Pronunciation: \kən-ˈtrer-ē-ən, kän-\
Definition: a person who takes a contrary position or attitude; specifically: an investor who buys shares of stock when most others are selling and sells when others are buying.1
Are you a trendsetter, always on the cutting edge of fashion, fads or cultural developments? Are you the type of person who abandons a style as soon as others begin adopting it en masse? Do you shudder when people begin copying your look, your purchases or your ideas?
If these descriptions sound familiar, you might be considered a contrarian.
Contrarians Think for Themselves
The term contrarian can apply to anyone who takes a point of view that is the opposite of popular opinion. When it comes to investing or dealing with your finances, contrarians are the types of folks who buy when others are selling and who sell when others are buying. They tend to believe that the masses have no idea what they are doing, or at least believe that when the public at large adopts a trend in full force, it is a signal to flee. Contrarians think for themselves and are not easily swayed when it comes to what others think.
Does this sound like you?
Being a contrarian can be the key to sudden and unparalleled success in some circumstances, especially when it comes to the markets. However, there is a great deal of risk in taking a viewpoint that is contrary to conventional wisdom. A good contrarian investor not only thinks for him or herself, but thinks through all of the potential consequences of the actions in mind. After all, there can be a lot at stake if your instincts are wrong.
Two Successful Contrarians
I had the opportunity to work for several amazing contrarians during my career on Wall Street. One man was the founder of a successful firm that bore his name. The legend surrounding this mogul was that he had made his fortune in 1929 by shorting RCA stock—betting that it would go down—right before the crash.
As the story goes, his colleagues thought he was crazy, but his analysis and his intuition lead him to the conclusion that a stock market correction was inevitable. He held to his hunch and made a bundle. What foresight! What courage! The most inspiring part of the story was that he continued to fearlessly buck the crowd for the rest of his brilliant seven-decade career. The mogul amassed vast wealth using this approach to investing and also built an impressive, and equally independent-minded, collection of contemporary art.
When There’s Blood in the Streets, It’s Time to Buy
The mogul knew when the markets were overpriced and how to find bargains using a value approach to investing. Another exceedingly successful and wise boss for whom I had the privilege to work did, too. Stephen was a tall and distinguished man with a charismatic smile. I remember him counseling me earnestly, “Suzanna, when there is blood in the street, it’s time to buy!”
Stephen and his partners had started their firm as young men in the early 1970s, just as that decade’s devastating recession took hold. Having nothing much to lose at that point in their careers, they used the downturn to find bargains in a variety of investments, from the stock market to venture capital to private equity. Stephen recalled that he and his partners often seized opportunities that no one else would touch. They bought real estate when conventional wisdom said real estate was dead. They invested in technology before technology was cool and opened an office in San Francisco to make bets on Silicon Valley companies when few had the stomach for risk in new and untested endeavors.
The key to success was that they paid next to nothing for these investments, mostly because no one else was interested in them. Stephen used to joke that when he heard people say, “I wouldn’t touch that investment with a ten foot pole!” it tempted him to go poking around to see if the deal was really a stinker or if it was just out of favor.
Buy Low, Not High
Despite Stephen and his partners’ experience with technology, he was extremely cautious when that sector was booming in the late 1990s. He had little interest in buying those high fliers for his investment clients, many of who begged him to buy the stocks du jour. Many of us at the firm thought he was too risk averse, not taking advantage of soaring markets and unprecedented opportunities.
“How could he pass on that brilliant dot com company?” we would ask each other in the hallways. But Stephen had been around the block and knew that the “irrational exuberance” that Alan Greenspan described was all too real. He stuck with more conservative stocks that had some tech exposure, and, for the most part, was exceedingly careful about placing IPOs or startups in client portfolios. Stephen refused to buy when the prices were too high, cautioning his clients against undue risk and ignoring the conventional wisdom of Wall Street, which was to buy, buy, buy.
I clearly recall a cab ride with Stephen in early 2000. We were on our way to visit a client in uptown Manhattan and Stephen chatted genially with the taxi driver about tech stocks.
As we left the cab and walked into the building, Stephen commented gravely, “When taxi drivers start touting stocks, I know the market is too high!”
While Stephen had nothing against cab drivers, his point was that in the tech hey-day, many individuals who had not previously participated in the stock market were now boldly day-trading with their retirement accounts. It was a sign of the times, and it was quite clear to a dedicated contrarian like Stephen that a bubble had formed and was about to burst. And burst it did.
Contrarian or Common Sense?
Were these bosses of mine true contrarians, or did they just have common sense about the reality of market cycles? As I reflect on their successes, I believe that the answer is a bit of both.
Both individuals had an uncanny ability to follow their intuition and to ignore the crowd, but each backed up their contrarian views with thorough analysis and research. When they bought low, they still purchased sound investments. When they sold high, they were aware that they might have left some potential gains on the table, but were content to take their profits and go home.
Being a contrarian can be difficult. If the mogul had been wrong about RCA, his friends and colleagues would have had the last laugh. If Stephen and his friends had been incorrect about technology in the 1970s, their firm may not ever have survived; the losses from a poor call can be devastating. A good contrarian must have the courage of his or her convictions, but that audacity must be backed up by scrupulous homework and a point of view that is all business.
As successful contrarians, these men had the uncanny ability to remain detached from the emotional aspect of investing. This is a rare skill, for most of us get caught up in what is popular and accepted when it comes to investments. Perhaps we can see peaks and valleys, but it can be difficult to keep our emotions at bay when evaluating investment opportunities that involve our own money. For example, in retrospect, many Americans claim to have seen the housing bubble taking shape, yet few individuals consciously sold off assets at the peak. We tend to hope the growth will continue and often hold on too long, selling real estate and stocks after the markets have crashed. Now, many Americans are hoarding cash, paralyzed by the prolonged crisis.
I have a hunch that if the mogul and Stephen were still around, they would have been happily taking advantage of the “blood in the streets.” They’d be buying up beaten down but valuable stocks and gleefully shopping for real estate. They were contrarians to the end.
1 (Source: Merriam Webster’s Dictionary Online)