Going against the herd is the key principle of Value investment. This is where it differs from the chartists etc who essentially try to “go with the flow”. Going with the flow is great while swimming.
Contrarian thinking is not based on ignoring known facts or just trying to be different / brave. It essentially means stripping out the emotions from the current situation and looking at things in black and white.
Explaining with a demo:
Let me make this clear with an example. I am sure“3 idiots” a popular bollywood flick, was enjoyed by one and all (including me). Most of us will also swear by the “message” of the movie. But on a slightly deeper analysis, the movie shows big fallacies and inconsistencies in its events and incidents.
I will take one: a student commits suicide since the heartless professor didn’t allow him extra time/credits for project submission.
CONSENSUS view: Poor student had to die because of the arrogant SOB Virus (nickname of the teacher). Damn you Virus!!! It was entirely the professor’s fault. Why didn’t he allow extra time / credits for the project? Wow a Quad-coptor!!! (what if incomplete?) He should have awarded full marks to the student for even attempting such a project?? What are lousy grades against a young boy’s life??
Why cant you learn from the netas giving away all those free stuff (free laptops, loan waivers, wi-fi etc) from tax payers’ money and getting praised for their large-hearts?
CONTRARIAN view: Sad & unfortunate that a student commits suicide. He/she should be saved. But was the professor at fault? The student wasn’t in a school project. He was old enough to realise the time required for his ambitious project and match it according to the available time and resources. C'mon we don’t write 2-pages answer for a 2 marks exam. Even a class 5 student knows that much. Common sense no?
How can a project guide allow extra time to a single student?
If he does, would he not be unfair to every other student who had worked hard/sacrificed to submit the complete project on time? It would be like examiner allowing “five minutes extra” to one kid, while every other student are asked to hand over their answer sheets.
Hence, Contrarian view is stripping away the emotions (of young student committing suicide) and realising that the movie is only trying to play with your emotions instead of properly examining the issue.
Business news channels, with their myriad “experts” tend to overplay a particular event zillion of times which does cloud our judgment and makes us act in hasty/emotional response. A value investor must be careful to avoid it.
Caveat: Averaging is usually followed as so called “contrarion” approach. But averaging in a debt-laden company or one which is getting obsolete etc. should be strictly avoided.
Fun fact: Google Bill Miller + kodak.