Contrarian Thought & Investing


A few years back, I flew down to San Francisco for a interview with Facebook.  The interview was in their hardware group.  While most people think of Facebook as primarily a software company, they also design and build the server hardware that’s placed into their data centers.

Fascinating facts you probably never cared about.

Anyway, there I am being interviewed by a young, white, male engineer in his mid-20’s… dressed in overpriced hipster-clothing.  He was tapping away on his computer taking notes, checking his phone once in awhile, and grilling me with various questions.

I was doing my best to answer them.

At one point during the interview he asked a question that stood out — He said, “How do you keep up to date in this industry?  What websites or publications do you read to stay informed?”

This question stood out not only because it emphasized the importance of keeping up to date in a field of work, but also the importance of being “plugged-in” and connected to the “correct” influences when you work for a corporation.

 

Contrarianism & Investing

If you’re reading this, the odds of you being an investor is quite high.  If that’s the case, you likely already know the dangers of “following the crowd” when it comes to investing.  Certainly sometimes the crowd gets it right, but the crowd can also get it very very wrong.

History is filled with tragic stories of investors that got crushed following the crowd.

In my mind, independent thought when investing is far more valuable than trying to keep a finger constantly on the pulse of the investing world.

But how do you know if you’re truly a contrarian thinker?

Funny enough, one of the great ironies of the investing world is Warren Buffett — He’s arguably one of the best contrarian investors in the world, and one of the best independent thinkers.  The man actually moved away from Wall Street to Omaha Nebraska so he could think independently.

The irony, is that nearly forty thousand “contrarian” investors flock to Omaha to hear him speak every year at the Berkshire Hathaway annual meeting.  Are all forty thousand really contrarian thinkers?

All the while Buffett extols the virtues of index investing — essentially telling his crowd to invest with the rest of the crowd (albeit at a very low cost).

independent thinkers.
A room full of independent contrarian thinkers?

Buffett certainly didn’t build his wealth by following the crowd.  He did it by being a contrarian and buying unpopular stocks.

It should come as no surprise then, that I believe good investors should put some effort into unplugging from popular culture.

 

Unplugging

Cognitive independence gets relatively little attention compared to more popular topics like financial independence, but one thing I’ve learned over the years is that many financial independent-types are also really independent thinkers.

So which came first, the chicken or the egg?  The money or the independent thought?

It’s hard to say, but I will say this — in my experience it’s far easier to practice cognitive independence when you don’t have to work 50 hours a week.

Let me give an example:  Every morning around 8:30am I set out on my morning walk with nothing but a set of keys.  (Yes, I wear clothes too!)

I leave my cellphone at home and I don’t bring a radio, or any other music device.  It’s just me and the fresh air.  I’m completely alone with my thoughts and unplugged from the world, with only two purposes in mind:  To walk and to think.

I do it this way on purpose.  It’s my time to think independently about the world without outside influence getting in the way.  I’m almost certain that without financial independence, these daily walks wouldn’t happen.

If I was working, I’d be commuting to work on a bus with the rest of the crowd — face-down in their phones and all consuming the same media.

unplug
Sometimes you just have to unplug from the world to be alone with your own thoughts.

At work I would be expected to “keep up” with all email, latest corporate management trends, industry, and technology changes… just every other employee.

As a financially independent investor, I’m mostly isolated from that required “group think”.

Now, I purposely try to spend a lot more time “unplugged” from the consumer world.  I don’t even bother buying a data plan for my phone — there’s no need (I don’t need to check my phone every five minutes).  I can’t even remember the last time I read a facebook timeline.

I’m just not part of that consumer world anymore and I think it’s made me a better person and a better investor.  Financial independence was the key that allowed me to unplug from it all.

At least I don’t have co-workers asking me if I’ve seen the latest TV show or laughed at the latest cat video on Youtube anymore.  What a relief!

 

Losing Touch

That’s not to say this idea is without its detractors — Some people might view being unplugged from popular culture as a bad thing.  Like I somehow might “lose touch” with reality or something.

I get that, but there’s really nothing to fear from unplugging a little.  Popular culture will find you if you even halfway pay attention.

For example — I’ll be chatting with my neighbor and he’ll say to me something like,

“Hey did you see that new Incredibles movie this weekend?  It was great!”

