Perhaps nobody made more money by betting against the crowd during the pandemic than Bill Ackman. The Wall Street Journal reported recently, that the legendary hedge fund manager and CEO of Pershing Square Capital Management made two complex debt investments—one presaging the economy’s swift shutdown and the other it’s fevered reopening— Ackman made nearly $4 billion in profit on an outlay of about $200 million, a staggering 2,000% return, in less than two years.
In late February 2020, Ackman was increasingly worried about the virus, bought instruments that would pay off if corporate bonds fell in value. He paid $27 million for bets against $71 billion worth of investment-grade bonds via the purchase of Credit Default Swaps (CDS). This is a similar instrument used by Michael Burry, the famous hedge fund manager portrayed in the movie “The Big Short”, to bet against mortgage securities back in 2008. CDS is essentially insurance against in case a bond defaults where the acquirer of the CDS would pay an insurance premium.
The beauty of Ackman’s trade is that he timed his purchase of CDS so well that he was able to turn his position into a $2.6 billion profit in a matter of a month only. As a comparison, Michael Burry’s trade took several years to yield profits and could have cost his funds a lot of money if his bet didn’t go his way.
Then he did it again a year later.
The world looked different by the beginning of 2021. Vaccines were coming out. Consumers were weary of lockdowns and flush with savings after a year of government stimulus and nowhere to spend it. Ackman believed the reopening would unleash a flood of consumer spending, sparking inflation not seen for decades and forcing the Fed to increase interest rates to cool down inflation. So he spent $177 million on options tied to Treasury bonds that would pay off if interest rates rose significantly. By the end of the year, the billionaire hedge fund manager had made $1.25 billion in profit.
In both trades, Ackman bet on something that the market thought was highly unlikely. In early 2020, bond investors remained unfazed by the virus and so were willing to cheaply sell what amounted to fire insurance. A year later the economy was still fragile, and traders didn’t think the Fed would end its easy-money policies by raising interest rates soon, so they offered long odds to anyone willing to wager on it.
We all know successful investing requires a lot of different attributes: analytical thinking, emotional fortitude, patience and luck, to name a few. However, having the confidence to go against the crowd is equally as important if not more, in Ackman’s view: “The best investments are the ones where we’re confident we’re right, and everyone else is wrong. I’ve been accused recently of being arrogant, among other things. And there’s a difference between arrogance and confidence. If you’re arrogant in investing, you’re going to get killed. If you’re not confident you’ll never make an investment. So you have to do a sufficient amount of work to be confident enough to have the conviction to do something that’s contrarian.”
However, even you have all the confidence in the world to bet against the crowd, you’re still going to get killed if you are wrong.
“It’s actually pretty easy to be contrarian. It’s hard to be contrarian and right.”
Reid Hoffman
Reid Hoffman, the co-founder of LinkedIn and partner at the VC firm Greylock, hit the nail on the head when he says being contrarian isn’t hard – anyone can say or try to do the opposite of what most people believe – but being contrarian and right is extremely difficult. Those who can both go against the crowd and be correct achieve outsized rewards.
As Jeff Bezos shared his insight in Amazon’s 2015 Letter to Shareholders, “Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.”
Outsize returns or any outperformance cannot come from doing what everyone else is doing. This is only natural because, otherwise, the ideas would be fully exploited and, by definition, result in average outcomes. However, conventional wisdom is usually right, so it takes courage to bet on the unconventional.
It is easy to follow the herd as this offers psychological safety, but it also offers no contrast, no exponential growth. This is not always a poor option, but you must acknowledge which game you are playing and be comfortable with the probable results. Electing to compete in cutthroat environments is always an option, but this is a grind! Zero-sum games abound.
Advantageous Divergence
Our journey then lies in finding and acting on ideas that are “Contrarian and Correct” as Peter Thiel would say – otherwise known as Advantageous Divergence – it is when you act correctly or rationally even if, especially if, others don’t. This mindset serves to create contrast for yourself, allowing for results different than the average. This idea is advantageous because it is overlooked, discounted, misunderstood, too difficult to act on, psychologically uncomfortable, abstract, counter-intuitive, or has too long of a time frame to play out, and therefore few people understand, let alone to act on them.
