“At times, going against conventional wisdom is painful, lonely, and for sure creates all kinds of self doubt and fear. I might add that fear is an extraordinary healthy characteristic.”
Sam Zell
Outlier Investing: Defying the Herd for Exceptional Returns
In investing, the crowd’s consensus often shapes asset prices, embedding collective knowledge—and errors—into market valuations. Contrarianism, or the art of being an outlier, thrives on identifying where this consensus falters. Success lies not in blindly opposing the herd but in discerning when their beliefs are wrong and the odds favor a different path. This requires second-level thinking: What does the consensus believe? Why are they mistaken? What drives their error, and what could expose it? These are simple questions but not necessarily easy to answer, yet answering them unlocks opportunities. When the crowd loves an asset, its price soars, leaving little room for profit. Conversely, assets despised by the herd—shunned as risky or unpopular—become mispriced, offering the potential for outsized returns if your contrarian bet proves correct.
The payoff for such outlier thinking can be immense, but it’s not enough to merely bet on the unlikely. You must be right. Investing in what everyone hates, like a neglected stock or distressed sector, demands rigorous analysis to ensure the consensus has misjudged its value. This process may seem complex to the non-contrarian, but for those with a natural contrarian bent, challenging euphoria or panic with disciplined reasoning comes more instinctively. For instance, at market bottoms, when fear triggers mass selling, an outlier investor spies opportunity in undervalued assets, meticulously verifying that fundamentals herald a rebound. The rewards are substantial, as the crowd’s disdain creates bargains, but the path is still far from guaranteed, as the world and its facts can shift.
“Value investing is at its core the marriage of a contrarian streak and a calculator.”
Seth Klarman
The personality of an outlier investor is as critical as their temperament, blending contrarianism, analytical rigor, and emotional resilience. Contrarianism requires a natural inclination to stand apart from the mainstream, questioning prevailing narratives with disciplined skepticism. In a room buzzing with excitement over a popular stock, the outlier investor doesn’t join the euphoria but probes whether it has inflated the stock’s price, resisting the seductive pull of groupthink. This solitary stance is inherently uncomfortable—criticism, isolation, and self-doubt are constant companions. Great returns demand differentiation from the herd, coupled with the emotional toughness to endure prolonged uncertainty, sometimes appearing wrong for years, until the market validates their foresight.
Crucially, an outlier investor should not feel compelled to convince others of the validity of their investment thesis. As Nassim Nicholas Taleb aptly stated, “You can never fully convince someone that he is wrong, only reality can.” Similarly, Ben Graham emphasized, “The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” The outlier investor trusts their own reasoning and evidence, understanding that being right is not contingent on persuading others. If their analysis is sound, reality will eventually bear out their convictions, though this may require enduring significant time and patience. This independence from external validation not only preserves mental clarity but also reinforces the investor’s commitment to their principles, a key tenet of having skin in the game—where personal conviction and risk align without reliance on the approval of the crowd.
“We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”
Warren Buffett
In the animal kingdom, two creatures embody this outlier mold: the puma and the octopus. The puma, a solitary predator, thrives across vast territories from Canada to Patagonia, displaying unique social flexibility—sharing kills strategically over time—while hunting alone with precision. Its adaptability and independence mirror an outlier investor navigating market extremes. The octopus, with its unparalleled intelligence and camouflage, operates solo in marine depths, solving problems and seizing opportunities others cannot. Like these creatures, the outlier investor dares to differ, harnessing disciplined, independent thinking to defy the herd and achieve exceptional results.
“Huge profits are frequently available to those who zig when most of the financial community is zagging, providing they have strong indications that they are right in their zigging.”
Phil Fisher