A collection of ideas and quotes on contrarianism
On the necessity of contrarianism for divergent results
“Mimicking the herd invites regression to the mean.”
Here’s a simple axiom to live by: If you do what everyone else does, you’re going to get the same results that everyone else gets. This means that, taking out luck (good or bad), if you act average, you’re going to be average. If you want to move away from average, you must diverge. You must be different. And if you want to outperform others, you must be different and correct. As Munger would say, “How could it be otherwise?”
Why the best investments start out controversial
Josh Wolfe said the best performing companies in the portfolio were the companies that were heavily disagreed upon but 1 person enthusiastically saw the value.
The reason outsize returns never follow consensus is explained by Agustin Lebron in his book The Laws Of Trading:
You’ve seen that financial markets are extremely competitive arenas. Good ideas won’t be obvious ones, but rather subtle and hard to find. This requires a process that rewards creative thinking. Paradoxically, ideas that at first glance seem clearly to be good ones probably aren’t. The best, most creative ideas have the strange peculiarity of being half-great and half-terrible.
In the venture capital world, there is a truism that you should never fund obviously good ideas. This makes sense: if something is clearly a good idea for a business, then (a) why do they need your investment, and (b) why isn’t someone already doing it? Looking back to the beginning of this chapter and our definition of edge, you can see the connection. Good venture capital investments are either ones that only you can see, or ones that only you can access.
We are left in the uncomfortable position of trying to create a process and a culture that rewards crazy ideas, at least to some extent, but not so crazy that you waste time and effort tilting at windmills. But then again, no one said this was going to be easy.
This is very difficult because an idea needs to be radical but most radical ideas are failures.
If something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts.” “The entire art of venture capital in our view is the big breakthrough for ideas. The nature of the big idea is that they are not that predictable.” “Most of the big breakthrough technologies/companies seem crazy at first: PCs, the internet, Bitcoin, Airbnb, Uber, 140 characters. It has to be a radical product. It has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual.
The visual case for contrarianism
These charts are from 25iq and Oaktree respectively.
The danger of consensus thinking broadly
If you pursue ideas and opportunities which are popular and sensible today, you are on the path to being commoditized.
-Taylor Pearson in The Overton Window and How Creative Business Ideas Arise
While hilarious, simply doing the opposite of what your instinct tells you doesn’t fully translate to the real world. However, what does work in the real world is doing things which are contrarian and correct. This is what makes great startups, great investments, great decisions. If it was obvious, it would have been done already and there’d be no margin, no opportunity. Lots of things are contrarian, but relatively few are contrarian and correct.
-Blas Moros in Costanza’s Law of Contrast
- You need to “beat the spread”. Heavy favorites are priced in.
- When filling out an NCAA bracket, lotto tickets, or playing Daily Fantasy the expectancy of a strategy is conditional on how much you win when you are correct. If you choose strategies that are likely to be followed by others the fact that you “must split the pot” changes whether it was a good play in the first place.
Consensus and alpha don’t mix
What important truths do you believe that few people agree with you on?