At the Money: Contrarian Investing

Episode Summary

Executive Summary: This podcast episode, hosted by Barry Ritholtz, features Michael Mobison discussing the psychological and institutional challenges of contrarian investing. They explore why going against the crowd is difficult due to evolutionary instincts, neurological fear responses, and career risks. The conversation also covers the wisdom vs. madness of crowds, the importance of distinguishing fundamentals from expectations, and the Mr. Market metaphor. A brief promo at the start introduces the concept of Q Day, a future quantum computing threat to encrypted data.

Main Topics: Psychological Barriers to Contrarian Investing (Priority: 5/5): Explores why it's hard to fight the crowd, including natural tendencies to buy high and sell low, and the influence of asset prices on behavior. Wisdom of Crowds vs. Madness of Crowds (Priority: 4/5): Discusses conditions for crowd wisdom (diversity, aggregation, incentives) and how loss of diversity leads to madness. Evolutionary and Neurological Basis for Conformity (Priority: 4/5): Covers evolutionary cooperation and the Solomon Asch and Greg Burns experiments showing amygdala activation when going against the crowd. Institutional Constraints and Career Risk (Priority: 3/5): Examines how career risk and the business vs. profession of investing discourage contrarian behavior, referencing Keynes' quote. Role of Expectations in Contrarian Investing (Priority: 3/5): Highlights the importance of distinguishing fundamentals from expectations, and how extreme expectations create opportunities. The Mr. Market Metaphor (Priority: 2/5): Ben Graham's metaphor of Mr. Market as a way to think about pricing extremes and contrarian opportunities. Q Day and Quantum Computing Threat (Priority: 1/5): Brief promo about the potential future risk of quantum computers decrypting current data.

Key Arguments: Asset prices influence behavior, making it natural to buy when prices rise and sell when they fall, which is opposite to contrarian investing. Crowds are wise when there is diversity, aggregation, and incentives; madness occurs when diversity is lost and views become correlated. Evolutionary cooperation makes conformity deeply rooted; the amygdala activates fear when going against the crowd, as shown in fMRI studies. Career risk encourages conformity because failing conventionally is safer than succeeding unconventionally (Keynes). Contrarian investing requires both a contrarian streak (examining the other side) and a calculator (assessing asset prices relative to fundamentals). Distinguishing between fundamentals and expectations is crucial; extreme expectations (optimism or pessimism) create buying or selling opportunities.

Data Points: Conformity rate in Asch experiment: 75% of people conformed at some point; about one-third of answers were conforming - Solomon Asch's 1950s conformity experiment with line matching. Amygdala activation in independent thinkers: Independent thinkers showed amygdala activation (fear center) - Greg Burns fMRI study replicating Asch's experiment. S&P 500 low in March 2009: 670 - Example of unduly pessimistic expectations creating a buying opportunity.

Pivotal Quotes: "Worldly wisdom teaches us it's better for reputation to fail conventionally than succeed unconventionally." — John Maynard Keynes (quoted by Michael Mobison): Discussing career risk and the pressure to conform in investing. "Value investing is at its core the marriage of a contrarian streak and a calculator." — Seth Klarman (quoted by Michael Mobison): Defining the essence of contrarian investing. "For you to stay independent, you had to overcome that sensation of fear to get to the other side." — Michael Mobison: Explaining the neurological barrier to going against the crowd.

Implications: For investors, the episode highlights the deep psychological and institutional hurdles to contrarian investing. Success requires awareness of these biases, a focus on expectations vs. fundamentals, and the courage to act when the crowd is extreme. The Q Day promo also underscores future cybersecurity risks from quantum computing.