The Secret to Contrarianism

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length: ~6 minutes

Newcula is a blog dedicated to the pursuit of excellence at life through continuous learning.

In a previous post, I said that, especially for millennials, simply being above average requires the extraordinary. But between above average and the far right side of the bell curve, is still considerable distance. And somewhere within is elite.

What is elite?

In the NFL, there are just over 1,600 players; each year, 80 of them get to play in the Pro Bowl in recognition of their excellence. In the MLB, approximately 1,100 players see significant playing time each season; 50 of the best are selected to the All-Star game annually. The United States Navy has over 310,00 active duty personnel and just over 8,000 Navy SEALs.

The concept of elite, then, roughly describe someone at or above the 95th percentile of whatever is being measured.

In this current age of populism, elitism has become a dirty word because it has been commingled with condescension. It’s almost shameful to be seen as”trying too hard” to be elite. We allow our athletes, soldiers, and musicians to strive for excellence, but we judge our peers harshly for wanting the same. Don’t let yourselves feel hamstrung in pursuit excellence.

Away from the Average

Before we begin the journey, we must acknowledge reality: whether it’s influence, impact, income, or intelligence, most of us are below average. There are always a few people on the extreme right side of the curve skewing the averages higher than the median. That’s why it’s so hard to actually be special, versus just thinking we’re special.

Obviously, there is no obligation to go for excellence. However, it’s important to recognize that if we simply make similar choices as the majority around us – the same careers, same activities, same use of time, same consumption of media, and perform more or less the same – we will predictably end up clustered less than one standard deviation on either side of average.

Assuming you find this option lacking, and also assuming you hit neither the birth lottery nor the actual lottery, I see only two ways forward.

First is choosing an elite career path such as medicine or law, getting into the right schools, and constantly being the top 1-5% of every peer group; and the second is to be a master contrarian. The first option is like driving a finely tuned Ferrari around an F1 race track hitting every corner better than everyone else; the second option is to drive a monster truck straight through the track instead.

Many people follow the first path first. And on a risk-adjusted basis, that is the best choice. However, most of us will lose interest, lose motivation, or simply fail along the way.

Rather than making excuses or shifting blame just realize that failure was always statistically the most probable outcome. We can either try again, or pivot to the second strategy of contrarianism.

An Illustration from Finance

Investing is a discipline where master contrarians become legends. The stock markets are a microcosm of life: most people overestimate their natural abilities; the vast majority believe they are above average and thus expect to make unrealistic amounts of money investing.

Inescapably, most investors are below average. This includes the vast majority of day traders, and an astounding 80% of professional money managers. In 2008, Warren Buffett made a bet with investment professionals that over a 10-year period, a low cost index fund (i.e. the average) would beat any pre-selected basket of hedge funds1. He’s winning and it is not even close.

Day trading and investing in hedge funds seem like opposite investment strategies, but in fact are very much the same. People want to be far above average, without the trouble of learning actual finance. They rely on either their own supernatural stock-picking abilities, or trust that their fund manager will beat the average.

As an actively contributor to Finance and Investment topics on Quora (a popular question and answer site), I witness firsthand the flood of people always looking for shortcuts to investment success. This is also clearly evident in the general pursuit of excellence. It is the reason why the internet filled to the brim with articles like “This Powerful Food Destroys Belly Fat”, “3 Tips for Prosperity”, or “5 Ways to Land Your Dream Job”.

The strategy of discovering some low-effort secret and winning via information asymmetry is folly; and it’s becoming more so day by day as information flow becomes ever more democratized by the Internet. And yet it’s also becoming more popular at the same time.

As I tell people seeking investing shortcuts in graphs and volume metrics, if something you can read and learn in a few minutes makes you an excellent day trader, you better hope everyone else in your country is illiterate.

Most people invest this way, and live this way, and therein lies the opportunity for contrarian.

The legendary investor Charlie Munger said “[Investing] is not supposed to be easy. Anyone who finds it easy is stupid” and the same holds true for excellence.

