Contrarian thinking

I was brainstorming with Doug Scott, CEO of Potential and one of the more original thinkers I know. We generally spend a bit of time trading niceties about the UK and where things are headed, and then deep dive into some of the key issues we have top of mind.

One of the key issues we grappled was the timing of contrarian thinking. We both are fans of the discipline and have applied those strategies to varying degrees of success, in different ecosystems and know others that have used the discipline, like Dave McClure of 500 startups, Jon Bradford of Motive Partners, and Paul Smith of HyperLoop.

Peter Thiel made the famous contrarian endorsement of Trump when he was just a candidate. Thiel was universally derided by the Silicon Valley community, who almost all supported Clinton, and then by a large part of the Democratic Party and its supporters. But when Trump actually won the presidency, Thiel's opinion became accepted by the mainstream, and even lauded as visionary for his foresight.

George Soros is another famous contrarian for his short against the British pound, which saw him realize $1 billion on the deal. But after this deal, Soros hasn't been particular well known for his investor prowess, unlike his previous bet.

Looking at Thiel and Soros, does it matter that someone is philosophically contrarian or that one is circumstantially contrarian? There is a philosophical argument about this, but that aside, is it economically better in the longer run to be one or the other? That really does seem to be the crux of the matter.

In that light, it does seem to be net positive to be circumstantially contrarian from an economic perspective. The upside is that you make a big bet, got in cheap when the market wasn't looking, and rode the wave to success. The downside is that you look like an ass and a crackpot; in that case, you have the latitude to make another contrarian bet, and so on until you get success.

But what is the logical limit of contrarian thinking. The very definition of contrarian thinking is that it is counter to what the majority believes. Sometimes the contrarian thought is not accurate, so the thought passes by and no one notices. But what happens when a belief becomes accepted by the majority, then what recourse does the contrarian have?

The conclusion I have come to for now is that contrarian thinking behaves like a sigmoid function. What I mean is that (per the graph), in the beginning a contrarian makes very little impact (Y axis), along time (X axis). But as time progresses, the impact accelerates (ie the marginal impact increases), and then impact stabilises with every input time, which essentially means that it starts becoming accepted as mainstream. Contrarian thinking becomes indexed, or mainstream, when the marginal impact of time decreases again, or the top right of the graph.


At this point, there are two courses of action: to allow things to become indexed or mainstream, or to become contrarian again and embark on a new sigmoid function.