Andy Kessler wrote in the WSJ this month about the value of being a contrarian. Contrarians have a reputation for being cynics or curmudgeons because they’re out of step with mainstream thinking. And it’s true that being contrarian solely for the purpose of resisting or denying change is generally not helpful. But contrarian thinking can bring a lot of constructive insight.
For quite a few years now, I’ve written about the value of activist investing, which at its best challenges institutional thinking - and, when necessary, institutional reporting - for the benefit of those invested in the business outcome. Activist investors are contrarian thinkers. An effective activist investor sources their own ground truths, creates their own hypotheses from the data, and advocates for those alternative hypotheses. This is true for public company investors and captive IT investors alike. The activist investor in a public company visits company installations, talks to customers, analyzes the footnotes of SEC filings, and develops hypotheses that management may not see or may be choosing not to report. The activist investor in a captive IT investment does the same things: interviews members of the team, reviews code, and analyzes status reports to develop alternative interpretations about the actual progress of and threats to a program or product. The formula is the same: scrutinize the data you’re provided, get some of your own, recontextualize it, and draw your own conclusions. This is critical thinking technique as we were all taught in high school.
But every silver lining has a cloud. The activist isn’t always right. David Einhorn raised questions derived from ground truths and got it right about Allied Capital, St. Joe Company, and Lehman Brothers, but he got it wrong about Keurig. The value of Mr. Einhorn’s contrarian thinking wasn’t in its accuracy as much as it was in offering a fact-based challenge to management’s narrative. The activist articulates a narrative that reframes a situation and draws attention to a risk or deficiency that others don’t see or that management may be obfuscating. The thought exercise is helpful for all investors to re-evaluate what they believe their risk exposure in that specific position to really be.
And it’s important to note that, like anything else, investor activism can be a charade. The public company investor may simply be generating doubt about a company to bolster a short position that can be quickly liquidated. Similarly, the captive IT steering committee member who is also a vendor rep may simply be fostering fear, uncertainty and doubt to drive more services revenue from an existing customer.
Perhaps most important of all, the activist investor isn’t very popular. Contrarian thinking takes us out of our comfort zone, makes us consider difficult possibilities, forces us to have data to support the thing that we desperately want to be true, and reminds us that we’re not as smart as we want to believe that we are. But more banally, challenging the board and management meeting-in and meeting-out wears on people. Contrarian thinkers are irritating. 'tis best that you enjoy dining alone.
Being a contrarian is not the easiest path to take. John Kay once wrote that regulators, if they are not to be co-opted by the regulated, require "...both an abrasive personality and considerable intellectual curiosity to do the job." Contrarian thinking at its best.
Because sometimes, when everybody is too mesmerized or beat down or overwhelmed, or simply can't be bothered, for the sake of everybody concerned, somebody has to ask: “what does God need with a starship?”