I’ll answer, “Uh, no I didn’t.  What’s that movie about anyway?  Why was it good?”

And just like that, my neighbor will tell me everything I need to know about Incredibles 2 and why it’s a great movie.  My neighbor feels important and knowledgeable, and he’s more than willing to tell me all about this new movie.

But what about young people (teenagers) that don’t usually offer-up conversation to adults like myself?  Well, that’s just a simple matter of asking them about stuff they’re interested in.

“Hey, you seem like you’re pretty good at that video game.  What’s it called?”

“This?  This is Fortnight for the Nintendo Swtich.  It’s the new hotness right now.”

“Looks pretty cool.  How is it better than the old fps game like I used to play?”

At that point, any teen would be willing to offer up information that makes him superior to his elders.

The secret is really to just not have an ego about it.  “Popular” culture will simply find you if you’re willing to ask questions and maintain a curious mind.

 

Final Thoughts

The information we consume has a HUGE impact on how investors form our worldviews.  Simply put, we can let popular culture either define us, or serve us.

It’s your choice.

My suggestion with this post is that investors try unplugging a little.   Turn off the social media for awhile.  Close the laptop.

Instead, seek out new and original ideas, and spend the time to cultivate them in ourselves.  By doing so, we stand a very good chance of having excelling outcomes in our investments and life.

If we truly want to be better investors and better people, cultivating independent thought and a contrarian viewpoint might just be the key to a different outcome.

 

[Image Credit: Flickr1, BusinessInsider, Flickr2]

25 thoughts on “Contrarian Thought & Investing

  • June 20, 2018 at 6:29 AM
    Permalink

    “The irony, is that nearly forty thousand “contrarian” investors flock to Omaha to hear him speak every year at the Berkshire Hathaway annual meeting. Are all forty thousand really contrarian thinkers?”

    No irony at all. Investors of Berkshire Hathaway aren’t “contrarian” investors. Rather, they believe that investing with Warren Buffet makes a lot of sense whether or not it is a mainstream idea.

    Happy Berkshire Hathaway shareholder since 2007.

    Reply
    • June 20, 2018 at 8:46 AM
      Permalink

      Hehe, I thought that one might get some of the Buffett lovers riled up!

      So tell me, why does investing with him make a lot of sense? Would love to hear your thoughts.

      Reply
      • June 23, 2018 at 9:29 AM
        Permalink

        Well, I’ll take the bait. You could look at Berkshire (BRK) as a close end fund with a very low expense ratio and where the asset allocation decisions are taken by the best in the business (with a very long track record). That in itself is not bad. But there are two things that improve wildly upon this.
        First off: no dividends. Not only is this very tax efficient for you as a shareholder, it let’s BRK put all the earnings at work for you. And because it is a holding they are not limited to one business or country where they need to find good acquisitions. That is a big plus.

        Second: massive leverage. 114 billion of it (market capitalisation is 470 billion, book value somewhere around 300 billion). This leverage (in the form of insurance float) has two huge advantages: BRK usually gets paid to hold it (as long as their insurance underwriting is profitable) and “p/c float can’t be withdrawn. This means that p/c companies can’t experience massive “runs” in times of widespread financial stress, a characteristic of prime importance to Berkshire that we factor into our investment decisions.”

        The leverage alone is a guarantee that BRK will outperform the index by a few percentage.That in itself makes it a no-brainer investment over an index fund. Even with average investment decisions it would still be interesting to buy. But those investment decisions are usually pretty good.

        Now all of this doesn’t mean you should buy BRK at any price. It too can sometimes be pricey.
        Current stock price is OK-ish but not cheap. But I like the june 21 2019 put with strike price 175 USD. At current bid you buy BRK at 170 USD and that is around the level Buffett said they would start with stock buybacks (or you get to keep the 3,2% premium, add in a 1,8% savings rate and your money could return you 5% for not buying a stock). Perfect would be if the strike 185 put would give you 15 usd premium. Either you buy BRK.B at 170 USD per share or you get to keep a 8% premium …

        Reply
  • June 20, 2018 at 9:41 AM
    Permalink

    Hey Mr. Tako,

    Another thoughtful post. But did you find out what the deal is with “Fortnight”? My nine year old mentioned it last night and as a lifelong gamer, I’m still in shock that I didn’t know about it. I must be getting old…

    Reply
    • June 20, 2018 at 1:45 PM
      Permalink

      Yes yes, this is exactly my point. For investors, trying to stay plugged in to all aspects of consumer culture is near impossible.

