Cracking the Contrarians Code

by on November 28, 2020
Christopher Mayer on William O’Hanlon’s “The Reality of Reality”

Read Marks, not Marx if you want to learn anything useful about the future.

It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So

— Unknown (but frequently attributed to Mark Twain)


Over on AxisOfEasy we often say the defining conflict of our time is between centralization and decentralization. When I listened to Howard Marks on the Value Investing Legends podcast he said there are two schools of thought, the “I know” school and the “I don’t know” school.

As I thought about this, I realized that the distinction between centralization / decentralization and I know vs I don’t know delineate out in a similar fashion.

Those espousing centralization do so because they think the centre knows. The trains will run on time as long as there is a super-intelligent brain, or AI or committee in the middle that has everything figured out and can direct traffic.

What could possibly go wrong? Well, you could make the case that history is largely a chronicle of things that didn’t go as expected, or at least things that happened that weren’t expected at all. As Winston Churchill termed it, history was “one damned thing after another”.

How is this relevant to contrarianism?

What is often misunderstood, as per Ken Fisher’s Beat the Crowd, contrarian calls are frequently mistaken for opposite calls. He used the analogy of an analog clock, if the hour hand is at the 1, the opposite call is 7. He called this “Curmudgeonly Contrarianism”.

But real contrarianism isn’t just picking the diametrical opposite outcome, it’s realizing that there are many other options than where the hour hand is pointing (or is predicted to be).

In other words, contrarianism isn’t really about thinking you know what’s going to happen that is different from what the crowd thinks. Contrarianism is more about knowing that whatever it is the conventional wisdom thinks is going to happen, probably won’t.

Thinking about it in this way helped me put a point on some bullet points / aphorisms I had been mentally pencilling out over the last while. If I tried to expand on all of them below this would be too long, I may break them out in detail in subsequent posts. Keep in mind, none of these are absolutes.

If something will never be the same again, it’ll be close enough.

The more hysterically that experts are shrieking about some unthinkable scenario, the greater the odds are that you can ignore it.

The batting average for the accuracy of the most sophisticated macro models about nearly everything is abysmal.

There is no such thing as AI. There are expert systems, a label from the 90’s, but they are by no definition “intelligent” and none of them give anybody any edge about predicting anything, let alone everything.

Some of the most sacred cows and established tenets that underpin conventional thinking are demonstrably wrong (Phillips Curve) or unfalsifiable (OOL theories).

The consensus outlook describes the one scenario that is impossible to occur (see Douglas Adams in his Hitchiker’s Guide to the Galaxy and his concept of the recipriversexcluson, a number whose value can be anything but itself , “In other words, the given time of arrival is the one moment of time at which it is impossible that any member of the party will arrive.”)

Continuing on above: It’s true that a gaggle of of people who guess at the number of jelly beans in a jar will often times be wrong individually, but close enough statistically. For some reason the Wisdom of Crowds phenomenon does not translate to consensus outlooks by experts. My suspicion is that if you did the jelly beans in a jar guessing thing with a population comprised solely of  Nobel Economics Prize laureates and central bankers, their guess would be further off than a crowd of inbred hillbillies.  I don’t know why this is, but a few years back Dan Gardener put out a pretty good book about this called Future Babble: Why Expert Predictions Fail – And Why we Believe Them Anyway.

There is a big difference between something being inevitable and it being imminent – the differential between the two can exceed the length of multiple lifetimes.

However, the corollary is that “eventually” inevitably shows up sooner than anyone expected.

The majority of expectations are delusional. Keynesian beauty contests lead to perverse feedback loops in which entire premises are built on infinite linear extrapolation. Then if you want to see real hysteria (or exuberance), put in an exponential curve. Exponentials cannot continue indefinitely anywhere, but our expectations around them certainly can.

Many fears are unfounded. When bad things happen to people they are more often things that they didn’t expect rather than things they were actively fearing.

All of the above boils back town to Marks’ (not Marx’s) “I know” vs “I don’t know”. Marks doesn’t know. Marx knew. Marxists today know.

The governors of the Fed Board, Ben Bernanke, Janet Yellen, Stephanie Kelton, Anthony Fauci, Paul Krugman, Neil Ferguson, Greta Thunberg, Klaus Schwab, they are all of the “I know” school. There’s an expression “Left knows best” and it’s not wrong, but it’s not limited to lefties. Right wing conservatives belong to the “I know” school too. Especially those Neocons.

Austrian-school capitalists, libertarians, Howard Marks and I suspect, all master class investors, belong to the “I don’t know school”. And so do I. At least I try to.

So when I make a bet on gold, on silver and crypto currencies, I’m not making a bet because I think “I know what’s going to happen”. Contrarianism may not actually be about “everybody is wrong, the market is wrong, and I’m right, I know what’s going to happen”

Contrarianism may more accurately understood as being about examining what everybody thinks they’re right about and what they take for granted. It’s not about what will happen as much as what can’t happen, or will likely stop working.

You can’t print prosperity, you can’t indebt your way to wealth, you can’t save an economy by destroying the currency, even if you invent a scholarly sounding perpetual motion machine like MMT to justify it. And you can‘t keep leaching the last crumbs of wealth out of the under-class to enrich the elites and expect the underclass to sit still for it in perpetuity.

I think the experts and the policy makers are wrong about inflation and I think they’re wrong about debt and I think they’re wrong about interest rates. That means I don’t want to be in cash, and to get out of a cash I don’t want to put it in things that are over priced and expensive relative to their value.

Out of all that, it leaves a contrarian bet on precious metals, crypto currencies (because of capital destruction), income producing businesses (economic destruction) and commodities (because of inflation).

Over the past year as I’ve been seeing increasingly more references on #fintwit that fundamentals are dead, value is dead, the New Normal is permanently high multiples, there is certainly some merit to these arguments given  the destruction the monetary reset that certainly seems to be coming (even if we don’t know how it’ll play out).

But also reminds me of the famous “permanently high plateau” remarks of yesteryear and other forms of New Era thinking, and thus the last couple of aphorisms from my collection:

If it’s unprecedented, there are precedents.


If it’s different this time, it isn’t.

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After I had finished the first draft of this post, my copy of Christopher Mayer’s How do You Know? arrived. Mayer has written such investment classics as Invest Like a Dealmaker and 100 Baggers (which was in turn his study of the Tom Phelps’ fabled 100-to-1 In the Stock Market).

The graphic I used in this post is from Mayer’s book. In the chapter on General Semantics he is talking about William O’Hanlon’s demonstration of reality:

“Let the dots represent ‘facts’. Now we want to “connect the dots”, or make sense of them. O’Hanlon’s chart shows some of the ways in which you can connect the dots.

It’s a brilliant rendering that makes clear there are many ways to interpret the same set of facts”.

It is a different kind of book than his other two, but in this day and age of experts-uber-alles, mandatory narratives and institutionalized groupthink, it’s more important and a must read. This book is an ode to the I Don’t Know school of investing and of life.


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