“Will Growth Investors Have the Nerve to be Contrarians?”(1) was the question posed by Richard Bernstein Advisors (RBA).(2)
Buying “growth stocks” and anything expensive worked brilliantly in 2020. It’s human nature to take a victory lap and keep doing what has worked so well recently. So, this question from RBA probably seems peculiar, especially since “contrarian” and “growth” don’t usually go together. RBA continues:
“Do good growth investors have the ability and nerve to actually sell those hot stocks at the peak of their performance? That seems to be the key question investors are not asking for 2021. It’s always easy to spot a growth stock, but many growth investors will likely rationalize underperformance and continue to hold positions when technology fundamentals deteriorate…2021 could be the year during which very significant rotations from growth to value, from large to small, and from secular growers to cyclical growers occur because it is highly likely the profits cycle will rebound in 2021.”
We all fall into the trap of reading and listening to content that tends to validate what we already believe. It’s a form of confirmation bias – the tendency to seek out and focus on information that supports existing beliefs. Strong identification with those beliefs, and blanket rejection of contrary information, creates major blind spots. This behavior seems especially acute today in society today – maybe we’re seeing all-time highs in confirmation bias!
This tendency can be very costly in business and investing. I find that the best businesspeople and investors deliberately attempt to counteract confirmation bias by seeking out information which may challenge their beliefs. They willingly adopt a stance of “please show me where I’m wrong.” They allow themselves the space to accept and evaluate new information and update mental models as warranted. As a result, their attitude is one of strong beliefs, loosely held.
RBA’s comments are not just a warning to growth investors. They’re a reminder that being contrarian is not just about buying the things everybody hates – but also selling the things everybody loves.
Perhaps most importantly, they’re a timely reminder about falling in love with our own beliefs.
Richard Bernstein Advisors (RBA) is an investment manager that takes a “top-down” approach to investing using macroeconomic analysis. It’s an approach that’s very different to our own – which we appreciate!