In Zero to One: Notes on Startups, or How to Build the Future, Peter Thiel describes the essence of contrarian thinking as the belief that the world still has many secrets left to be discovered – something that is important and valuable but unknown, something that is hard to do but not impossible to do – but they will be discovered only by relentless searchers.
The best place to look for secrets is where no one else is looking, or where no one else is believing in them. So the contrarian question you should ask is:
“What important truth do very few agree with you on?”
Peter Thiel
Every correct answer to this contrarian question is necessarily a secret: something important, valuable but unknown.
It’s difficult to answer the contrarian question, much less to get it right. That’s why so much of our society come to believe that there are no hard secrets left? Everything in the world that’s worth doing has been done already. It might be because of risk aversion. People are scared of secrets because they are scared of being wrong. The prospect of being lonely and appearing foolish but right – dedicating your life to something that no one else believes in – is already hard. The prospect of being lonely and wrong can be unbearable.
Humans’ future progress, however, is depending upon discovering and pursuing these hard secrets relentlessly:
- Creating new electronic money in 1998, or inventing a decentralized digital currency in 2008? Good luck with that.
- Blogging with a 140-character limit? That makes absolutely no sense.
- Disappearing text messages? What a stupid idea.
- Staying in strangers’ homes and riding in strangers’ cars? That’ll never work.
- Challenging Amazon in e-commerce or NASA in space exploration? Haha, don’t make me laugh.
If we all believe that everything in the world that’s worth doing has been done already. If we all would rather follow the crowd and play safe than risk being wrong and dumb, then all these seemingly bad ideas: PayPal, Bitcoin, Twitter, Snapchat, Airbnb, Uber, Shopify, SpaceX, would have been reminded merely as jokes instead of brilliant inventions.
Horizontal vs Vertical progress
Future progress can take one of two formats. The first format is “Horizontal” or extensive progress means copying things that work – going from 1 to n. Horizontal progress is easy to imagine and achieve because we already know what it looks like – taking things that work somewhere and making them work everywhere. But in the end, you’re just 1 of n, there’s a dog pile of competitors thinking or doing the same thing, and that will limit your success to nothing more than ordinary.
Another form of progress is “Vertical” or intensive progress means doing new things – going from 0 to 1. Vertical progress is harder to imagine and achieve because it requires doing something nobody else has ever done. It requires unconventional thinking and uncompromising commitment to making the unknown perceivable and the impossible possible. That’s how you discover secrets, creating the new things that will make the future not just better, but 10x, even 100x better– to go from 0 to 1.
Simply put, to achieve extraordinary performance in anything you must think and act differently from the crowd since it is mathematically provable that you can’t beat the crowd if you are the crowd regardless you are right or wrong.
We can use a payoff table to illustrate the difference between contrarian and non-contrarian thinking in terms of reward and risk, it looks like this:
As you can see, non-contrarians will never produce extraordinary payoff even if they are right because millions of others are also right (Horizontal Progress). Contrarians, on the other hand, lose big when they’re wrong and, as Jeff Bezos notes, contrarians are often wrong. But when they’re right, the payoff is extraordinary (Vertical Progress).
The power of the contrarian mindset isn’t limited to business or investing. The concept applies to all things in life, from entrepreneurship to creative pursuits to scientific discoveries to sports to politics. If you think or act the same way as everyone else, you should expect an ordinary result. That is the point of conventional wisdom.
But if you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
Think for yourself
Conventional beliefs only ever come to appear wrong in retrospect. Bubbles don’t appear to be bubbles until they pop. The first step to thinking clearly is to question what we think we know about the past, present and future.
That doesn’t mean the opposite ideas are automatically true: you can’t escape the madness of the crowd by dogmatically rejecting them. Instead ask yourself: how much of what you know about the world is shaped by mistaken reactions to what the majority believes? Are you seeking confirming evidence to reinforce your existing views or looking for disconfirming evidence that proves your existing ideas wrong?
The most contrarian thing of all is not to oppose the crowd but to think for yourself.
