“If everyone else is buying, you should sell, and if everyone is selling, you should buy.”
This seems to be the most common perception of what “contrary” investing means.
Over the years this term seems to be gaining popularity as we see it was spread by entrepreneurs like Elon Musk or Peter Thiel.
It is valuable to have a particular mindset that is geared towards being diametrically opposed to the typical thoughts into which our bias falls.
But when we go through the standardized education system in Singapore, the brain is used to adapting rather than being contrary.
Like a muscle, it must first be stretched and strengthened.
Here I share 5 different ways to develop a contrarian investment mindset.
1: Say “I don’t know” more often
Aidah shared how humility can be the most unremarkable investment strategy. She is very right about that.
My best clients, who are successful professionals in their own industries, regularly draw on my expertise when choosing their real estate investments.
They know themselves and their content very well. Doctors and surgeons are very good at saving their patients’ lives.
But they are also able to recognize their own limited knowledge of real estate investments.
“I don’t know” is not a sign that you lack confidence.
Instead, this is an indication that you are open to better solutions or suggestions.
When you consistently admit the phrase “I don’t know”, you get a feeling of security and power.
It means you can go wrong less often and live an honest life.
2: Find competing opinions
The book The Intelligence Trap – David Robson argues that intelligent and educated people are less likely to learn from their mistakes or seek advice from others, for example.
And when they are wrong, they are better able to come up with sophisticated arguments to justify their reasoning, which means that they are becoming more and more dogmatic in their views.
Worse still, they seem to have a larger “bias blind spot,” meaning they are less able to see the holes in their logic.
This is where you need to avoid the confirmation bias trap by finding competing opinions.
When you hear that a particular development is a great investment, find another point of view that says it differently.
At Stacked Homes, our highly independent editorial team means they can present their opinions without the colored lens of commission rates.
They know the importance of making the right property selection, so they take the time to detail the various pros and cons to help you make a decision.
3: Understand the concept of antifragility
Nassim Taleb is a well-known opposing investor.
In 2020, a fund he advised achieved a YTD return of 4,144 percent as it benefited from pandemic fears.
He is known for introducing the concept of anti-fragility.
If you drop a glass bowl on the floor, it will shatter and represent fragility.
If you drop a stone in spite of the fall, it will remain complete and firm and stand for resilience.
And if you cut off one hydra head, two will be born in place, which represents antifragility. With more adversity, the reaction should become stronger.
The concept of antifragile explains that some form of randomness and variance makes things less fragile.
Some stress is productive; doing some physical work is good for the bones; some fasting is good for the immune system, etc.
At the information and knowledge level, we can apply the concept of anti-fragility by constantly exposing our ideas, beliefs, and investment theses to a certain level of conflicting information – to make them less fragile.
For example – there is a strong persistent belief that condominiums make the best investment decisions.
But what if I showed you data that 99 year old LH properties actually outperformed condos over the same period?
Okay, the argument is honestly not that straightforward (more on the subject can be found here).
However, once you are aware of such information, you will definitely think twice about your beliefs about the infallibility of condominiums, which will help you orient yourself in your decision-making process.
In an uncertain world, understanding the concept of antifragility will help you build a portfolio that is resistant to vulnerabilities such as prolonged volatility and severe setbacks.
4: Watch out for things that don’t make sense
In Singapore, we introduced the concept of borrowing from our retirement funds to pay our monthly mortgage. There is a cost to this borrowing, and this is where the term CPF accrued interest comes from.
In most parts of the world – larger places than Singapore – retirement benefits are considered inviolable and the majority do not allow withdrawals for housing benefit payments.
In Malaysia, 22 percent of their salary is paid into their EPF. And only 30 percent of the 22 percent are allowed to be used for residential purposes. This means that a maximum of 6.6 percent of their income can be used for the monthly mortgage. (0.3 * 22 percent = 6.6 percent)
In Singapore, 37 percent of our salaries are paid into our CPF accounts. And 21 percent go to CPF OA, 7 percent to SA and 9 percent to Medisave.
This means that we can use up to 21 percent of our income on our mortgage – as long as we are under 45 years old.
So what does it mean when we turn 46?
Too late to participate as a real estate investor?
Singapore’s strong home ownership culture is perhaps one of the reasons we are allowed to use so much of our income on our home.
It also explains why there is a strong love affair with the Singapore real estate market. This is where a significant portion of our retirement funds are parked.
In other countries a house is a home. In Singapore, your home is also likely to be an investment vehicle.
This is why it is so important that you pay close attention to the details and how unusual they are – so that you can make this interesting state of emergency in Singapore’s housing system work for you.
5: Go to the least crowded room
It’s scary how often people feel the strongest that stocks will go up or the economy will improve – and instead, just the opposite happens.
The problem is not that investors and their advisors are chronically stupid or insensitive. At the time the signal was received, the message may have already changed.
If enough positive general financial news is filtered out so that the majority of investors feel genuinely confident about the short-term outlook, the economy will likely begin to come to its knees.
With our strong human tendency to conform and watch out for social evidence, we instinctively decide that we must follow the masses.
It is similar to how people behave during real estate launches when the market has been weak.
As early as March 2019, the Florence Residences were only able to sell 54 units when they opened.
Back when it first hit the market at relatively attractive prices, no one was really interested in buying it.
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Why?
I remember the reluctance of buyers to commit when they see an almost empty show flat where there are no crowds. You are wondering – are we in the right room?
But as soon as a show flat is filled to the brim, irrationality and emotions take over, as the fear of missing out outweighs the initial reluctance to buy a property.
Developers love the environment that a crowded space creates during a sales launch and they will play it to their advantage.
(Perhaps less applicable today due to social distancing measures)
Protect yourself by going to the least crowded room.
Conclusion
The most successful people will be those who can think differently. You are the adversary.
This 3 minute video has a powerful lesson in being standout and contrary (use tone to see that commentary is key).
It’s very hard to be the first in anything.
It needs
- courage
- Be able to see what others are not doing
- The willingness to look silly / stupid / just wrong
- Embrace uncertainty
- Giving up the certainty of being right
To be successful as a contrarian you need to recognize what the crowd believes, have a concrete justification for why the majority are wrong, and have the patience and conviction to stick to what is by definition an unpopular bet.
The inevitability of discomfort
Don’t confuse security with security.
The man who knows he will be hanged tomorrow has certainty but no certainty.
His fate is not much more pleasant than that of the saver who today wants to use low-risk bonds as a means of retirement – the certainty that such a saver will achieve is the certainty of a low standard of living in old age.
It’s better to feel uncomfortable now, while we’re still young and able.
You can’t think your way to success. You can’t think your way through every problem either.
You have to live with uncertainty, but you also have to experience and do the things you want to be good at.
Get started and stop hesitating.
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What is the worst case scenario and do you agree with it?
And if you think you’re okay with that …
Is there some way to easily experience it and deal with it so you can see what your reaction is and then improve it?
I think it’s a bit like a vaccination. You will feel uncomfortable at first, but that discomfort will protect you later.
If you are interested in exploring the concept of contrarian real estate investing in Singapore, please let me know. Wisdom is not always in the crowd.
This article was first published in Stackedhomes.
