Contrary thinking -Chetan Parikh

In a book “Rediscovering the Wheel: Contrary Thinking and Investment Strategy’, the author, “Bradbury K. Thurlow, writes about the formulation of a contrary thinking strategy.

“If 95 per cent of all stock investors — amateur or professional — lose substantially relative to the general market over prolonged periods of time, they must be doing domething wrong. It follows that those who pursue a precisely contrary course of conduct will win (less commissions and taxes) actual profits equivalent to the losses suffered on the other side. When the amount of new money coming into the market is in balance with the supply of new issues coming to market, the odds on speculative and investment success, as measured by actual realized profits and losses, are essentially the same as those on betting on the red or black on a roulette wheel, with the brokers and the Government taking their cut as croupiers on every trade. What makes speculation more interesting than roulette is that a numerical majority of the players almost always bets on the wrong color.



The most primitive formulation of a contrary thinking stock-market strategy would be to keep tabs on what the small investor is thinking and doing and then study to think and do the opposite. If that were all there was to it this book could end right here, and this may be the most con­vincing explanation of why no one — to my knowledge — has yet written any kind of detailed study dealing with contrary thinking approaches: In earlier times, when the stock market was primarily influenced by emotional and uninformed small investors, every professional worth his salt knew enough to take the opposite side of the little fellow who was obviously acting foolishly. No one would bother to write — much less to read — a book telling one nothing more than that.



Fortunately or otherwise, the stock market during the 60s and 70s became enormously larger and more 'efficient' than it had ever been and its behavior is now primarily, almost exclusively, governed by the actions of highly sophisticated professionals handling portfolios worth hundreds of millions of dollars. These people are well paid, well trained, and well above average in intelligence. They are avaricious learners of facts and techniques, are supported by high priced staffs, and relish tough competition.



The fact remains that in the aggregate they make the same mistakes the amateur investing public used to make. The same small percentage do better than the market; the same high percentage buy at tops and sell at bottoms. Clearly knowledge and experience alone are not the major determinants of success in today's stock market.



After being mesmerized by this question for ten years, I wondered whether a possible explanation might not be found by using old and basic contrary thinking techniques, but gearing them up to match the complexity and sophistication of the present-day problems with which they must now deal.



In short, would it be possible to attack what is essentially a question of group behavior by building a disciplinary approach specifically designed to deal with behavioral problems? That seemed an obvious first step, but it immediately raised the question as to how much of the behavioral problem was individual psychology as we know it and how much was social — an area on which little of practical value seems to have been written.



I still do not know the proper mixture of ingredients and this book, consequently, presents a whole series of experimental mixtures designed to deal with specific aspects of the problem. These mixtures include both well-established psychological evidence and social evidence which must still be considered largely untested and hypothetical.



One of the most arbitrary and, I believed, significant assumptions to be included in this approach was to equate contrary thinking — which even in its simplest form is dialectic in nature, proceeding to synthetic conclusions by questions and answers that develop opposing points of view — with such so-called formal dialectic disciplines as have been developed under Marxism. For two and a half years I worked on a series of essays seeking to develop a non- or anti-Marxist 'individualist' dialectic that could be applied to extremely broad areas of human behavior. At the conclusion of that study I was satisfied that there was enough evidence to justify using the same methods in dealing with the full range of issues raised in making investment decisions.



In this context, one can define contrary thinking as a decision-making technique using dialectic methods at three distinct levels: 1) identification and criticism of a thesis, 2) exploration for tactical antitheses, and 3) development of a strategic synthesis.



The problem with definitions is that if they are concise and precise enough to satisfy those who made them, they may be thoroughly obscure to those to whom they are being explained. My definition uses terms from the German philosopher Hegel because they describe most accurately and efficiently what I want to say, but, except for these few words, one need not be a student of philosophy — let alone of Hegel — to understand contrary thinking.



A thesis, as here used, means an idea we are studying; the dialectic method is a way of pulling that idea apart by finding contradictions or inconsistencies in its various meanings. One of the best ways of finding the meanings of an idea is to look at all of its possible inferences from different subjective points of view and to test each by inquiring whether opposite interpretations could be equally valid.



Someone holds out a red flower and says: "This is a rose." Assuming he is not a liar, his statement is an assumption of fact and is not a thesis. A second person observes: "Yes, I know that, because roses are red." This is a thesis — a statement of belief. It is not necessarily a deliberate falsehood, but it is a conclusion based on the observation that the rose in question is red. Because the conclusion is based on observation, it is subject to cri­ticism. Using the dialectic method, one can examine the thesis by asking a number of questions: "Are all red flowers roses, or can there be other red flowers?" "Of course there are other red flowers, but this one is shaped like a rose." "Here is a flower of the same shape, but it is white. Does this mean it is not a rose?" "No, there are white roses as well as red roses." "Then you didn't know it was a rose because of its color alone, but because of its color and its shape. Isn't that right?"



