Scott Adams, of Dilbert fame, notes the fine line between “crazy and disciplined.” Adams writes:
Warren Buffett modestly says he was lucky that his brain is wired in a way that suits the times. A few hundred years ago he would have been the crazy peasant who was always talking about ways to increase crop production if only he had the capital.
It often seems that the best investors (and traders) seem to obsessed with their work.* Another example of was recently in the news. In Vanity Fair, Michael Lewis profiles Michael Burry who was among the first portfolio managers to both recognize and bet that the subprime mortgage market was dangerously out of whack. What maybe more interesting for our purposes is why Burry uncovered this market opportunity. Lewis writes:
People with Asperger’s couldn’t control what they were interested in. It was a stroke of luck that his special interest was financial markets and not, say, collecting lawn-mower catalogues. When he [Burry] thought of it that way, he realized that complex modern financial markets were as good as designed to reward a person with Asperger’s who took an interest in them. “Only someone who has Asperger’s would read a subprime-mortgage-bond prospectus,” he said.**
The point being that Burry’s particular cognitive processes made him able to focus on the many details of subprime that other investors had happily glossed over. This single-minded focus has served both Buffett and Burry well. One could argue that having some diminished capacity to read the emotions of others may in fact be valuable in success as a contrarian investor.
Some investors refer to contrarian investing as a phenomenon that takes advantage of reversion to the mean. In short, cheap stocks become more valued by the market and expensive stocks less so. For our purposes a contrarian investor is one who takes a position in the market contrary to overwhelming popular belief.
To hold that sort of position, like shorting subprime mortgages when every one thinks the value of real estate can’t go down, is an emotionally taxing proposition. You are constantly being bombarded by news and opinion that you are in fact wrong. However for those individuals who are less able to read emotional cues this contrarian investment process may come more easily.
This discussion of compulsion and dedication need not be limited to contrarian investors. By extension this sort of analysis could cover other styles of investing. For technicians it may be the ability to scan and analyze more charts. For quants it may represent testing more variables and writing better code. The point being that great investors often demonstrate a level of dedication to their chosen process.
This is not to argue that Asperger’s-like personality traits are necessary to investment success. The takeaway is that when you invest you are in a real sense competing with those individuals who do have obsessions (healthy or not) with the markets. The question you need to ask is whether your level of research, analysis and discipline can match theirs. If it can’t, you may want to re-think your investment plans.
*For the purposes of simplification I am using interchangeably: obsession, compulsion and dedication.
**Hat tip to Heidi Moore and Epicurean Dealmaker.