During the 1980s, I worked with a large US stockbroker house called Dean Witter. Our then market ‘guru’ was a technical analyst who was very well known as being a ‘contrarian’ investor. In other words, he looked to buy when most were selling and vice versa. As someone who had researched anarchist philosophy’ in an earlier career (how about that for irony!) this appealed to me. It also gave me a perspective on crowd and organisational decision-making that has proven repeatedly useful in my life.
The basic philosophy behind contrarian investing is that beliefs and attitudes build over time and that by the time a belief becomes consensus, prices have long since moved to reflect the known risks or opportunities and the facts are actually changing. People become temporarily blind to these ‘new facts’ because they are still absorbing the old ones that come to govern their perspective. Beliefs change slowly. Simplistically, by the time the consensus has developed that the market can only go up, everyone has bought and there is no one left to buy so actually it can only go down. Of course, calling these turning points is incredibly difficult, if not impossible, but an awareness of the influence of consensus thinking is very helpful.
We regularly see the same process at work in business strategy, the most recent example being the oil industry. For several years, it became a truism that energy prices would rise relentlessly. At $110 a barrel people were saying expensive oil was here to stay and prices would only go higher. What happened, therefore, was lots of industry people held this belief so exploration for oil in difficult, costly locations went through the roof as did the development of alternative sources of carbon fuel such as shale oil and fracking. It was perceived as a ‘one way bet.’
People became blind to a possible excess of supply and to the fact that the all their competitors were looking to expand supply in the same belief. Today, oil prices are nearer $80 than $110 due to excess supplies and slow economic growth. This same ‘boom and bust’ phenomenon happens all the time in other cyclical businesses, such as mining (e.g. China will keep needing more and more copper) , construction (e.g. House prices can only go up) etc. It also happens in all industries in one form or another. For example, Tesco stayed in love with the Superstore format even though LiDL and Aldi were growing by offering a smaller more local store displaying more limited but cheaper ranges which indicated that consumer fashions were changing.
Organisational blindness is an area of great interest to me. I remember one time being bullish (positive on the market) in the 1980s and trying to hold out against consensus in the office and among my clients, which was overwhelmingly negative. After a while, you come to doubt your own sanity when so many people you respect see something differently from you. Their analysis was sensible. Their data was right and even the market was moving slowly in their direction. Everyday I appeared to be a little bit more wrong. Eventually I threw in the towel and reversed my opinion to agree with them. Literally the next day, the market jumped 100 points and started another big upward move. It was purely peer pressure that had caused me to change my mind, a very important lesson to me.
So what is ‘the learning point’ here? Try to be aware of social and organisational influences on your decision-making. If something is a consensus view, it is often based on out-dated information. Look and read widely, well outside of your peer group and usual data sources so that you are open to alternative perspectives and information sources. Learn to be comfortable even if you are in a minority of one. I often quip, with tongue slightly in cheek, that the one thing history proves is that the majority view is always wrong, the trouble is you never know which minority is right!