Entrepreneur and investor Naval Ravikant said it best:
“A [true] contrarian isn’t one who always objects — that’s a conformist of a different sort. A contrarian reasons independently, from the ground up, and resists pressure to conform.”
Naval Ravikant
During the pandemic, “Covid contrarians” have become many people’s favorite villains. Their repeated claims that masks and vaccines don’t work despite strong scientific evidence have proved the opposite and have increasingly been viewed as wrong and, lately, downright dangerous.
In that sense, “Covid contrarians” and “Climate change contrarians” are very similar. Frankly, they are giving contrarianism a bad name. I don’t believe people who merely disagree with the majority and express opinions that are unpopular without carefully considering available data, facts, and evidence as true contrarians.
So how to become a true contrarian? Below are some of the key frameworks for becoming true contrarians, a set of mental models in which makes your thinking more right than wrong:
1. Question everything, assume nothing
The first and foremost step to being a true contrarian or smart contrarian is to think independently and critically, and the best way to do this is the presumption to doubt and to investigate rather than the presumption to believe.
In other words, question, question, and question before believing. A successful contrarian life requires you to be a detective, not a follower. This doesn’t mean that you should go to the extreme and believe nothing. It means being able to have the intelligence and the courage to discuss tough issues that you may disagree with the mainstream’s views. Ask questions. Get the facts before you decide to believe and act. Never look to a teacher or a person of influence or authority as a replacement for your own judgment. Think for yourself!
2. Five Whys Analysis
Another way of asking questions and digging further to fully understand how things truly work instead of believing in conventional wisdom is doing the “Five Whys Analysis.” It’s something that the Toyota production system came up with years ago in Japan.
Here’s one of the examples from a blog post by Eric Ries, the creator of the Lean Startup.
Five Whys Analysis in Action: Website Crash
- Why was the website down? Well, the CPU utilisation on our front end servers went to 100%.
- Why did the CPU usage spike? Well, some code contained an infinite loop.
- Why did that code get written? A programmer made a mistake.
- Why didn’t that mistake get checked in? He/she didn’t write a unit test for the feature.
- Well, why didn’t he/she write a unit test? He/she’s a new employee and wasn’t properly trained to do test-driven development.
Five Why Analysis is similar to the First Principles thinking, which requires us to unlearn what we know, to relearn and start over from the ground up to avoid the tyranny of our knowledge. We’re constrained not only by what we’ve learned and done in the past, but also by what others have done as well, by following the crowds, by coping with others’ ideas.
3. Expand your time horizon
If you want to do better as an investor the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away. It can’t neutralize luck and risk, but it pushes results towards what people deserve.
Increasing your time horizon works in other fields as well. In Think Again: The Power of Knowing What You Don’t Know, Adam Grant discovers a paradox in great scientists and super-forecasters: “The reason they are so comfortable being wrong is that they’re terrified of being wrong. What sets them apart is the time horizon. They’re determined to reach the correct answer in the long run, and they know that means they have to be open to stumbling, backtracking, and rerouting in the short run.“
How scientists and forecasters think is good practice in life. When you form an opinion, ask yourself what would have to happen to prove it false and make a list of them. Then keep track of your views so you can see when you were right when you were wrong and how your thinking has evolved.
The trick is being able to adjust and adapt to the inevitable short-term setbacks and so you can evolve and stick around long enough to enjoy long-term success.
4. Balance your confidence with humility
Bill Ackman believes that one of the most important attributes for successful investing is “be confident enough to have the conviction to do something that’s contrarian.”
Confidence is a measure of how much you believe in yourself (your capability & strength). You can be confident in your ability to achieve a goal in the future while maintaining the humility to question whether you have the right tools or strategies in the present. That’s the sweet spot of confidence.
This sweet spot is what Adam Grant called “Confident Humility”: An ideal wherein the individual has faith in their abilities but retains sufficient doubt and flexibility to recognize their tools, ideas or strategies could be wrong. Because of this, they remain curious and flexible, always seeking the truth.
Confident humility doesn’t just open our minds to rethinking – it improves the quality of our rethinking. When people have the confidence to acknowledge what they don’t know, they pay more attention to how strong the evidence is and spend more time reading material that contradicts their opinions.
