Principle #1: Be contrarian
“Tell me something that’s true, that almost nobody agrees with you on?” — Peter Thiel, Venture Capitalist, Author of “Zero to One”
The most critical skill for being a great investor is learning to think independently from the crowd. If you find yourself constantly being reactive to information, you will, at best, only achieve average returns and, at worst, lose the majority of your capital. Wayne Gretzky was right when he famously said, “Skate to where the puck is going, not where it has been.”
Why is this principle so important? Let’s start by asking what we are trying to accomplish as investors. True investing is the search and deployment of capital towards goods and services that serve humanity. To do this well requires you to fully understand your investment and be able to clearly articulate how it does or will benefit humans in the future. Too often, people think they are investing, but in reality, they are simply gambling. How can you tell the difference? The gambler buys because they believe “it’s going up” or notice everyone else is buying (following the crowd). The investor buys without considering either of those factors but instead has a well-thought-out thesis for how the asset/stock/idea will provide greater value. When considering an investment, a good litmus test question would be, “Would I still invest, even if no one else would?”
This, of course, is much easier said than done because, as humans, it feels very natural to lean on the opinions of the “group” when faced with new ideas or have a great fear of losing capital. There is a field of psychology that studies mimetic behavior in humans that I won’t discuss here (these theories explain why trends exist), but developing self-awareness and catching yourself following the crowd simply “because everyone else is doing it” is a valuable skill to master. This is why great investors like Warren Buffet purposely remove themselves from intellectual hubs like New York City and choose to live in a more hype-free environment in Omaha. They go to great lengths to ensure they insulate themselves from “expert opinions” and are not tempted to invest in something they genuinely do not understand.
I’ll end this post with one of my favorite lines in Peter Thiel’s book Zero to One, which is what I believe to be the best summary of contrarianism: “…you can’t escape the madness of the crowds by dogmatically rejecting them… the most contrary thing of all is not to oppose the crowd but to think for yourself.”