      So basically Fortnite hits a few key gaming elements and does them really well:
      * Smooth, 60fps gameplay.
      * Very large maps with up to 100 players, and a mechanism to slowly force players closer and closer together.
      * A Battle Royale. This style of game is quite popular right now.
      * Aspects of “tower defense” and building games. Unlike older fps games it’s not all offense. You can also build defense structures.

      Reply
  • June 20, 2018 at 11:17 AM
    Permalink

    It must be (a bit) annoying to be interviewed by hippie 20 yr olds, but this seems to be common in the tech world. I’m sure you are glad that you are out of the corporate rat race.

    I am still very much attached to my phone, so definitely need to work on it. I consider this to be my “addiction”. On the other hand, for some reason, I am never really into any type of games–computer/online games, cell phone games etc. I wonder if this has to do with the different chemical components inside one’s brain….

    I used to read some of the really famous FIRE blogs religiously. But after a while, I realized that, personal finance varies so much, it’s highly personal (as it should be). And of course some of these blogs’ content change a bit after they try to aggressively monetize the site. I still read a good amount of blogs/articles, but now I take some of the info with a grain of salt…I developed my “filters” (so to speak) over the years..

    Lastly, I do plan on watching the new dinosaur movie that’s coming out this weekend, this is one of my few splurges in life as a scifi fan. guilty as charged, hahaha.

    Reply
    • June 21, 2018 at 10:16 AM
      Permalink

      Speaking as the guy on the other side conducting the tech interview, yeah it’s common but I fail to see how it’s annoying unless you were planning on skating through the interview on your experience. I’ve had too many older guys come in with attitudes like “I’ve got 20-30 years experience, why am I being interviewed by some millennial?”

      Because these companies employ the best, top grads, famous names, people at the top of their field. These are meritocracies: your impact/contribution/skill determines your level, not just years put in. If you used those X years wisely then you should have no trouble whatsoever with a few technical exams. They’re not testing rote memorisation.

      Reply
  • June 20, 2018 at 1:11 PM
    Permalink

    I don’t understand something. If you want to be an exceptional individual stock investor, it would be very helpful to be tied in to consumer and popular culture. You would gain insight on long-term consumer trends, shopping habits, strategic direction, obsolescence, etc. Stocks are a construct of society, to have insight into that society can only aid investing. You’d have a better idea if Disney was losing touch or growing its brand. You’d see if Limited Brands was still hot or not. You’d be more educated on whether to invest in Netflix or Comcast. Just my two cents…

    Reply
    • June 20, 2018 at 1:24 PM
      Permalink

      That’s might be a typical way to think about it. I have a *different* way of looking at it.

      Consumer tastes are always changing. Rapidly. Attempting to predict those changes is folly. Trying to keep up is always staying one step behind.

      Just look at my previous post on Nintendo. Even Nintendo can’t consistently create hits.

      There’s a reason I own very very few consumer stocks. Picking winners in that space is almost akin to throwing darts at a board.

      See what I mean about contrarian thought now? Most people reject contrarian thought almost outright.

      Reply
      • June 20, 2018 at 11:56 PM
        Permalink

        Nintendo is so niche. Apple was a great consumer stock, it’s been a winner for a long long time and it wasn’t hard to pick it as a winner.

        Everything is changing rapidly, not just consumer tastes. Energy dynamics, semiconductors, software, finance, biotech, healthcare, retail, consumer staples, entertainment, social media, are all undergoing major changes. Disruption is everywhere. Picking individual winners today is dicey in any sector. What is your one favorite stock today that you think will be multiples higher ten years from now?

        I don’t reject contrarian thought. But I think analysis should be done with all knowledge on the table for consideration, including data from consumer or popular culture. To ignore it would be to ignore critical data.

        Reply
  • June 20, 2018 at 3:41 PM
    Permalink

    Leaving your ego behind is a great way to learn a lot and engage with anyone (even teenagers!). People love to talk about themselves and their stuff, and the younger generation are really receptive if you’re truly interested rather than just going down your “adult talking to kid” checklist. As you point out, it makes you a better investor and a better person.

    And it’s Fortnite, gentlemen. You guys are like so old.

