Don't catch Contrarian Disease

Thinking contrarian without being a sucker.

The last few days have been mayhem. The invasion of the sovereign state Ukraine through Russia shook the world and myself to the core. What is currently happening less than 800 km away from my home is a tragedy.I have colleagues who are in Ukraine, and wish them and all the people there the best. Slava Ukraini 🇺🇦

Contrarian Investing

Contrarian investing has been a core mantra of many well known investors. John Templeton, Buffett, Soros and Druckenmiller showed us the incredible returns that can be made through going against the crowd.

Be fearful when others are greedy. Be greedy when others are fearful." — Warren Buffett

Sadly those who act contrarian and are not one of the investors mentioned above, can fall into the trap of Contrarian Disease. Thanks @Liberty (who has one of my favourite newsletters) to coin that word (and released it under CC Licence BY-NC-SA - ahh licence jokes...).

What is Contrarian Disease

Contrarian Disease is where an investor forgets that just being contrarian is not an investment thesis. A single, but often legitimate example confirms their contrary view -  and rather than seeing both sides, statistical evidence or more nuance, they accept it. After having sunk money into their thesis, they reject all new evidence, and create an alternative reality for themselves.

Examples would be: There are a lot of old smokers, therefore smoking can't be as bad as everyone says it is. Or that because Thomas Edison was not solely responsible for everything he invented, therefore he stole them.

These are mostly harmless examples, but we recently saw what damage Contrarian Disease could do. First during the pandemic (I don't know anyone who died, therefore it is harmless) and now where it is used to turn around the situation in Russia's favor. (Ukraine trying to join NATO, therefore it is Ukraine's fault). Meanwhile they ignored Chechnya, Georgia and Crimea and that the invasion showed why they seeked accession. It downplays the brutality.

In investing you don't just have to prove the other side wrong, you have to be right as well.

Quickly Change your mind

With less competition in neglected markets, returns are often easy to come by while contrarian investing. A good example would be those who invested in oil or coal last year. Studying the history of energy, current government plans and statistics showed that the energy transition takes longer than many realize. Combined with low valuations, that thinking led to great returns. 

However even when having a good investment thesis at first, you can fall into the trap of contrarian disease. Thinking that because currently renewable energy sources are not enough, they will never replace oil or coal -  can potentially turn a huge gain into a brutal loss down the road.

"When the facts change, I change my mind." - John Maynard Keynes.

One of the things all great traders have in common is quickly changing their minds. Stanley Druckenmiller went from being long the Friday before Black Monday 1987, to shorting the market during the first hour on Monday. Instead of suffering tremendous loses (he was 130% long), he had a small gain. NeckarValue has a great Twitter Thread on Paul Tudor Jones, a brilliant trader who also quickly changes his mind. Remember: Ego is the enemy.

The Idiot - Me

Two weeks ago, I was looking at Russian stocks. They seem cheap and I did not think that an invasion made sense economically. I held Gazprom for a year and thought that it might be an opportunity. I was wrong, very wrong. I underestimated the insanity of a proven, ruthless dictator. 

Luckily I did not buy more, due to uncertainty. Yet I was still a sucker. Despite facts changing with the invasion I did not liquidate my 2% Gazprom position. Lesson Learned: I changed my mind, but wasn't decisive enough. I am a sucker.

The deep end

It's one thing to be a sucker, but it can go much farther. On Twitter one individual is trying to pin the invasion on the West/Nato and trivializes the conflict. There is more nuance to the current situation than is portrayed, but one needs to take in new developments. 

Tweeting that he has 30% in Russian equities, he still claims that Russian stocks are the best risk/reward and that they will go back to previous prices once the conflict ends. There might be an ounce of truth in that last Thursday, but it is a different picture now. To quote the founder of the Soviet Union: “There are decades where nothing happens; and there are weeks where decades happen” – Vladimir Ilyich Lenin. 

Russia from two weeks ago seems decades away. Claiming otherwise ignores the sanctions, closed stock markets, willingness of foreign companies to do business in the country, forced liquidations and governments searching alternatives to Russian energy. There might be a time where Russian stocks can create huge returns, and it is hard to predict when - but if you don't look at the problem from all angles, it can also lead to painful losses. 

Is your thesis ill?

I tried to formulate a few questions that should lead to more clarity if a contrarian thesis is good, or sick. If you have more suggestions please write to me on Twitter @InvestRoiss or in the comments, so I can add them to the post. 

• Why is the market/sector cheap? 

• What will change the perception of the market?

• How quickly can I get out of the market -  and what happens if I can't?

• Am I vulnerable to regulations or governments?

• Try to prove that the market/sector is a bad investment.

• How long can the sector/market stay cheap?

Wish everyone the best, and don’t catch contrarian disease!