Being A Contrarian Sounds Cool

Say hello to the friendly Pacific Salmon.

Hello there. Image credit: Shuttershock.

Not the most glamorous looking creature I’ll admit. But you would struggle to find a story of greater determination, of bitter perseverance, than our underwater chum’s.

Shortly after salmon hatch, they leave whatever river they are born in and head out into the ocean to live out their adult years doing whatever it is salmon do. Dodging Captain Birdseye presumably.

But at some point our fishy friend will feel an overwhelming biological urge to to swim back to the exact spot on the river where they were born. To return home.

Now, the ocean is a big old place of course. It is remarkable that a salmon can even know what direction to head in.

But what is even more impressive are the odds that have to be overcome on the journey. A brutal struggle upstream, for weeks or maybe even months - battling against the current. It is a relentless slog.

And when they do finally arrive home, a herculean effort behind them, they spawn and then they die. Nice one.

The global stock market is where buyers and sellers come to trade the shares of the biggest companies in the world. A stock’s price at any given time is driven by the real-time aggregated opinion of millions of investors.

And if we simply invest in the global equity markets and do not try to do anything else, we allow capitalism’s current to pull us along.

Now this is fine, but to many successful people, it may just seem a bit dull. Going against the crowd is intellectually seductive - cool even. The only thing more satisfying than being right, is being right when everyone else is wrong.

But by betting against the aggregated wisdom of the crowd, taking a contrarian view, we naturally fight the consensus. And the consensus is often the consensus for a reason. We may very well might end up being swept out to sea.

Iain Couzin, a British scientist, has spent his career studying animals that move in packs. If we stick with the theme of fish (as I feel we really must) - Couzin once set up an experiment where he observed shoals of golden shiner, a minnow fish.

These fish naturally prefer to live in darkness however, sadly, they are also thick as mince.

When researchers projected shifting patterns of light over a pool containing individual fish, they found that the solo fish were terrible at tracking the moving shadows. They were essentially swimming randomly.

But when more and more fish were added to the pool, they found the shoal’s ability to track the moving light improved markedly. This wasn’t because the individual fish suddenly became smarter - it is because the fish that were in darkness slowed down, and when this happened the fish around them realised they should slow down too.

The efficient market hypothesis is one of the most hotly debated topics in finance.

Absolutists would say the theory should be taken to mean that a stock’s price will reflect all of the publicly available information at that given point in time. It is therefore impossible to beat the market on a consistent basis as one will never have any insight consistently above the level which is already aggregated into prices.

My own view’s more nuanced. I do not believe that the efficient market hypothesis should be taken to mean that real time prices are always exactly “perfect”. How can they be? But I do feel that the aggregated wisdom baked into live prices is at a high level. There is generally wisdom in the crowd.

For sure, there can be big money to be made at the edges by making bold calls, by swimming outside of the shoal.

But it is hard to do, and even harder to do consistently. The odds are not in your favour.

Being contrarian also just requires so much effort. Fighting against the prevailing narrative, constantly battling upstream. Don’t we have anything better to do?

Some people will always feel naturally compelled to go against the grain. Good for them.

But it is also true that some people are just too smart to be good investors.