On “Contrary” Thinking

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  • on September 7th, 2013

“I’m a synthesizer. I like to bombard my brain with lots of opinions from various sources.” Martin “Buzzy” Schwartz

Much of my outside time of late has been dedicated to the data project that in its own way synthesizes those various sources of which Buzzy speaks. Of course, for me those sources are simply price data across 200-300 stocks and multiple timeframes, but collecting and organizing that data allows me to get to my synthesizing much more efficiently.

Having found an idle moment one recent evening, I popped open one of my all-time favorite books and read exactly 2 pages when I knew I had to share it. Humphrey Neill’s The Art of Contrary Thinking is such a gem, a short and easy read from the 1950s packed with loads of wisdom. I think the last time I opened it resulted in a blog post as well, so I guess I know where to turn for inspiration.

Late in the book, Neill offers a criticism of his own tendency towards knee-jerk contrarianism. The following passage serves up a great prescription on overcoming 2 inherent trader flaws, confirmation bias and “outsmarting” the market:

“Instead of leaping abruptly from affirmation to its opposite(from general opinions to contrary opinions), we need to consider the synthesis(combination) of parts of general opinions and their opposites. That is, not every element of a generalized opinion may be wrong, or ill-timed, but only certain phases, or aspects, of the generally-held viewpoint.

I suppose our process of thought should be something on this order: Take the leap from the General Opinion to its Opposite(or from affirmation to negation) and then, from the ideas thus released, work back to a speculative and reflective conclusion, or synthesis. In this way, we may avoid denying facts which are elements in the generalized opinions we are analyzing contrarily.” 

This is gold, right? The problem for the modern trader or investor is not a lack of information; it is the lack of a process for filtering the vast information that is at our fingertips. Every one of us is aware of both a) confirmation bias(proving ourselves right) and b) its contrarian offshoot, looking only for things that prove everyone else wrong. Both harmful to our bottom line and our personal growth, but how do we get past this?

For me, it must be part of my process to consistently incorporate opposing data sources. For every “which way is it moving?” measure, I have an opposing “do I have nearby protection?” measure. If they are in complete conflict, then I have no trade. If one or the other reveals an edge, and the other isn’t extreme in its opposition, then I have a trade. As simple as that.

If your process needs more balance, learn from the 2 way traders. They are an exercise in constantly synthesizing and sharing conflicting data. Be it Alphatrends or Steve Spencer or Gtotoy or Redler, they offer the prevailing facts in each direction as part of their process, and let conditions dictate when to lean one way. Look at the mindsets used in posts like Ukarlewitz, who methodically presents both the positives and negatives from his work.

The contrary argument is almost always the smarter sounding one, as though the person offering it is doing us a favor by revealing this unique foresight. We don’t need this foresight, we simply need a consistent process that incorporates various sources and creates “Yes”, “No”, and “Too Hard” buckets. From there, we need the courage to make a decision, and most important…the courage to make a new decision when our present decision begins to fail.

I love that Humphrey Neill’s book translates into today’s conditions, and that Buzzy can still synthesize the way he wrote about 20 years ago. A successful contrarian is the value player who rejects a short investment in $TSLA or $LNKD despite conviction about overvaluation; he or she realizes that the opposing story(growth) has just as much power, and that the time for shorting is when the growth fades, NOT when the stock is “too high”.

The truly contrarian trade is to reject the dogma of one investment religion or another, and understand the limits of one’s take on a prospective trade. All the time and money put into forecasting the economy, and as only Josh can put it, “macro strategy has become indistinguishable from astrology”. As long as our process forces us to accept both the pros and cons of each idea, then we’ve used information rather than letting it use us. And it’s still possible that the biggest contrarian is the first one willing to buy at a new high or sell at a new low.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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