As investors, we can broadly categorize ourselves into three main types: Contrarians, Consensus investors, and Cult investors. What matters more is (a) whether we do our due diligence and (b) making money consistently.
Contrarian
To the non-contrarians, the contrarians are often viewed as risk-takers and at times, hated and weird. Their ideas and picks are unheard of (not mainstream), controversial, hated or scorned. Many are sceptical and cynical about their picks. Many react with “Huh?”, “What company is that?”, “Are you sure?”, “Will this be a pump and dump?”. We will only know whether they are right later. The contrarians focus on their due diligence and making money. They believe their picks are mispriced. These can be relatively unheard, small and micro-caps or dead stocks turning around and coming alive. They are okay with others not agreeing.
Some stocks are constantly perceived as risky. Investors are often wary of investing in a highly competitive sector with a limited addressable market. They worry that the sector’s potential upside is not worth the risk. How can they keep growing? How can they compete against the larger and well-established competitors? Well, these companies keep making the impossible possible. Examples of such companies include DoorDash, Uber, Airbnb, Transmedics, Netflix and Tesla,
Contrarians are early before the investments become more known and mainstream. They study many companies in detail to find the hidden gems. They know their stocks with conviction even when many doubt the company’s potential. They may not have a high probability of being right (batting average); they do not have a high win-loss ratio. However, the payoff can be substantial (slugging percentage). It requires effort, patience, and willingness to go against the grain. They have strong independent and different views.
Contrarians are difficult to follow. Many will constantly doubt their picks because they are unfamiliar and out of their comfort zone. We must do our due diligence and understand the company and the sector. These take effort.
Here’s why the best investing opportunities are not obvious
Consensus
Many investors prefer to invest in great companies with high-demand products and services riding on clear, obvious and strong secular trends.
These companies are large caps, index chips covered well by analysts and mainstream media and many talk about them. Having these “consensus” stocks is deemed “safer” and many would follow and invest in these stocks as “the stocks” to buy (aka market herds).
Consensus investors can be trend followers or momentum traders in the short term. Some take a longer-term secular view. They have different timeframes. They find comfort in the stability and reliability of these well-established companies, even if they may not offer the same outsized returns as contrarian picks. Some keep growing for years and decades. Examples of such companies include Apple, Coke, Visa, McDonald’s, Mastercard, Costco or S&P 500 ETFs. They look “easy”. Hindsight is 20/20; there are pullbacks and crashes too. We need to do our due diligence to ascertain the durability of the secular trend and the right investments to ride with.
With the herd mentality, few do due diligence. They take a simplistic approach to understanding the stocks. With hypes and momentums, the stocks can push stocks to very high valuations. Can the company grow so fast? They follow what is hot; believing the stocks will go up. This is a classic example of linear extrapolation.
What is our edge? Why do we think that the good investment will continue to do well? What do we know that the market does not?
Do know their upsides and downsides. Do not be caught on the short end of the stick or the last man standing when the music stops.
Cult
Some investors develop a near-religious devotion to certain stocks, becoming part of a “cult” following. These investors have an unwavering belief in the company’s huge potential. These stocks can also be meme stocks.
Cult leaders
Cult leaders did not start as cult leaders. They are contrarian investors with firm convictions and allocate a huge bet or a huge percentage of their money to the stock (i.e. the only and some, an all-in bet).
Regardless of whether they are right or wrong (later), they have deep knowledge about everything relating to their investments. Regardless of market conditions, they remain convinced to hold on through thick and thin.
They share their investing thesis online and keep pounding hard. They are convincing. It attracts followers and slowly, a cult is developed.
Cult followers
Cult followers are often clueless. They believe and follow the cult leaders faithfully. They regurgitate the investing thesis of the cult leaders. They do little or no due diligence and have little or no views. Diamond hands; to the moon!
Examples of cults are GameStop, Tesla, Alibaba, Bitcoin and crypto memes.
Signs of cults:
- The market is wrong; the drop is temporary. It will recover.
- Sense of stubbornness more than conviction: More emotional attachment and bias that refuse to change with new information which may contradict their original thesis.
- Memes; the investments are meme-ified.
- Many posts on the stocks attract many likes and comments with little or no rational justifications.
Always beware of strong views and biases (identity and confirmation biases) in social media.
Beware of cult leaders fading away and we, the followers, holding the bag.
Study their research. Do they make sense?
Always do your due diligence and have your independent views.
Always follow those with different or opposite views.
Watch Dumb Money (2023); a great movie of how GameStop became the hottest investment.
DYODD, adaptability and making money
The most important factors are
- Do our research and develop an investment strategy that aligns with our goals and risk tolerance
- Be willing to admit when we are wrong and adjust our position accordingly. By staying open-minded and focused on generating consistent returns, we will be well on our way to becoming a successful investor.
The most successful investors are flexible and adaptable, willing to adjust their approaches as market conditions and investment opportunities change.
Strong opinions loosely held. - Do not follow blindly and hope to be rich.
Beliefs are hypotheses to be tested, not treasures to be protected.
