By Joel Bowman
12/14/10 Buenos Aires, Argentina – Why do smart people do dumb things? Or, more germane to our Daily Reckoning beat, why do smart investors make stupid decisions?
More on that in a second…
We returned to the “Paris of the South” over the weekend after a quick trip to Baltimore for an editorial meeting and, of course, the annual office Christmas party. Rarely do we find ourselves surrounded with so many outcasts and oddballs as when we attend Agora-sponsored events. We doubt The Maryland Club – the jacket-and-tie venue where the shindig went down – had ever seen such a motley crew. Not since last year’s celebration, anyway. Agorans, if you haven’t yet met one, are a quirky bunch; a little adrift of center on almost any topic; a tad eccentric; not quite “all there” in any generic sense of the definition. Needless to say, it is a pleasure to work with such a group…and to be in the service of an “outsider” readership. A very Happy Holidays to you all!
Chatting with a few old friends at the party – and some new – we started thinking about the contrarian mindset. How does such a state arise in one’s own brain? Is it inherent? A genetic predisposition? Why is it that some folk tend to stray from the herd, while others follow in perfect step and with nary a question as to their position in the line…much less to where it is headed? Why, in other words, are some people so delightfully independent while others are forever setting the cut of their jib to whatever the prevailing theory of the day happens to be?
Forgive our post-flight ramblings, Fellow Reckoner. There is a point to all this.
There is little doubt that, in the world of investing, it pays to be in the minority. Some commentators divide the crowd into unequal portions: the minority constitutes the “smart” money; the majority represents the “dumb” money…on which the minority happily feeds. We are reminded here of Rick Rule’s famous line: When it comes to investing, you are either a contrarian or a victim.
Necessarily, the smart money must be a minority. The moniker is afforded, at various times, to bond traders, short sellers and industry insiders. Whatever their position, this renegade outfit must be ahead of the curve, ready to sell at the point of maximum demand and to buy at the moment of minimum interest, when there is “blood on the streets,” as the old adage goes.
Though not entirely dependent on the status quo, a contrarian’s position is almost always in opposition to it. It is helpful, therefore, to ask what the accepted norm of this day is. Bill Bonner helpfully identified the accepted wisdom of our time in yesterday’s column.
“Lies!” said he.
The financial system is built on lies. Economic and political systems likewise. There is the lie that people can grow rich by spending more than they earn…that companies can achieve success by producing stuff that people don’t buy…that real estate prices always trend higher…and that, when the entire economy is in a debt-induced funk, it can dig its way out by piling on still more debt, by debasing its currency and by fibbing to the masses about what it is doing all the while.
“Lies, lies, lies,” commented Bill.
Where then is the truth? Gold, for one, is notoriously, incorruptibly honest. You can tell this because fiat-money pimps won’t go near the stuff. It is indisposed to the creepy advances of central bankers who would seek to compromise its virtue. It is, as one friend likes to say, nobody else’s liability. It is honest to a fault, Fellow Reckoner. Has been for thousands of years. That is why to the majority of it remains a barbarous relic. But for the rest of us, like honesty, it’s still the best policy.