Being Contrarian Is About To Be Mainstream

Over the past two weeks I’ve heard the word “contrarian” more times than I can count.  Suddenly, to become a successful investor in any segment (angel, venture capital, public markets, debt markets) you have to be contrarian.  The assertion that a “contrarian strategy” always wins seems to be in the air.

When I ask people what they mean by “contrarian”, I’m amazed at how often they define it as either as “actively investing” or “sitting on the sidelines.”  Specifically, “there are too many people investing at this point – I’m going to take a contrarian approach and sit on the sidelines for a while.”

To me, contrarian means doing the opposite of everyone else.  If everyone is buying, you are selling.  If everyone is selling, you are buying. Our friends at Webster even give us an example:

“As an investor, he’s a contrarian, preferring to buy stocks when most people are selling.”

Now, to be fair, you can make the case that “not buying” when everyone else is buying is contrarian. But I have never thought about it that way.  And, as the word contrarian enters the mainstream vernacular around entrepreneur / angel / VC land, I think it’s important to ponder what it really means, especially if the majority suddenly adopt a “contrarian strategy” which, by definition, ceases to be contrarian.

Do you remember the amazingly hilarious “We’re All Individuals” segment from Monty Python’s Life of Brian?

  • This cycle has been going on for a long time. One of my favorite books is Extraordinary Popular Delusions & The Madness of Crowds. The 3-inch thick book describes many examples of irrational exuberance, bubbles, crashes, depressions and recovery in great detail. One of my favorite quotes from the book is:

    Men, it has been well said, think in herds ; it will be seen that they go mad in herds , while they only recover their senses slowly, and one by one!

    Oh, did I mention the book was written in 1841?

  • bigwags

    Speaking of movies and words your post reminds me of the Princess Bride and "you keep using that word. i do not think it means what you think it means"

    Thanks for stirring things up!

    Keep creating…it freaks people out,

  • Brad: Good topic and one that is talked about little and understood even less.

    It's pretty clear to anyone who invests professionally, that too much capital chasing an idea also chases out returns – driving them into the negative category for almost everyone. Remember the web video craze- everyone had to have a hand in that business – and yet only You Tube and its backers emerged well. There are very few sectors where betting with the consensus makes a ton of sense and can lead to good outcomes for all. So when people look at Groupon – and all of its clones – there may actually be a case for deal of the day sites – but if you are going directly into cities that Groupon and Living Social already cover – you're neither contrarian nor likely to come out of it well. Indeed, as you say, if everyone is investing there you should perhaps be actively thinking about ways to sell into the madness – or move onto a theme that is less recognized and that has less competition.

    One important thing about being a contratrian investor. You need not only to be contrarian – but be willing to be wrong and alone in making the error. Sometimes the crowd is right – and just going against it for the sake of being a contrarian makes no sense. However, sometimes being a contrarian means buying tobacco and food stocks in the midst of the internet bubble circa 2000 because no one cared about them anymore. Unless you are willing to be alone in your error – you will never invest enough capital when you are correct to make it truly worthwhile.

    And BTW: sitting on the sidelines is not being contrarian. sitting on the sidelines simply means that you are not finding enough interesting investment opportunities – probably because you are spending too much time thinking about how you can get involved with the investment fad of the day as opposed to getting in on the ground floor of the next wave.

    • messel

      Same goes for startup founders and learning about the technology fad of the day. It's better to build the next fad while leveraging the best of todays. It just takes a helluva lot of time to understand all the nuances of today's tech in order to build something desirable for tomorrow.

  • reecepacheco

    ah… good ol' investor buzz-speak…

    classic movie.

  • messel

    Thanks Brad for the morning laugh.

    You paint investors as a social pack animal. I say embrace the swarm and accept that there will always be alpha dogs, hive queens as well as a buzzing army of individuals.

    The nifty feature of the network economy is that individuals can play off of each others strengths. Investors in medtech can leverage the deep knowledge of investors in web tech and vice versa. Companies too can create greater value as clusters of partners.

    I don't understand the specifics of how a social attention economy will come to pass, but all the signs suggest it's coming. We'll come to value our business relationships more than our wallets.

  • i recently wrote this post on contrarianism on the stocktwits university blog.

  • There is a saying that goes something to the extent that "if you do what everyone else is doing, you will end up like everyone else." That is great advice if you are trying to board an airplane, but in the public equity world, that means that you will not beat your index that you are trying to beat and you will essentially add zero (or negative) value to the investment world. So in the public equity world, the trick if you want to beat your index is NOT to do what everyone else is doing – and by your definition to be a contrarian. I wonder what is the answer in the venture capital world? I know that in my world I prefer to be somewhat contrarian just for the plane facts that the crowd pushes up valuations (both buying and selling), tends to be late to the party, tends not to do proprietary research and tends to have unrealistic expectations of the outcome.