Peter Thiel, a billionaire venture capitalist and entrepreneur (Paypal cofounder, first investor in Facebook, etc) asks one question to all entrepreneurs and people who want to be successful. “What is the one thing that you believe to be true, that very few others do?”
Why does he ask this? Because he wants to see a person’s ability to think differently. He wants to see a person’s independent thinking abilities and ability to go against conventional wisdom.
Mankind’s long term progress stems from its ability to go against conventional wisdom and it’s ability to think differently from the status quo. Innovation is just another word for “change” – better “change”.
So what does “thinking differently” in the investment world mean? As we’ve demonstrated in the Technical Indicators Backtest, most of technical analysis is just reading the tea leaves. So while most traders will use technical analysis and draw lines on a chart, someone who thinks differently will recognize that technical analysis is not the magical tool that it’s made out to be. But thinking differently doesn’t stop there. That’s just the start.
A successful investor needs to step back and question every “conventional belief”, “way of doing things”, and “best practice” in the industry. He should test out everything for himself. He should keep things that stand up to the light of empirical evidence and discards things that do not stand up to the light of evidence.
In investing as in life, in order to be successful, you need to think differently. To put it simply, if you want to be better than others (ie above average), then you must do something that’s DIFFERENT than what the average person does. By definition, if you think and act like everyone else, you will end up just like everyone else.
Outsiders often win because they can think independently more easily. This happens when someone from the outside enters a traditional industry, goes against the traditional view, and uses a very different way of doing things. (Think about how Elon Musk disrupted the auto industry and how Jeff Bezos disrupted retail).
Being an outsider allows you to easily throw out all of the dogma, assumed truths, and conventional beliefs because outsiders weren’t trained with that. Outsiders can easily question standard processes and “best practices”, wondering if those “best practices” really are really the best way to do things. They refuse to accept the status quo. They analyse everything in forensic detail and ask “does this really work”?
In other words, outsiders come into the industry (e.g. investment industry) with a fresh perspective.
For example, the “fashionable” thing in the investment industry is to worry about every single small risk, draw crazy lines on a chart, look at crazy indicators, draw crazy patterns, and stroke your chin over nothing while pretending that’s real work. It takes an outsider and independent thinker to even ask “does this stuff actually work? Or is it just reading tea leaves?”
Does being an independent thinker automatically mean that you must be a contrarian?
Being a contrarian for the sake of being a contrarian is foolish. The crowd isn’t “always wrong”. Contrarian traders often say “everyone else is doing X, so I’m going to do the opposite of X”. That’s just madness. These contrarians are still basing their decision on what other people are doing instead of basing their decision on facts and data.
Sometimes the crowd is wrong, but the crowd is often right. For example, every tech magazine in 2011 was saying “smartphones are the future”. They were right. Being a skeptic of conventional widsom doesn’t mean that you should automatically disagree with every piece of conventional wisdom, because the crowd is often right. It just means that you should examine every piece of dogma for yourself.
You never want to do something just because someone else is doing it, and you never want to do something just because everyone else is doing the opposite.
It’s important to remember that most of the time, contrarians are wrong. But of course contrarians are always remember for the 1 out of 5 times they were right. For example, Paul Tudor Jones is famous for “predicting” the 1987 crash. But he also “predicted” a lot of crashes that didn’t actually materialize. On balance, the successful predictions and failed predictions cancel eachother out.
This is one of the funniest things about the professional investment community. You can see it very clearly on fintwit. Every thinks everyone else is a contrarian indicator. Everyone looks at the same sentiment indicators. If everyone thinks they’re smarter than the “average Joe”, then where does this sentiment even come from? This is just some weird circular logic.
Here’s what’s harmful to you
- Making an investment/trading decision because mainstream financial media says it’s the right thing to do.
- Blindly believing in mainstream “trading wisdom”, because that’s the conventionally accepted road to success in trading.
It’s hard to determine how valuable mainstream financial media is to the average investor.
- On one hand, financial media reports the news. That’s valuable – you can’t make decisions without knowing what’s going on in the world.
- On the other hand, mainstream financial media is self-interest to sensationalize every piece of news. It’s financial media’s job to make ad $$$. They are in the business of generating clicks. Hence, financial media has a natural bearish lean. No one wants to know why “the stock market could go up 7% next year”. That’s boring. Everyone wants to know why “the stock market could crash 30% next year”. The first lesson in marketing is to trigger a fear or trigger a desire. It’s hard to trigger a desire: the stock market goes up more slowly than it goes down. Hence, financial media often resorts to baseless opinions about “why the stock market could crash” – aka trigger the fear.
Triggering that fear is good for their business, but it’s not good for investors. Financial media reflects mainstream sentiment. It turns bullish AFTER the stock market goes up a lot, and it turns bearish AFTER the stock market goes down a lot.
I’ll give you a simple example. Just look at some of the clowns CNBC has on. They often interview permabears. And right under the interview, CNBC writes “XYZ person, who has been bearish for decades, thinks that the stock market will crash”. I’m thinking “are you kidding me? CNBC might as well change their article’s title to ‘XYZ person, who has been wrong for decades, thinks that the stock market will crash”. What other industry besides finance decides to bring on experts who are consistently wrong for decades?
Remember: the market “analysis” from most guys on mainstream financial media is no better than random guessing.
Here are 2 interesting articles from Market Watch and Gizmodo
In order to run a successful media business like CNBC, you need to have large numbers of followers and viewers. The more viewers, the better. Hence, it becomes a popularity contest. Do you know how to win a popularity contest? Think just like all the people out there who are watching. Mirror your viewers and reflect their thinking.
E.g. What makes a singer popular is his/her ability to “relate” and be “just like” his/her fans. Likewise, if you want to run a successful media business, your thoughts need to echo what your audience is thinking. This means that when the stock market is going up, you need to get very greedy with the rest of your readers. This means that when the stock market goes down, you need to get bearish and “fear for an even bigger crash” along with the rest of your readers. Being a contrarian is not the popular thing to do, hence it is not what media businesses do.
It’s also important to ignore the big name “pros” on financial media. Even the best investors and fund managers in the world are often wrong. So focus on independent thinking. If a big name pro says something on financial TV, WHO CARES ABOUT THEIR PEDIGREE. What matters isn’t who the opinion is coming from. What matters is whether or not the opinion is supported by facts and evidence. Focus on fact-based analysis instead of faith-based analysis.
Ignore financial dogma and pulling rank. It’s very common in the investment world to pull rank. “I’m Vice President at XYZ investment firm, hence you should believe in my authority”. Always remember: the average professional in the finance industry – from the door man to the VP – is no better than your average mom and pop at predicting the markets.
Once again, never listen to someone just because of their name or past track record. Always focus on the reason and facts behind their market outlook. Use the facts that they present to come up with your own market outlook. Whether your outlook ultimately aligns with theirs or not is irrelevant. Use their facts as inputs into your trading strategy. Then use your own strategy to come up with your own conclusion, regardless of other peoples’ conclusion.
Proof that even the best investors are often wrong
I’m not trying to criticize these wealthy and famous investors. I’m merely making the point that you should always think for yourself, because anyone can be wrong at anytime.
Here is more proof that the media, (whether it be the press, bloggers, or social media) all have a bearish lean. This is taken as of December 5, 2018.
See how there are always more bearish than bullish articles, even though stocks go up more often than down? This is why most people underperform. Bad news captures peoples’ attention much more than good news.