Consensus can be right for a long time — ride it while reflexivity is reinforcing it, but be ready to turn contrarian near the inflection point.
It is not “always go against consensus.”
George Soros says the crowd is right 80% of the time.
“Most of the time I am a trend follower … Only at an inflection point are we rewarded.”
His key idea is reflexivity: market prices are shaped by investor bias, and those prices can then affect fundamentals, creating boom-bust loops. So the contrarian opportunity is when the market’s “prevailing bias” has gone too far and starts to reverse.
Being contrarian for most of the time is dangerous.
Being contrarian in investing for too long can be dangerous.
On the upward trend, if you are against the trend and short the stocks, Tiger Mgmt is a case in point – Tiger Management, run by Julian Robertson, effectively shut down in March 2000, right as the dot-com bubble was peaking.
Robertson was acting like a classic contrarian:
- “These internet stocks are absurdly overvalued.”
- “Eventually fundamentals will matter.”
Both statements were true.
But Soros would likely argue that Robertson fought the trend too early. A reflexive bubble can become much larger than valuation alone would justify.
On the downward trend, if you are against the trend and long the stocks, there is a term called “value trap”.
Sometimes the crowd is right: the business is structurally deteriorating, ROIC is falling, or the terminal value is lower than historical multiples suggest.
For value traps, the key question is not “is it cheap?” but:
What changes the prevailing trend?
In the case of investing and cigar butt investing like what Warren Buffett did in his early days, he bought near/below liquidation value.
In addition, he had an exit path.
Cigar-butt investing often worked through liquidation, tender offers, buybacks, asset sales, control pressure, or mean reversion. It was not “this bad business will become great.”
So Buffett avoided value trap with asset/liquidation value protection + catalyst/control.
That is even harder in China, as there is little space for an activist in China investing.