Going It Alone

Oftentimes in investing you are faced with a choice. Would you rather be:

1. Right with everyone else?

2. Or wrong alone?

Or would you rather be:

1. Wrong with everyone else?

2. Or right alone?

They say that misery loves company, and what I’ve found is that most investors don’t mind being wrong as long as they’re getting killed with everyone else at the same time. This is common in bear markets. You’re long stocks, the stock market goes down, everyone loses money, and you feel smug because at least you’re not doing as bad as that guy. How was I supposed to know that the market was going down? ¯\_(ツ)_/¯

It just comes with the territory of stock investing; there are bear markets every few years, and every once in a while, one is going to roll through and wipe everyone out. Nothing you can do about it. We are all losing money together.

True Contrarianism

I’m wired a little differently. It doesn’t make me feel any better if I am wrong and everyone else is wrong too. I tend to do the opposite of what everyone else is doing, and I can tell you that there’s no better feeling than being right and alone, making money while everyone else is getting waxed like a surfboard. 

This is called being contrarian, but “contrarian” is such an overused word, I hate to even bring it up. There are very few people out there who are true contrarians, who can stick with a losing trade while the whole world is making fun of you on Twitter, in print, and on TV. You’re an idiot for being in that trade. You’re an idiot for being short stocks. Can’t you see that the stock market is going up? Don’t you want to buy stocks that are going up, you imbecile? You push against the grain, and you suffer these sorts of indignities on an almost daily basis.

It is a very lonely path to be right and alone. Now, I will admit that there are some contrary people out there, people who do the opposite of what everyone else is doing just to be contrary because they get some psychological satisfaction out of being a maverick. That is not me. There are times to fade the crowd, and there are times to trade with the crowd. I am not above buying fad stocks and crap if I think I am going to make money. I am not comfortable doing it, but I will do it. There are times when you want to be a dummy and buy stuff that is going up. Druckenmiller does it.

Hard Things Are Worth Doing

I have spent the last few weeks talking about small-cap value in this letter, and I want to spend even more time talking about small-cap value because this is a classic example of going it alone in a trade. How can you be so stupid, buying these value stocks? Everyone knows that growth is going up! 

If you want people to crap on you on days ending in “y,” then become a value investor. You might remember that a legendary value investor committed suicide in 2021. This is what you are signing up for if you invest in value: years and years of pain. Now, like I have said before, the pain has been going on for 21 years, and I’m doubtful that we’ll have 21 more years of pain, and I think we are pretty close to the end… but who knows? If you invest in small-cap value, you might be hanging around with a collection of misfit toy stocks while Nvidia and Microsoft go on to be $10 trillion market caps.

Still, hard things are worth doing. I don’t know what kind of catalyst or dynamic would make growth go down and value go up—it literally escapes my imagination—but you pretty much have a free option because things cannot get much worse for small-cap value. And as I’ve said before, when these style box trades work, they work for thousands of basis points, and they work for years. All it takes is some commitment to see this through to completion.

It does take a certain psychology to do this. You do have to be a maverick. You do have to believe that you are right and all these other people are wrong. And you must be patient—very patient. 

Throughout the history of the stock market, buying cheap stuff has always worked—except for the last 21 years. I don’t think the markets have fundamentally changed. I don’t think people have changed. If value stocks are up 10% in a month and growth is down, people will chase them. Are you with me? Was it over when the Germans bombed Pearl Harbor?

Jared Dillian, MFA