True contrarianism is not a shortcut. The secret to contrarianism is that there are no secret formulas. Instead, it is a combination of two things: thinking differently, and spending time differently.

Thinking Differently – A Lesson From Peter Thiel

Peter Thiel knows a thing or two about thinking differently. He co-founded Paypal (I’m sure people will put actual money onto an unknown website), and was the first outside investor of Facebook (the world really does need another social network).

To paraphrase his investment philosophy, “it doesn’t matter if most of my investments go to zero, as long as one of them goes up 100x.” In 2017, this idea is as widely accepted amongst tech investors as Paypal and Facebook is amongst consumers. But in the early days of the dotcom bust, Thiel was most definitely an outlier.

In his seminal book Zero to One |Amazon|, Thiel explains contrarianism as “Most people believe in x, but the truth is the opposite of x”.

So the question for the contrarian thinker is, “What important truth do most people disagree with you on?” Emphasis on the word truth.

The question will evoke two types of responders: people who find this difficult, and people who find it easy.

For the former, Thiel explains:

[Contrarian thinking] is intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon. And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular.

For the latter, refer back to Charlie Munger’s quote about investing.

Contrarian thinking is the opposite of always believing what everyone else believes. It is also the opposite of always disagreeing with what everyone else believes. Thinking differently isn’t simply adopting contrary positions. It’s about continuously examining every belief we hold to make sure we know why we believe it.

Anyone can disagree with popular opinion. That’s easy. A true contrarian knows that the wisdom of the crowd is actually correct most of the time. They understand the why behind the rare unpopular opinion they might hold because they arrived at it independently.

Blindly agreeing with the crowd on every issue clusters you around the average. Blindly disagreeing with the crowd will put you far below it.

Spending Time Differently – A Lesson From Warren Buffett

So if there are no secrets, and being wrong puts us far below average, how do contrarian thinkers arrive at their unpopular truths?

In the end, my belief is that thinking differently is still about information asymmetry. But this asymmetry will not come in an easy, ready-to-digest format. Because if something is both correct and easy, everyone would be doing it.

If we return to investing, another very popular question on Quora is along the lines of “What is Warren Buffett’s Secret?” Well his answer is that with investing and with life, there are no secrets.

Actually it’s quite the opposite. He goes to great pains to explain his investment methodology each and every year in Berkshire Hathaway’s annual letters:

We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business:

(1) favorable long-term economic characteristics;
(2) competent and honest management;
(3) purchase price attractive when measured against the yardstick of value to a private owner; and
(4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.

He further repeatedly mentions two books that detail exactly how to assess each of those points2.

When asked the question, Buffett said that the biggest contributing factor to his wealth was compound interest. He invests money where it will compound over time. In the same way, he invests his time into knowledge acquisition, so that his mind can also benefit from compounding over time.

His advice to becoming a masterclass investor, given on the PBS’s Money World decades ago is “do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publically traded securities.”

The moderator protested, “But there’s 27,000 public companies!”

“Well,” Buffett responded in all seriousness, “start with the A’s.”

That’s it. That’s all there is to it. Read, think, test, read, think.

It could not be more simple. But alas, simple is not the same as easy. Warren Buffett said of his methodology, “All of you can do it, but I guarantee not many of you will do it.”

Spending our time differently from our peers, is about doing the hard work that most people are loathed to do. By choosing the harder path consistently, it becomes ever more probable that the rare contrarian opinions formed end up being correct.

So the counterpart to Thiel’s question for the contrarian thinker, is the question for the contrarian doer, “What could I be doing that is generally agreed to be very good, but which most others are not willing to do?

Being a contrarian is not lazy thinking – just naively going against the crowd. It is independent thinking informed by relentlessly upgrading our brain software.

If you are able to find unpopular truths by doing simple yet difficult things that most are unwilling to do, you will find profit in contrarianism and move beyond the average. 

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1 Fortune – Warren Buffett Bets Against Hedge Funds

2 Benjamin Graham – The Intelligent Investor and Security Analysis

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