On the contrary – Contrarian investing is tough to do but that can also make it rewarding


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

Here on The Value Perspective, we may wear our contrarian approach to investing as a bit of a badge of honour but taking a position that is in direct opposition to the great majority of investors and – an equally important part of the equation – doing so with conviction is by no means as easy as we might occasionally imply. 

To illustrate the point, let’s consider a US study from 1996 that added a couple of twists to the classic psychological experiment where test subjects answer simple questions and then begin to doubt themselves when they are informed – falsely – that everybody else has come up with an entirely different answer. 

The newer study contained some of the traditional ingredients – putting images up on a screen and then asking people to say what they had seen. The first set of images remained visible for a comfortable period of time while a second set were flashed up for just a fraction of a second, thereby making the process of accurately recollecting what they had seen much more challenging for the participants. 

In a fresh twist though, some of the test subjects were told they were simply taking part in an informal academic study while others were told the results they generated would be used in a much more meaningful way – contributing towards the development of a process to help witnesses identify criminals, which would ultimately be used by the state’s police and court authorities. 

It was stressed to this latter group that previous participants had all tried their hardest in the test and they should aim to do likewise. Completing the range of psychological pressures being applied, a small amount of cash was offered to those producing the best results. Then the images started to flash and the doubts were raised over what had been seen. Would the test subjects stick to their guns? 

After the easier task, about a third of the group who believed they were involved in an informal study chose to change their minds when they came under pressure to do so. Among the group who thought they were involved in the more meaningful project and so were trying to do their best, however, the percentage of people willing to abandon their original judgement was much lower – at around 15%. 

It was, though, a different story after the more challenging task. While the percentage of test subjects willing to change their minds in the ‘informal study’ group stayed fairly constant, among the ‘meaningful project’ group, the number of people who were willing to change their original view rather than stick to their guns actually spiked significantly. 

The conclusion drawn by those behind the study was that, when a task is both difficult and perceived to have a high degree of importance, people are more likely to find it harder to go against the ‘wisdom’ of the herd and stand by their original decisions. 

With much about the stockmarket being difficult and also – rightly or wrongly – perceived as highly important, the study may help to explain why taking contrarian views about investment and doing so with conviction is so hard for so many people. This is especially true at times of heightened stress, such as the autumn of 2008, when the dramatic events seem to raise the stakes of each individual decision and make doing the same as everyone else seem even more comforting. 

Of course, as we have written many times before, it is precisely because these decisions are difficult to take that they can be so rewarding for those who are able to instil such a level of discipline into their investment process.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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