Are You A COIF?
- Posted by DynamicHedge
- on January 10th, 2011
Being a contrarian means having a healthy dose of skepticism. It’s necessary in the trading world. Contrarians don’t take things as they come. They don’t chew and swallow every morsel spoon fed to them by the media. They don’t blindly act on every analyst research note. In a world where every thesis can be slanted with near-ideal scenarios, few roadblocks to success, and a long-term trend in their favor, a critical mindset is required to temper all the BS.
Great contrarians are invaluable team members and collaborators. They force you to consider counter arguments by highlighting perspectives you may not have considered. They tend to dig deeper in their analysis than average, especially when the consensus is heavily against them. This contrarian persistence has uncovered information that may have never seen the light of day (see Enron, WorldCom, etc.). They can be inspiring in their fearlessness, conviction, and bravery, armed only with their due diligence and intellect.
Not all are contrarians are created equal. In my experience I’ve come across three types of contrarian:
- The Natural Contrarian.
- The Trained Contrarian
- The COIF
The Natural Contrarian has skepticism and intellectual curiosity from birth. They have a competition in them that drives them to “take the other side” when they know they’re right. One of the defining characteristics of a Natural Contrarian is that they know where to pick their battles. They work hard to confirm or disprove their thesis and aren’t afraid to walk away when proven wrong. Contrarian opportunities are intuitively obvious to them, and being right in the face of the consensus comes naturally.
The Trained Contrarian is different in that skepticism is not second nature to them. They force themselves to be more skeptical and go against their naive and trusting tendencies. They can become even better at spotting contrarian opportunities than the natural. They work much harder and dig deeper into their analysis than the naturals — not only to prove their thesis, but to convince themselves.
A terrible condition exists for those that take contrarianism too far. They make it a part of their identity and wear their cynicism as a badge of honor. The identity of being a skeptic determines how they view all events in life and business. Give them any consensus and they will fade it. Present them with any situation or opinion and they will argue against it. They see the world as perpetually incorrect.
New term: COIF, (Contrary Opinion Indifferent to Fact) (Pronounced kwäf)
The main difference between contrarian and COIF is that the COIF doesn’t hold the same standards for logical and intellectual analysis to see if they’re correct. They carpet bomb cynicism because their internal contrarian gauge is uncalibrated. The kiss of death is when COIFs have been correct enough times by simply betting against others that they believe that “betting opposite” is all that is required for success.
Contrary does not equal correct, although it can appear so in the rear view mirror. COIFs appear right more than wrong because they are unafraid to take bold stands against popular modes of thinking. Being right about something as serious as a financial crisis can appear critical and timely after the fact if the observer doesn’t realize that they are dealing with a COIF. Being correct about big events is addictive and being a COIF offers a high probability of doing that. If you bet against everything you will be right about many things. More importantly you will be right about things that many others were wrong about. They will wonder what the COIF saw that they missed, and to them the COIF looks like a hero/genius.
Contrarianism needs to be tempered with fact. Cynicism can only masquerade as intelligence for so long. There is a time to be a contrarian and, believe it or not, a time when the consensus is actually right. You do NOT need a COIF on your team, because they’ll never be able to tell the difference.
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DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More