This exchange is a primitive example of the method we have in mind. Its assumption is that the theses it examines are like the statement of the observer — partly true, partly false, based on inaccurate, incomplete, and undisciplined observation of more or less familiar experience. The anti­thesis, by showing that a flower could be red without being a rose, led to a revision of the original thesis: A rose is a rose because it is shaped like a rose. The observer knew that perfectly well to begin with, but had simply not thought his observation through.



In dealing with stock-market problems, experience has long shown that imperfect observation is not the exception, but the rule. Otherwise highly intelligent people are led to oversimplify observations when the data become too complex. Dr. Jerry Felsen, in his Cybernetic Approach to Stock Market Analysis (Exposition Press, NY, 1975) opines that it is difficult even for the most highly trained human mind to concentrate on more than four variables at a time.



What, then, does the investor do when faced with a barrage of facts and differing interpretations? He oversimplifies — his basic concepts, his interpretations, the data he is willing to consider, his analytical tools, everything that goes into his decision-making process. He then wonders why he makes so many wrong decisions.



How many of us have bought a stock because we thought the market was going up? Is this not as weak a thesis as saying a rose is a rose because it is red? Like the rose thesis, it may be supported by subconscious knowledge that gives it validity, but how does one know until one asks the right questions? The thesis could be equally based on what one had for breakfast that morning, with no rational foundation whatever.



Contrary thinking does not solve the information problem by enabling us to cope with more variables, but it does, by allowing us to examine the problems and the approaches to them in different lights, help us to avoid waste motion and to concentrate our efforts in the areas we pick out for ourselves as being most profitable to study. Our judgment will still be faulty, but if we continue to identify and criticize the theses we are using, we should, in the slow learning process, come to eliminate some, improve others, and discover new ones more suitable to work with.



If we are engaged in any form of selling activity (Who is not, at one time or another?) we are taught from our earliest days to think positively. Seeing the good in people and ideas is in the best interests of society and makes us socially attractive to others; moreover, it is a natural human instinct that increases our enjoyment of life.



The problem that comes up in dealing in any marketplace where assets are freely exchanged is that our natural goodwill toward man may prevent us from recognizing that some assets are increasing in value while others are declining. Owners of deteriorating assets will rationally try to exchange them for assets that are appreciating; to do this they must find takers. To find takers they must make the assets attractive, either by lowering their price or by emphasizing their good qualities and obscuring their defects. At the same time they will resist as far as possible paying high prices for ap­preciating assets and will, as bargainers, emphasize their defects and obscure their good qualities.



These attitudes are basic to all trading operations, be it horses or blue-chip securities. The person of goodwill will be impressed by the commendations of others and will tend to underestimate the value of what he owns if no one else is praising it; socially he will be inclined to exchange his good assets for assets of lower quality. He is the dupe of the marketplace, the born speculative loser.



Contrary thinking, without attempting to change the morals of the marketplace — which have been the same for millennia — enables one to recognize them for what they are and to counteract the destructive effects of indiscriminate goodwill through the antidote of rational negative thinking.



To arrive at constructive conclusions contrary criticism begins destruc­tively, negatively. Its method is to find the weaknesses in an idea and attack them with gusto. If the trunk of the idea can survive the pruning, new branches may grow or can be grafted on; if it does not survive, it is just so much dead wood.



One of the most concrete and practical forms of stock-market ideas or theses are our approaches to the raw data of the market­place. There is so much material available that we must spend a con­siderable effort determining which parts of it are useless and a waste of time to study. This determination will rest in part, of course, on the total amount of time we have available; the professional can, and should, absorb a good deal more information than the part-time amateur.



The amounts are so overwhelming, however, that everyone must be ruthlessly selective. In practice we must work through and from the digests of others: the summary studies of specialists, the theoretical interpretations of generalists, the background reports of news and economic analysts, and the interpretations of market psychologists.



Every piece of information that is interpreted by others before it reaches us is subject to distortion. Tolkien called it subcreativity — the process by which we arrange all the data we receive subjectively in our own minds. By applying criticism to our sources we come to recognize these distortions and factor them out. Some are individual and are learned only after long ac­quaintance; others are institutionalized: brokers' reports are usually too optimistic, technicians tend to be dogmatic, economists do not like to stray from the consensus, newsmen emphasize the ephemeral and miss the main story, almost everyone is uncomfortable and timid in dealing with psy­chology — except those who do not know what they are talking about — and so it goes.



There is a good deal of contrary criticism in this book. Much of it is bla­tantly destructive and directed against institutions in the financial communi­ty that are almost as sacred as motherhood. Its sole purpose is to suggest how the hard-pressed investor can avoid wasting valuable time. The occa­sional constructive criticisms represent syntheses in the dialectic process and suggest how some of the expertise in the investment world might be put to more useful purposes.



Moving from criticism to the second activity of contrary thinking — exploration for tactical antitheses — brings us into a sort of game that can have all the pleasures of individual competition. The tactical antithesis is based on the assumption that a given thesis is wrong and that going opposite to it, as in the example given at the beginning of this chapter, can be profitable.



