Editor's note: We're back to round out the year with more timeless essays from our Stansberry Research editors... And today, we're joined by none other than Brett Eversole. In this essay, which we last published in December 2022, Brett considers some wise words from two investing legends – including the late Charlie Munger – on how to make successful contrarian trades...
"It's not supposed to be easy. Anyone who finds it easy is stupid."
Charlie Munger told that to Howard Marks over lunch in 2011...
Munger, as you probably know, was Warren Buffett's right-hand man for decades as vice chairman of Berkshire Hathaway. And Marks is no slouch himself... He's one of the founders of Oaktree Capital Management, an investment company with nearly $200 billion in assets.
Both men had built up decades of investment knowledge. Yet Marks felt the lunch was a great learning experience.
Munger's words might have seemed harsh. But they cut right to the heart of investing.
Today, I'll share what he means... and how it gives you – the individual investor – a leg up in the markets.
Once you think about it, you can see how important Munger's observation was...
Millions of people want to make money in the markets. With all that competition, earning outsized returns can't possibly be easy. If you think it is easy, as a lot of people do, then you really don't understand investing.
Marks felt this was so important, he used Munger's point to write the first chapter of his book The Most Important Thing. He titled the chapter "Second-Level Thinking." Here's how he described the idea...
Remember your goal in investing isn't to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level...
For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and you have to be more right than the consensus.
Different and better: that's a pretty good description of second-level thinking.
Here's Marks again, explaining first- and second-level thinking in practice...
First-level thinking says, "The outlook calls for low growth and rising inflation. Let's dump our stocks."
Second-level thinking says, "The outlook stinks, but everyone else is selling in panic. Buy!"
This is the framework of contrarian investing... something that we focus on here in DailyWealth.
The truth is that you have the potential to make the biggest gains when you buy what other investors hate... assets they've left for dead. That's when you get the best opportunities to buy, with the biggest potential to outperform.
But, as Marks said, your idea has to be different – and better. Making contrarian bets just for the sake of it is a terrible idea. The most important part is being right that the market is wrong.
Again, "second-level thinking" isn't easy. The hidden advantage, though, is that this is one way you can set yourself apart from the pack as an individual investor...
You've got no one to answer to but yourself. And that means you have the freedom to make contrarian bets – the hard bets – without worry of scrutiny.
That's not the case for guys who operate on Marks' or Munger's level. They have investors they must answer to... Plus, everyone in the world is watching what they'll do next. That alone makes it harder for the big-league investors to make (and hold onto) truly contrarian positions.
Most folks will tell you individual investors are fighting an uphill battle. After all, when you're competing with guys like these – who have billions of dollars to throw around – finding an edge can seem impossible.
This is one area where you have the advantage. Being a contrarian isn't easy... But it's one path to outsized returns.
Editor's note: As part of our holiday series this year, we're taking a break from our weekly Highs and Lows segment. We'll return with those highlights next week!
"Buying something just because it's down does not necessarily pay off," Dr. David Eifrig writes. Most folks know this – that's why going against the crowd can be so daunting. But three rules of thumb can help you make smart contrarian bets (and avoid the value traps)... Read more here.
One quirk of human psychology could be getting in the way of your investment results. It's called "loss aversion." For example, if everyone else is selling, most of us are ready to cut and run with the herd. The good news is, you can get around this hurdle with a few simple steps... Learn more here.