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The Sceptical Investor: How contrarians bet against the market and win - and you can too
Everyone wants to be a contrarian investor.
From the hedge funds who bet against the US housing market in the run up to 2008, to George Soros’s billion-dollar bet against the Bank of England in 1992, some of the most famous and most profitable trades in history have been contrarian calls.
And with the relentless growth of passive investing - investors blindly following the market - the opportunities for a smart investor to profit by betting against the crowd should be greater than ever.
Yet being a contrarian is hard work.
It takes patience, the conviction to stand by an unpopular viewpoint, and the mental toughness to endure being 'wrong' for prolonged periods of time. Standing out from the crowd goes against our every natural instinct.
Which is, of course, why it works.
So how do you go about it? There is no single, mechanical investment approach that marks an investor out as a contrarian. Instead, you need to adopt a sceptical mindset: a flexible mode of thinking that allows you to stand back and spot when the market’s view of the world is badly out of touch with reality - and the best way to profit when reality eventually reasserts itself.
In The Sceptical Investor, John Stepek, executive editor of MoneyWeek, pulls together the latest research on behavioural finance, and examples from well-known contrarian investors, to offer practical techniques to help you to spot opportunities in common investment situations, from turnaround plays to bubbles and busts, that others in the market miss.
It won't make you popular and it won't make you famous. But it will make you money.
From the hedge funds who bet against the US housing market in the run up to 2008, to George Soros’s billion-dollar bet against the Bank of England in 1992, some of the most famous and most profitable trades in history have been contrarian calls.
And with the relentless growth of passive investing - investors blindly following the market - the opportunities for a smart investor to profit by betting against the crowd should be greater than ever.
Yet being a contrarian is hard work.
It takes patience, the conviction to stand by an unpopular viewpoint, and the mental toughness to endure being 'wrong' for prolonged periods of time. Standing out from the crowd goes against our every natural instinct.
Which is, of course, why it works.
So how do you go about it? There is no single, mechanical investment approach that marks an investor out as a contrarian. Instead, you need to adopt a sceptical mindset: a flexible mode of thinking that allows you to stand back and spot when the market’s view of the world is badly out of touch with reality - and the best way to profit when reality eventually reasserts itself.
In The Sceptical Investor, John Stepek, executive editor of MoneyWeek, pulls together the latest research on behavioural finance, and examples from well-known contrarian investors, to offer practical techniques to help you to spot opportunities in common investment situations, from turnaround plays to bubbles and busts, that others in the market miss.
It won't make you popular and it won't make you famous. But it will make you money.
288 pages, Paperback
Published March 11, 2019
13 people are currently reading
64 people want to read
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Displaying 1 - 4 of 4 reviews
July 8, 2021
Covered a lot of topics, but thought it jumped around. Key points:
(1) Markets are complex: Theory of Reflexivity and the market being a second order chaotic system is a more accurate reflection of how the market operates than the efficient market hypothesis. It is a system that is not just complicated but one that also reacts to predictions about itself, and so can never be predicted accurately.
(2) Opportunities do arise: while epoch-defining booms and busts are rare, little pockets of inefficiency or areas where the gap between reality and the market are wide enough to be of interest to a sceptical investor are more common.
(3) Uncertainty: key to investing is decision making in the face of uncertainty, based on a strong understanding of your goals and tools available to achieve those goals. A single good decision may lead to a bad outcome. A single bad decision may result in a good outcome. But making many good decisions over time should compound over time. You cannot control the outcome of your investment decisions. But you can control the process by which you come to those decisions and you can control the environment in which you make them.
(4) Humility: Contrarian investing can lead to thinking ‘I’m right, and everyone else is an idiot’, particularly after some success. This hubris can result in stubbornness when conditions change, and lead to mistakes. Requires a balance between self-confidence and humility to know you can be wrong, before you blow up. Made more difficult by confirmation bias. Need to cultivate intellectual humility: recognise the possibility you are wrong. Change your mind when the facts change. Change your mindset from ‘I’m right’ to ‘how do I know I’m right’.
(5) Difficult to time the market: very hard to predict bubbles. Greenspan’s irrational exuberance speech was in 5 December 1996. Between then and the Nasdaq peak in March 2000, it quadrupled.
(6) It’s hard to be a contrarian: as human beings we crave security and certainty. We navigate an uncertain world by seeking patterns, cause-and-effect rules that govern outcomes. It is difficult to go against the crowd: (1) need to be comfortable with being uncomfortable (Howard Marks: ‘most great investments begin in discomfort... found among things that are controversial, that people are pessimistic about and that have been performing badly of late’), (2) acknowledge you will never be popular: it’s more pleasant to be wrong and part of the ‘in’ crowd than right and isolated. Many sceptical investors consider themselves outsiders. Confidence in yourself you’re right and the majority are wrong. (3) don’t fall for stories, follow facts, (4) know financial history: wary of ‘this time it’s different’.
(7) The psychological quirks that make humans entirely unsuited to the world of investing: anchoring, availability bias, recency bias, framing, seeking patterns where there aren’t any, loss aversion, reframing, hindsight bias, endowment effect, confirmation bias. And being aware of them makes very little difference to your ability to surmount them. Need practical work arounds. Keep an investing journal. Stop losses, other barriers to put time between decision and execution.
