Why is it hard to take contrarian actions in investing?


In the investing world, taking contrarian actions often leads to several challenges. Here are some reasons why it is hard:

  1. Emotional and Psychological Resistance: Contrarian investing requires going against market trends or popular opinion, which can be emotionally challenging. Investors may face criticism or skepticism from others, making it psychologically hard to stick to their contrarian views.

  2. Financial Pressure: Contrarian positions might not perform well in the short-term, even if they are beneficial in the long run. This can put financial stress on the investor, especially if significant capital is at risk.

  3. Temptation and Peer Influence: During strong market rallies or declines, the pull to join the crowd can be very strong. Investors might feel left out of 'easy gains' or panic sell during downturns, deviating from a contrarian approach. According to Tom Gayner, while value investors often succeed in the long term, they might miss out on short-term gains and excitement by not following the crowd (1).

  4. Environmental and Contextual Factors: The environment in which an investor operates can also influence their ability to maintain a contrarian stance. If their financial stability or job security is tied to market performance or peers’ perceptions, maintaining a contrarian position can be even more challenging.

Together, these factors contribute to why embracing and sustaining contrarian investment strategies can be difficult.

The Cost of Optimization

Tom shares his perspective on the trade-off between optimization and satisfaction, emphasizing the importance of being a satisfier rather than an optimizer. He also discusses the temptation to chase bigger numbers and the discipline of thinking backwards. Shane highlights the challenges of looking like an idiot in the short term while striving for long-term success.

The Knowledge Project

The Charlie Munger Approach to Success in Life and Business — Tom Gayner (CEO of Markel)