At the Money: Contrarian Investing

Challenges

Contrarian investing poses significant challenges, primarily due to the psychological difficulty of going against the crowd. Barry Ritholtz highlights the romantic image of the contrarian investor who buys low and sells high, yet acknowledges the difficulty of this approach 1. Michael Mauboussin explains that asset prices often influence investor behavior, making it hard to resist following market trends 1. He cites Keynes, noting that it's often safer reputationally to fail conventionally than to succeed unconventionally, which discourages contrarian strategies 2.

Everybody wants to be a contrarian. We want to be the person who sells at the top as greed consumes the crowd or buys into the lows.

--- Barry Ritholtz

This mindset can lead to missed opportunities for excess returns, as the consensus is not always correct.

   

Independence

Independence is crucial in contrarian investing, yet it requires overcoming significant psychological barriers. Michael Mauboussin discusses Solomon Asch's conformity experiments, which show that people often conform to incorrect group opinions due to fear, highlighting the challenge of maintaining independence 3. He notes that the amygdala, the brain's fear center, activates when individuals resist conformity, indicating the emotional struggle involved 3. Value investing, as described by Seth Klarman, combines a contrarian streak with analytical rigor, emphasizing the need to assess both bullish and bearish cases to identify mispriced assets 2.

For you to stay independent, you had to overcome that sensation of fear to get to the other side, and that's difficult for us to do.

--- Michael Mauboussin

This approach underscores the importance of independent thinking in achieving investment success.