This Is Why It’s so Hard to Be a Contrarian Investor

Everyday you’re going to be told you’re wrong.

Jim Chanos is a grizzled short-seller with a long history of making bold calls. He was short Enron before it became one of the biggest bankruptcies ever. He’s also recently tried to short Tesla. The stock market, in general, has a bias. The majority of investors, funds, and people participate to make money on the long side. They want to buy undervalued companies and watch them become more valuable, or they want to buy growing companies and watch them grow even more. When you try to short the market, you are essentially betting against everyone.

Chanos is one of the few who has consistently made money betting against everyone. That’s a hard life to live. The odds are against you and so are the people. I imagine it’s something like going to a Warriors championship parade dressed as Lebron James yelling “ya’ll still blew a 3–1 lead!”

I recently watched an interview with Chanos and out of nowhere he dropped a knowledge bomb about the intersection of life as a short seller and the positive reinforcement cycle this little thing called society revolves around. I’ve taken the time to transcribe what he said below. Being contrarian is hardEven if you’re a long-term investor with no interest in being short or contrarian, this hits like a trap beat:

“What I like to point out is that almost everybody that will view this video is the beneficiary of a positive reinforcement cycle in their life. That is they were told to study hard by their parents, go to good schools, get good grades, go to better schools, get a good job, work hard, get promoted, be paid well… The so-called virtuous cycle.

Studies have shown that most rational people, including people that fit that profile, that their decision making breaks down in an environment of negative reinforcement. The ultimate example of which would be interrogation, where your ability to withhold information is broken down by various physical or mental techniques.

If you think of wall street, it’s a giant positive reinforcement machine. Basically, I come in every morning, flip on my Blackberry and check Bloomberg at five in the morning. And of the hundred short ideas that we have in our global fund, I can pretty much predict there’s going to be about twenty to twenty five percent everyday where there is some sort of commentary, research report, analyst buy recommendation, estimates raised, or CEO’s on Bloomberg or CNBC. And generally, it’s noise. Generally there’s not much information or content in that, but it’s nonetheless positive noise. It is why you should be investing in company “A” “B” or “C”.

Most people don’t notice this because they’re in the business going long securities. I like to say this is the muzak that plays in the background of the investment world. But if you’re a short seller, this is negative reinforcement. You’re being told that one-quarter of your portfolio every morning is wrong. For most people, that becomes a difficult environment in which they continue to think clearly about their investments. There’s a constant drum beat of just negative reinforcement saying you’re incorrect, you’re incorrect.”

A picture I made for Jim Chanos living life as a short-seller