Counterfeit Contrarianism

Business and Investment Philosophy

Yesterday (Tue 11/6) the most popular article on MarketWatch was Mark Hulbert’s “Do you have the guts?  Being a contrarian takes guts, like buying Citigroup stock”.

Hulbert begins this way:

OK, all of you who claim to be contrarian investors: it’s time to see if you walk the walk, not just talk the talk.

How many of you have stepped up to the plate in recent trading sessions and bought shares of Citigroup?

You say you don’t follow the crowd.  You say that your favorite quotation is Nathan Rothschild’s famous phrase that the time to buy is when the blood is running in the streets.

Well, now may be just such a time.

Well, I consider myself a contrarian.  But I wouldn’t touch Citigroup.

What gives?

First of all, contrarianism is a derivative virtue. 

Going against the crowd is not always the smart thing to do.  When everybody is running out of the theater, the contrarian thing to do would be to enter it.  Not always smart.

That’s because sometimes the crowd is right.

At the same time, sometimes the crowd is wrong.  That’s when contrarianism is a virtue.

But, as you can see, the real virtue is not going with or against the crowd.  It’s being right.  That is to say, the fundamental virtue of which contrarianism is a derivative is independence. 

Independence is the virtue of looking at and evaluating reality on your own, independent of the views of others.  When you agree with the majority, it entails conformism.  It’s when you disagree that contrarianism comes into play.

In this case, the massive selling of Citigroup stock by the crowd strikes me as a reasonable reaction to the news.

To buy Citigroup simply because others are selling it is a kind of “counterfeit contrarianism”.

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