(8) In theory there is no difference between theory and practice. In practice there is.
(9) Magazine cover indicator - contrarian signal - when pessimism is at its worst, or even on the opposite end, the market is near a peak. A good way to get an understanding of what the other players’ mental state looks like right now. Newspapers don’t dictate the views of their readers, they reflect them. People want to read news that confirms their own world view and that addresses their concerns. If a lot of people are worried about it, that means a lot of people know about it. And if a lot of people know about it, it’s already in the price. The media tends to focus on the outliers - events that are out of the ordinary. The thing about outliers is that they tend to regress to the mean. Appearing on a magazine cover makes you an outlier and it suggests that regression to the mean is not far behind
(1) Markets are complex: Theory of Reflexivity and the market being a second order chaotic system is a more accurate reflection of how the market operates than the efficient market hypothesis. It is a system that is not just complicated but one that also reacts to predictions about itself, and so can never be predicted accurately.
(2) Opportunities do arise: while epoch-defining booms and busts are rare, little pockets of inefficiency or areas where the gap between reality and the market are wide enough to be of interest to a sceptical investor are more common.
(3) Uncertainty: key to investing is decision making in the face of uncertainty, based on a strong understanding of your goals and tools available to achieve those goals. A single good decision may lead to a bad outcome. A single bad decision may result in a good outcome. But making many good decisions over time should compound over time. You cannot control the outcome of your investment decisions. But you can control the process by which you come to those decisions and you can control the environment in which you make them.
(4) Humility: Contrarian investing can lead to thinking ‘I’m right, and everyone else is an idiot’, particularly after some success. This hubris can result in stubbornness when conditions change, and lead to mistakes. Requires a balance between self-confidence and humility to know you can be wrong, before you blow up. Made more difficult by confirmation bias. Need to cultivate intellectual humility: recognise the possibility you are wrong. Change your mind when the facts change. Change your mindset from ‘I’m right’ to ‘how do I know I’m right’.
(5) Difficult to time the market: very hard to predict bubbles. Greenspan’s irrational exuberance speech was in 5 December 1996. Between then and the Nasdaq peak in March 2000, it quadrupled.
(6) It’s hard to be a contrarian: as human beings we crave security and certainty. We navigate an uncertain world by seeking patterns, cause-and-effect rules that govern outcomes. It is difficult to go against the crowd: (1) need to be comfortable with being uncomfortable (Howard Marks: ‘most great investments begin in discomfort... found among things that are controversial, that people are pessimistic about and that have been performing badly of late’), (2) acknowledge you will never be popular: it’s more pleasant to be wrong and part of the ‘in’ crowd than right and isolated. Many sceptical investors consider themselves outsiders. Confidence in yourself you’re right and the majority are wrong. (3) don’t fall for stories, follow facts, (4) know financial history: wary of ‘this time it’s different’.
(7) The psychological quirks that make humans entirely unsuited to the world of investing: anchoring, availability bias, recency bias, framing, seeking patterns where there aren’t any, loss aversion, reframing, hindsight bias, endowment effect, confirmation bias. And being aware of them makes very little difference to your ability to surmount them. Need practical work arounds. Keep an investing journal. Stop losses, other barriers to put time between decision and execution.
(8) In theory there is no difference between theory and practice. In practice there is.
(9) Magazine cover indicator - contrarian signal - when pessimism is at its worst, or even on the opposite end, the market is near a peak. A good way to get an understanding of what the other players’ mental state looks like right now. Newspapers don’t dictate the views of their readers, they reflect them. People want to read news that confirms their own world view and that addresses their concerns. If a lot of people are worried about it, that means a lot of people know about it. And if a lot of people know about it, it’s already in the price. The media tends to focus on the outliers - events that are out of the ordinary. The thing about outliers is that they tend to regress to the mean. Appearing on a magazine cover makes you an outlier and it suggests that regression to the mean is not far behind
December 13, 2020
A wonderful book by John Stepek here. Not only does the book outline the concept of a contrarian investor accurately, but the author also focuses more on the qualitative side of investing as a contrarian or 'sceptic' rather than just focusing on quantitative measures - like other books are guilty of.
The book isn't a do-all investment book as it doesn't focus much on portfolio and money management but it does give all the tips and tricks one needs to find good contrarian investment opportunities and profit from them.
Overall, a very good read.
The book isn't a do-all investment book as it doesn't focus much on portfolio and money management but it does give all the tips and tricks one needs to find good contrarian investment opportunities and profit from them.
Overall, a very good read.
July 4, 2022
Rehash - seen it many times before
Fear you would be a lamb to the slaughter of you tried to invest with the cod behavioural finance cliches herein. Remember Goldman Sachs could be in the other end of your trade and I wouldn't suggest you take them in with this!
Fear you would be a lamb to the slaughter of you tried to invest with the cod behavioural finance cliches herein. Remember Goldman Sachs could be in the other end of your trade and I wouldn't suggest you take them in with this!
May 24, 2022
More about human psychology and contrarian approach to decision making in popular social domains such as stock markets.
Oh, it has an amusing piece on 'why engineers find stock market frustrating?'.
Oh, it has an amusing piece on 'why engineers find stock market frustrating?'.
Displaying 1 - 4 of 4 reviews