“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
John Maynard Keynes
“Doubt all before you believe anything. Watch your idols.”
Francis Bacon
“I have an iron prescription that helps me keep sane when I naturally drift toward one ideology over another: I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who are supporting it. Only when I reach that stage am I qualified to speak.”
Charlie Munger
“The Art of Contrary Thinking,” written by Humphrey Neill in 1954, provides an important and timely reminder of the need for objectivity and clarity of thought when it comes to financial planning and investment. Neill, a quirky and iconoclastic market analyst, summarized the book this way: “The art of contrary thinking consists of training your mind to ruminate in directions opposite to general public opinions.”
Very easy to say, very difficult to put into practice.
Just as most people consider themselves above average drivers, the group of self-described contrarians is, paradoxically, a large one. In the investing world in particular, virtually everyone considers themself a contrarian, and yet, by definition, very few investors are. Clearly, while most see the benefits of contrarianism in theory, very few are able live up to its precepts in practice.
Let me start by saying what thoughtful contrarianism isn’t. It isn’t just a blind contrariness that is compelled to do the opposite of the crowd. This blind nonconformity is just as irrational as that of the unthinking herd. What Neill is advocating instead is to avoid the quick, illogical, and often unconscious jump to conclusions. Note the word “rumination.” Study the crowd and it’s views, as well as your own preconceived notions and biases, and then strive to purposely study the countervailing argument and implications. Don’t assume anything.
Open-mindedness, objectivity, and emotional equanimity are all traits which help drive good financial and investment outcomes. Below are just a couple of Neill’s insights and my thoughts on their financial implications for clients.
“Individual opinions (our own as well as the next man’s) are of little value - because so frequently wrong. If one relies stubbornly on his own opinion, he is likely to stand on his opinion, right or wrong. No trait is stronger, perhaps, than that of defending one’s opinion and of being unwilling to admit error in judgment.”
We live in a hyper-opinionated world. What’s worse, the ubiquity of technology and media has dramatically increased the amount and frequency of opinion we are exposed to. Facts and unbiased reporting are out, purposely inflammatory and emotion-arousing opinion are in. Unfortunately, humans perceive someone with a passionately articulated opinion as having both knowledge and certainty-which is naturally persuasive. And yet, being exposed to opinions subconsciously compels us take a stand and agree or disagree with them. What’s worse, once we have formed an opinion ourselves, it is very difficult mentally and psychologically to reverse it, even in the face of new facts. To change one’s mind is to admit we were wrong-something we all struggle with.
Think of someone you know who is hyper-partisan politically. Is this the most rational, objective, clear-thinking person you know? Do they spend their time confirming their own biases by seeking out confirming opinions and media? Can they objectively and dispassionately list their party’s shortcomings? Can they list the opposing parties strengths? When talking about politics, can they stay even-keeled and composed, particularly when someone tests their views? I believe that when someone is dogmatic and irrationally opinionated in one area of their life, it tends to permeate their overall thinking and dramatically reduces objectivity.
Train yourself to question others views, as well as your own assumptions and beliefs-particularly long-held ones. Seek opposing, not confirming views. Strive to avoid coming to opinions quickly. Limit forecasting.
“Is the public wrong all the time? Decidedly, no. The public is perhaps right more of the time than not. In stock market parlance, the public is right during the trends, but wrong at both ends.”
Another way to state this is, “what the wise man does at the beginning, the fool does at the end.” Another is Warren Buffett's line about the three kinds of people in business and markets: innovators, followed by imitators, and then, finally, the idiots. As Neill implies, the consensus view can generally be right the majority of the time. However, at extremes, the crowd is typically always wrong. At these crucial tipping points, when sound behavior is most called for, the crowd’s degree of conviction and certainty in its errant opinions is particularly high, as is it’s emotionalism.
There are many times in markets where there is no clear consensus. The range of opinions and views is broad and diffuse. Interestingly, in these times, there can be high emotionalism. Earlier in this bull market, for example, there were highly convicted and vocal bulls on and bears. However, the overall effect was relatively balanced as these two groups served to largely neutralize each other. The analogy of a boat is useful. It is only when everyone is on one side of the boat that it’s dangerous. Having a mob of people on the bow of the boat, and another on the stern, both shouting at each other, while annoying, doesn’t threaten capsizing.
Keep an eye on the pendulum of consensus. In simple terms, virtually everyone will be fearful, bearish, pessimistic and emotional in late stage bear markets. Similarly, in late stage bull markets, most will be greedy, bullish, optimistic, and emotional. In the broad swaths of environments in between, it will be less clear. Look for the degree of consensus, certainty, and emotion, along with a complete absence of participants with opposing views. The pendulum of psychology currently, while not extreme, is tilting toward worrying levels of optimism, enthusiasm, risk seeking, and speculation. The thoughtful advisor and client should strive to calibrate financial and investment decisions in the context of the overall environment.
It is crucial for clients to be aware of these all too common psychological and behavioral shortcomings, and to strive, over time with their advisor to counteract their influence on decision making.