Where are the true contrarians?

How many people do you know that claim to be original, individualistic, in short, to be going against the grain?. I bet there are many, and most of us if asked would include ourselves in this category… After all, there’s nothing unique about just being a part of the crowd and the expression “following the herd” is clearly a pejorative one.

However, by definition, there cannot be many such contrarians or else or they would be the new conforming standard. In any case, and judging by the number of theoretical adherents to this approach, it is surely a laudable quality or at least a fine aspiration. But how does a quick reality check weigh up against this supposed state of affairs? (The one where you and I, and most of our friends and acquaintances are blessed with an innate sense of uniqueness and an urge to challenge the status quo…)

Sad as it is, no matter where you look, it is evident that ours is a society of conforming minds. In the moments of truth, i.e. where decisions of consequence are taken, the vast majority of people will opt for the most trodden path and willnot risk sticking one’s head out above the crowd, lest it be cut off! In fact, the degree to which we are conditioned by the expectations of those around us is difficult to overstate. Albeit with the best intentions in mind, our colleagues, friends and close family will frequently encourage us to limit our decisions and endeavours within our comfort zone.

How frequent is it that a doctor’s son becomes a doctor or a lawyer’s offspring follows the same route as his/her ascendants? Admittedly, if this is the result of a conscious decision on the part of the youngster then so be it, but real experience suggests that, consciously or not, this is rarely the case. At this point the reader may be thinking; well, what’s the big deal? Besides, there’s nothing wrong with accepting a bit of wise advice form our more experienced elders.

Indeed there is not, but when this behaviour is extrapolated to the investment domain, the drawbacks, and ultimately the negative consequences become glaringly obvious. In an arena where the practitioners are, for the most part, highly specialised, thoroughly trained, and of above average intellectual ability, the idea of herd-like mentality is at odds with common-sense. Nonetheless the lack of freethinking, true contrarians in this space is beyond question. Asset management as a profession is almost structurally shielded from the need to apply original thinking. This is hardly surprising when one looks at the incentive system in place, together with the short-term expectations of its participants. For over 90% of mutual funds the greatest risk is not one of underperforming in absolute terms (i.e. have a down year) but rather of delivering results that deviate for a market-wide average proxy such as the S&P 500.

Believe it or not, jobs are lost in investment management when 1-year results trail indexes, irrespective of whether this loss is a “paper one” and it likely might have been the basis of potentially stellar 5 or 10-year results! With this shortsightedness structurally built into the industry, most active funds are merely effecting a “closet-indexing” strategy all while extracting in the meantime “expert” portfolio management fees where no specific investing skill is actually applied!

Simply taking the effort to ignore the advice of the well paid Wall Street analysts whose job is to tout fully-price stocks in cheerleader fashion and in parallel to duly perform some independent research of one’s own, should result in investment returns above those of the conforming majority.

The benefits for those that choose this path are there for all to see (just think how everyone considered Warren Buffet to be “over-it” during the dot-com boom in the late ’90s only to see his wealth increase substantially since then).
However, it takes utmost courage to act out one’s contrarian’s inclinations: I think it was Mason Hawkins of the Longleaf Funds who said it best:

“To succeed in investing over the long run, you must be prepared to look stupid in the short run”