a crisis is coming, it is simple prudence to manage one's portfolio in a manner so as to profit from such an event (or at least lose as little money as possible).

I bring all of this up because I remain convinced that the only was an investor is able to achieve exceptional returns is by being a contrarian during times of extreme optimism or pessimism. Indeed, I look forward to the day when not only is there caution in the marketplace, but something more akin to revulsion (a point I do not believe we have yet reached). From a long-term investing perspective, that will be a great time to be a bull.