It is very well understood that achieving superior investment performance in the long term requires us to have a contrarian bent of mind. This would require us to think and work differently from the general consensus. But most of us usually fail to understand what being a contrarian means and what it takes to be a contrarian investor. Unlike popular perceptions about contrarian investing, it does not simply mean buying when others are selling and selling when others are buying. Also, being a contrarian investor requires us to have a unique set of personality traits and a number of psychological aspects that are very tough to imbibe. Therefore, in today’s post I’m going to talk about what contrarian investing really means and the qualities and personality traits that we must imbibe in order to evolve into successful contrarian investors.
Let us begin by understanding the philosophy of contrarian investing. The essence of contrarian investing lies in operating with an independent view on a given market context at a given point of time. Having an independent view involves developing a bent of mind that allows us to look at things differently to others. This would allow us to take cognisance of certain nuances of every situation which others may miss out on. And that allows us to be proactive and avail of opportunities which those around us may be too caught up elsewhere with other things to notice. From there, it is simply about having the patience and conviction to wait long enough to see our investment decisions come to fruition. So, contrarian investing doesn't just have to mean selling at market highs when everyone else is on a buying spree. Contrarian investing can also manifest itself in the form of buying into unduly neglected parts of the markets, where quality businesses would be available at much more realistic valuations. But given that our investment operations do not take place in isolation and are subject to scrutiny from those around us, walking the contrarian path is no easy feat. We need to train ourselves psychologically and imbibe certain personality traits to be able to practice contrarian investing successfully.
The first of these requirements is to develop the ability to be able to spend as much time with ourselves as possible. This also means staying away from discussing our investments and investment opinions with those around us at large. It also means staying away from traditional media and social media in all its forms. When we do this, we take away the chance for others to judge and give their opinion on what we are doing. But of course, no matter how hard we try we would not be able to remain completely reclusive like this for too long. Therefore we must try and seek out a set of like minded people who are looking to become contrarian investors or have already done it successfully. This would allow us to create a competent inner circle off whom we can bounce our ideas and gain validation of them for the way forward. And in time we would gain a set of like minded friends which would ensure that we don't end up becoming completely reclusive.
All of this would in turn help us focus purely on what we are doing and build conviction and patience in our investment operations from within. And these two traits are the next requirements that are vital to making the shift to contrarian investing. No matter how actively we try to avoid it, the fact that we look to operate differently from others would mean that our investment operations become the subject of judgement from those around us at different points of time in our investment careers. An unwavering inner conviction in our investment operations built on the back of continuous research and a logical understanding of our ideas would be the best way to combat this. Our conviction, if developed for the right reasons in the right way, would help us stay calm and on course in the face of scrutiny and judgement from those around us. Also, being patient with our investments is something that is born on the back of strong conviction. Patience is something that is at the very heart of contrarian investing. Contrarian investing is best practiced when we patiently wait for the herd to finish doing what they are doing and then emerge slowly to do what we have to do. Patience also plays a role when we are done acting on our ideas and need to wait for them to produce results. Waiting for well reasoned investment ideas to work is fine, because when they do work they invariably produce results that are outstanding. But playing the waiting game can be tough since there is no telling how long we may have to wait. Sometimes, actions that we initiate in one market cycle may only produce results during the next market cycle. Therefore, the process of waiting may have to go on for many years at a time.
The only way to make this wait a bit easier is to be able to shift our attention away from the markets while we are waiting. Therefore, it is important for those of us who aspire to be contrarian investors to not look to take up investing on a full time basis, at least until we have the experience of 3-4 complete market cycles behind us. The best way to ensure this is to ensure that we have enough meaningful work to do and keep ourselves busy outside the markets. How we choose to do this doesn't matter. It could be our jobs, our hobbies or spending time with our families. What matters is that we have something that keeps us busy for the majority of our day and takes our mind off the markets. Taking care of this aspect would also allow us the opportunity to mentally recharge as investors. And this is important because investing is a mentally and emotionally intensive activity. So giving ourselves the opportunity to recharge mentally and emotionally would help us establish a sustained commitment to the philosophy of contrarian investing without running the risk of burning out. Also, it helps us view investing as one solitary aspect in the broader picture of our lives, which puts things in the right perspective. So the wait would not seem as long and as excruciating as it would otherwise. And, in the end we would inevitably be rewarded for the long wait with long term investment performance that is highly sustainable and puts us way ahead of most other investors around us.
In conclusion, the philosophy of contrarian investing is one that is proven to put us way ahead of those around us in terms of long term investment performance. And is one that is centred around operating differently from those around us based on an independent view of every market context we come across. But making a commitment to doing things the contrarian way is never easy. The fact that we bet differently from those around us automatically means that we expose ourselves and our investment operations to constant scrutiny and judgement from those choosing to blindly follow the herd. Making the shift to contrarian investing is therefore as much, if not more about our character and mental fortitude as it is about our investment nous and acumen. It requires us to display significant amounts of conviction and patience, backed by having a set of like minded peers and enough meaningful work to keep us busy in our lives outside the markets. And though the rewards for making the commitment to contrarian investing may not show up for long periods of time, when they do, they make the decision to commit to contrarian investing more than worthwhile.