5. Moonshot thinking
When you’re working to make things 10 percent better, you inevitably focus on the existing tools and assumptions, and on building on top of an existing solution that many people have already spent a lot of time thinking about. Such incremental progress is driven by conventional wisdom and common beliefs.
But when you aim for a 10x gain, you lean instead on bravery and creativity — the kind that, literally and metaphorically, can put a man on the moon. The size of the challenge actually motivates people: bigger challenges create stronger passion and creativity. And that, counter-intuitively, makes the hardest things much easier to accomplish than you might think.
In his book Think Like a Rocket Scientist, Ozan Varol explains that moonshot starts with picking a big problem: something huge, long-existing, or on a global scale, such as nuclear fusion, quantum computing, preventing global warming or pandemics, etc. Next, it involves articulating a radical solution — a product or service or a concept that seems impossible, that sounds like it’s directly out of a sci-fi story. Finally, there needs to be some kind of concrete evidence that some breakthrough in science, technology, or engineering could actually make the solution possible in the next 5 – 10 years.
Most of us refrain from moonshots because we assume we are not cut out for them, or they are too impractical to materialize in the near future – if ever. Here’s the thing: the hurdle to taking moonshots is not a financial or practical one. It’s a mental one. It’s a story we choose to tell ourselves about our capabilities. And like every other choice, we can change it. Like every other story, we can rewrite it.
Elon Musk once said, “If you give yourself 30 days to clean your home, it will take you 30 days. But if you give yourself 3 hours, it will take 3 hours. The same applies to your goals, ambitions, and potential.”
No one really knew how to build an airplane or a rocket or an electric car when they decided to build the first one — but they kept going and achieved it. We can ask the same hard, slightly crazy questions of our own and declare our own moonshots as individuals and as groups.
6. Bezos’ 2×2 Matrix
In a 2016 letter to shareholders, Bezos laid out how Amazon goes about making good decisions as quickly as possible in its effort to be an “invention machine”:
“Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.“
When applying Bezos’s 2×2 framework to your decision-making process, you start with the question, “Is it consequential? Is it reversible?”: if this is a decision that’s highly consequential and irreversible (Type 1 decisions), then I’m going to keep myself open to do a lot of research, thinking and listening as long as possible because once I’ve made the investment, I can’t undo it and the stakes are really high. But if it’s reversible or if it’s inconsequential (Type 2 decisions), then I’m going to act quickly based on what I know now, and over time, I know I’ll have lots of opportunities to redo and improve in response to the feedback that I get based on new data.
In closing
Developing one’s own independent views – the root of genuine contrarian thinking – doesn’t happen overnight. It takes many years of sustained effort to focus on finding ways to do things differently, yet correctly.
True contrarians live and breathe with these mandates day in and day out:
- Explore the hidden contrarian truths or secrets relentlessly, which are important but unknown, hard to find but not impossible to find.
- Think for yourself on any topic, and derive a set of views independent of what other people around you think.
- Have the confidence to act on your convictions and the humility to update and modify them when new evidence or data emerges.
- Presumption to doubt and question rather than the presumption to believe, always questioning others’ assumptions as well as yours.
- Train yourself to make moonshot thinking not an occasional thing but a habit of mind. To think of the impossible you need a healthy disregard for the impossible.
- Play the long game. Thinking long term gives you much more space and time to explore and experiment and learn more deeply to solve hard, audacious problems.
- Fail cheap and learn fast. Take lots of small risks that are inconsequential and reversible to find out what works or doesn’t. Be extremely cautious when taking risks that, if lost, would be consequential and irreversible.
To some extent, an independent streak must be inborn; some people have it and some don’t. Think of quirky misfits and rebels who created modern science and pushed the human race forward: Galileo Galilei, Issac Newton, and Albert Einstein. They challenged conventional wisdom. They saw what others didn’t. They didn’t try to fit in, they stepped out. They didn’t follow the well-worn path, they created new ones, better ones.
I want to leave you with a quote from arguably the most iconic advertising campaign in history, narrated by a man who made a profound impact on the world:
“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”
Steve Jobs, 1997
Connect the dots 