Finding and exploiting tactical antitheses has been developed into a whole investment discipline by Humphrey Neill in his Theory of Contrary Opinion — which I shall discuss at some length in later chapters. I perhaps do not do my old friend justice in using the adjective tactical. Contrary Opinion Theory is as good a method as has ever been developed for sensing major stock-market turning points, and, lacking every other ability, the investor who can do that with any degree of success should be well on his way to a brilliant future.



Most of the time, however, the opportunities to identify a major turning point will occur only rarely and will be of fairly short duration. For this reason, although the theory fits in admirably with a larger investment strategy, it is essentially tactical in nature: a means for timing purchases and sales under certain special conditions.



Strategy is the most difficult of investment concepts and by definition, is eclectic; it takes in everything it can use and at the same time keep under control. Contrary thinking, by itself, is neither a synthesis nor a strategy, but it is both synthetic and strategic in its problem-solving approach. As an exercise in disciplined skepticism it pushes the mind toward disbelief while restraining it this side of inactivity; the only purpose of the decision- making process, after all, is to make decisions.



If this constant criticism, exploration, and balancing of positive and nega­tive ideas does not come naturally to the stock-market investor, it is perhaps a good idea to remind ourselves, when we find contrary thinking most irritating, that our natural inclination, nineteen times out of twenty, will lead us to the wrong stock-market choice. The statistical odds at any given moment may be 50-50 that a stock will move either way, but as members of a crowd — even if we have no physical contact with its other members — we are susceptible subconsciously to all the influences by which crowds are swayed. Statistical probabilities would rank low in any such list.



This means that to recognize contrary thinking as a useful tool is only a first step toward learning to use it effectively. As a discipline it, like giving up tobacco, requires practice day after day. The critical part comes easily enough to us if we constantly keep in mind that we do not want to throw the baby out with the bath water. The discipline in criticism comes in salvaging and rehabilitating what is left after our attacks have done their worst.



The tactical exercises are a kind of game. In practicing them at random we shall find in a good many instances that the thesis we attack turns out to be right, or that if we are right in judging it wrong we may choose the wrong alternative to it. To many questions there will only be one right answer and a thousand wrong ones.



Arriving at a synthesis involves making many revisions as one proceeds. In a field as dynamic as investments, where ideas bloom like cactus flowers that live only a few hours after months of preparation, the revision process does not stop when the basic strategy has been worked out. Most of the time, that will only be the beginning.



Contrary thinking is a deliberate shaking of the mind back and forth, reversing and reaffirming plausible views to separate out the non-essential much as the gold panner shakes out unwanted pebbles. It is worth the effort because it frees the mind of at least certain kinds of misconceptions that show their inconsistencies under dialectic analysis.



The most important and persistent of these misconceptions, as I see it, are based on the 'historical' assumption that a knowledge of the past enables one to predict the future. A mathematician will immediately spot the weak­ness in this proposition by the lack of precision with which we usually define knowledge of past human behavior. Richelieu, who may have been the most able strategist since Julius and Augustus Caesar, once remarked that "The past bears no reference to the present; the relationship between times, places, and persons is always an entirely different one."



I do not believe the great Cardinal was depreciating his own deep under­standing of history and human behavior, but rather observing that know­ledge of these things was worthless without dialectic analysis to determine and discard the non-essentials. Stock-market investment and speculation under modern conditions is a game closely resembling the politics and diplo­macy of an era when the best minds were intent on family greatness and national power. Accepting Richelieu's antithesis to the thesis that historical knowledge is valuable, one can dialectically arrive at the synthesis that the past can frequently be the most instructive to us when it seems to have the least superficial resemblance to the present. Human nature, after all, does not change and native intelligence does not improve.



The foregoing exercise in contrary thinking is only a little more sophisti­cated than our earlier primitive discussion of the rose and is probably about as complicated intellectually as contrary thinking is likely to be. The purpose of dialectics is not to make things difficult, but to reduce them to the simplest possible terms. Obviously one antithesis or synthesis does not exclude any number of other possibilities. We choose what appeals to us subjectively and build from there.



But isn't this the exact opposite of a discipline? By admitting a totally subjective choice, what claim do we then have of keeping our objectivity?



One answer to this dilemma is that if we do not make our choice sub­jectively, it will be imposed on us from outside and will simply be someone else's subjective choice passed on to us by suggestion which we shall have accepted without considering the alternatives. All decisions are subjective, whether we make them ourselves or submit to having them made for us. The discipline in contrary thinking consists in processing the pros and cons through our minds so that we have at least been through the exercise of' hearing both sides of the case' before taking action.



In practice one will find that the deliberate suspension of judgment until a decision must be made goes contrary to our natural vanity and becomes habitual only after long discipline. Dialectical analysis, which is only another name for contrary thinking, deliberately puts roadblocks in the way of ideas we receive to protect us against making hasty decisions — which have a better than even chance of also being unwise decisions.”