Beyond the Herd: Developing The Contrarian and Adaptable Investor Mindset

In finance, contrarian is usually defined as an investor who tends to have an opinion of market trends that is in variance with the majority.

A favourite example is the movie Big Short, which is based on a true story of Micheal Burry shorting the housing market during the housing bubble of the mid-2000s.

Burry shorted the housing market by betting against mortgage-backed securities, ultimately profiting massively when the bubble burst.

This move went against the prevailing optimism in the market at the time, showing us the potential rewards of contrarian thinking.

If you think about it, contrarian requires constant adapting, because it is an unconventional path and there's a less guaranteed or clear road map of what the outcome will be.

However, I think it's good to separate contrarian from adaptable as there are some key differences.

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Challenge Biases

The first key pillar to developing a contrarian and adaptable mindset is to challenge biases, especially the conventional ones.

For all its brilliance, the human brain is prone to cognitive biases that can cloud our investment judgment.

I think the two most important ones that we need to be aware of are the overconfidence trap and the alluring yet dangerous "herd mentality".

In my view, the latter is more prevalent in current times, as thinking for ourselves seems hard.

The overconfidence trap basically leads us to chase after false promises and overlook true gems.

Apart from being aware of these biases, a good way to actually challenge them is to diversify our information sources.

This means moving away from listening to the echo chamber, and seeking out contrarian perspectives that challenge our assumptions. This is where being open and adaptable becomes important.

If we're too rigid, information that opposes our assumptions will be dismissed right away, as there is no room to process or ponder about it.

At the same time, don't solely rely on gut feelings. It can be a good starting point. But also gather data and analyze trends, as it is a better way of building a more solid foundation for making investment decisions.

Embrace Discomfort Along The Way

Being a contrarian means going against the grain, challenging popular narratives, and standing alone when others panic or get euphoric.

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Although the rewards can be immense, it is essentially not for the faint of heart.

What I've notice is that most of the discomfort stems from short term thinking and becoming overwhelmed with the prevailing market sentiment.

So a good way to counteract that is to focus on the long game. For example, don't let short-term volatility or market noise sway your convictions.

Many were skeptical about the potential of electric vehicles in the early 2010s. But investors like Cathie Wood heavily invested in that sector through companies like Tesla.

And she was successful in identifying a long-term trend ahead of the curve and reaped significant rewards as the industry boomed.

The point of the matter is developing emotional discipline. Learning to not be overly controlled by fear and greed, the two biggest enemies of rational investment.

Standing alone doesn't necessarily mean being alone. Find a tribe of like-minded individuals who support an unconventional approach. More people are feeling the need to not follow a conventional approach.

In Closing

We already have an inkling that developing a contrarian and adaptable investment mindset is a gradual process, a journey of exploration beyond the traditional or conventional approach.

The investment landscape is constantly evolving. Thanks to technological advancements that give birth to disruptive innovations and shifting market dynamics.

To stay ahead of the curve, continuous learning is essential.


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Posted Using InLeo Alpha