    Reply
    • June 20, 2018 at 9:47 PM
      Permalink

      Spambot. Spambot! I think we need to take another look at Paul… 😉

      Reply
  • June 20, 2018 at 4:20 PM
    Permalink

    Awesome post Tako, love the thinking here. Being unplugged is HUGE. Typical convo I have with my Mom..

    MOM: (after watching the news) – “This world is going to $hit!! All this crime and shootings!!”

    ME: “Mom, violent crime in America as a whole is waaaaay lower than 10, 15, 20, and 25 years ago. Facts are facts. You Just hear about every incident now because everyone’s plugged in 24×7 and carrying a video camera.”

    Mom: “Whatever”

    So to her, I’m a contrarian. But honestly, I’m just telling the truth. Because I don’t let the noise skew the reality of the situation.

    Great stuff Tako!

    Reply
  • June 20, 2018 at 5:03 PM
    Permalink

    What do you think of LYB now with its recent acquisition?

    Reply
    • June 20, 2018 at 9:43 PM
      Permalink

      I assume your talking about the A. Schulman purchase. While technically it hasn’t been completed (it’s subject to further regulatory scrutiny), I’m fine with the overall transaction.

      At current levels of profitability the price seems high, but if LYB can reach the projected profitability levels it should make a decent bolt-on transaction.

      Reply
  • June 20, 2018 at 8:33 PM
    Permalink

    Very useful post! I have been reading Mr.Tako’s blog post for a while. You are absolutely right, you should form your own strategy, way of investing. Keep up creating posts!

    Reply
  • June 21, 2018 at 2:16 AM
    Permalink

    Majority does not equal reality. So, we have to separate some time to think independently about the world to get us closer to the reality of the world. Humans could survive in the world independently because we were granted the ability to think. So, we should never forget the need of thinking by ourselves daily. Got your point!

    Reply
  • June 21, 2018 at 12:30 PM
    Permalink

    I agree with disconnecting. Our plans are to do exactly that when I’m full time FIRE in 4 years time. We plan to live very rural and completely isolated from this f*cked up world that we all live in (protests, false news and media, etc).
    As for phones, media, etc. you’re right. Ever notice when you’re dining in restaurants and there will be a couple on a date sitting across each other and there’s no eye contact. Their heads are tilted down because they’re both on their phones! GIVE IT A REST!
    My phone is on “do not disturb” mode from 7:30 pm – 8:30 am each and everyday. And weekends I am off-limits and unreachable. I do use my phone a great deal during weekdays, I admit. But evenings and weekends; if there’s an emergency, call 9-1-1. I’m unavailable.

    Reply
  • June 21, 2018 at 12:55 PM
    Permalink

    “it’s far easier to practice cognitive independence when you don’t have to work 50 hours a week.”

    So true. When I was working, only my lizard brain was running and I couldn’t get to the creative parts. It wasn’t until I retired that I could see a lot of things more clearly. It’s really hard to think outside the box when you’re constantly running the treadmill and forced to be connected at all times. It really helps to step back and let your subconscious work out problems. Unplugging definitely helps.

    I think this is why Sauna and spa culture is so big in Germany. They work hard but also know how to relax. That’s how you can be creative in order to solve problems.

    Reply
    • June 21, 2018 at 4:16 PM
      Permalink

      Which problems have they solved creatively? How to turn the cup holder in a Mercedes Benz into a Transformer? My only experience with German creativity is with their flagship Mercedes Benz, and I have to say it’s beautiful on the outside but it’s a poor piece of engineering.

      I had my most creative accomplishments while working. And pressure actually helped, it forced me to think up a lot of alternate solutions.

      Reply
  • June 25, 2018 at 1:46 AM
    Permalink

    Very interesting article. I have been picking stocks since 2012. However since reading another blog, the jcollins stock series, it brought to me a perspective I am not thought of. Stock picking is VERY HARD and you will not always get it right. Yes, happened to me a few times during the oil bust of 2015 (I got kindered too with Kinder Morgan). Now I am drifting towards indexing, more like total US market. Yes, it is too “with the crowd”, but with individual stocks it just seems like it is getting more and more difficult to find good companies. I already have about 50 individual stocks, but any more money from now on is very likely going into vanguard ETFs.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Do NOT follow this link or you will be banned from the site!