In investing mythology, there is a special place reserved for the contrarian investor, i.e., the investor who goes against the crowd and makes money in the process. In fact, many investors, asked to describe themselves, describe their investment style as both contrarian and long term. But are you really a contrarian investor? Last Wednesday offered a simple test. At 3.45 pm, the S&P 500 was down to about 1150, the Dow had dropped 800 points in three days and the bottom was falling out of the market. If you were watching the screen at that time, which of the following impulses did you feel?
1. Denial: This is a bad dream... I am going to wake up from it any moment... It is not happening.
2. Panic: Sell everything. The world is coming to an end.
3. Cool Assessment: Buy now. Panic yields the best opportunities.
4. Wait and see: I think I should buy, but I am too nervous. Let me wait for things to settle down a little bit.
If you were truly a contrarian, you would have chosen (3) and done something about it: tapped out your cash reserved and invested in banking stocks, for instance..... For most of us, though, denial, panic and waiting would have been more natural impulses. At the risk of revealing more about my psyche than I should be, I did not pass the contrarian test. I chose to wait and see, which in the long terms turns out to be waiting and waiting for the right moment, which either never comes or comes too late. I think, though, that there are broader lessons to be learned from this test.
a. It is easy in the abstract to be a rational, long-term investor. It is much more difficult in practice. The same can be said about being a contrarian.
b. The fact that information is so much more easily accessible and timely has actually made the task of being a long-term investor more difficult. Twenty years ago, most of us would have been working in blissful ignorance at our regular jobs, completely unaware (at least during the day) that Wall Street was collapsing... and that may have been healthier.
c. You cannot force yourself to adopt an investment style that does not fit your make-up as a human being. Many of us are not hard-wired to be patient, long term investors, and fewer still have the stomach to go against the crowd.