Timeless Investment Classics, Part VIII: The Art of Contrary Thinking by Humphrey Bancroft Neill

by: Joseph L. Shaefer

This is the 8th of 10 reviews of what I consider the top 10 Timeless Investment Classics that I keep within arm’s reach of my desk. My only criteria besides brilliant investing insights and accessible writing that still speaks to us today, is that, to be considered a “classic,” the book must have stood the test of time. These qualify; they were published as far back as 169 years and as recently as 43 years ago. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since... (Of course, if you want to buy my book as well, who am I to discourage you?)

In chronological order of their original publication, here are the preceding 7 reviews:

  1. Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackey (1841)
  2. The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)
  3. Reminiscences of a Stock Operator, by Edwin LeFevre (1923)
  4. Security Analysis, by Graham & Dodd (1934)
  5. The Battle for Investment Survival, by Gerald M. Loeb (1935)
  6. Where Are the Customers' Yachts?, by Fred Schwed, Jr. (1940)
  7. The Intelligent Investor, by Benjamin Graham (1949)

And now #8, The Art of Contrary Thinking, by Humphrey Bancroft Neill, written in 1954. Some commenters have remarked how many of the books on this list changed their investing lives, and a few added other favorites. One that regularly comes up is Contrarian Investment Strategy: The Psychology of Stock Market Success, written by David Dreman in 1980, and updated as The New Contrarian Investment Strategy in 1982, after his advice to buy bonds in the earlier book had proven devastating to those following that advice. I prefer the later edition, though neither book qualify as having survived at least two generations of investing. But did you know the book that all of us who fancy ourselves contrarians owe our approach to, whether we admit it in print or not, was actually published 56 years ago – and 28 years before Mr. Dreman’s fine work in 1982?

The Art of Contrary Thinking is the seminal work in this area. Have you heard the quote, "When everybody thinks alike, everyone is likely to be wrong." That’s Humphrey Neill writing about investing more than a half-century ago. Do not turn to this slim little volume if you are seeking a guide to building a contrarian’s dream portfolio. Look to the other, more recent purveyors for that. Mr. Neill’s writing style is often less than engaging and the book is comprised of a number of short essays about contrary thinking originally published by him elsewhere. It’s a compendium, albeit slight, and that makes for some repetition of the same idea; but it is such an important idea that maybe the repetition is a good thing!

If I had to distill the entire book to just one phrase, it would be Humphrey Bancroft Neill’s own:

The crowd is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold.

One can truly make a key piece of one’s reallocation efforts based upon those few simple words. If that sounds like something another, more current, sage might say, it’s probably because it flows from Mr. Neill’s original thinking on the subject. So when I hear Warren Buffett say, “Be fearful when others are greedy and greedy when others are fearful,” I hear the not-so-distant echo of "The crowd is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold."

I have featured many authors in this series who recognized the value of understanding investor psychology. That’s because understanding and evaluating for yourself the sentiment of the crowd is key to successful investing. Many of our selected authors, certainly including Mr. Neill, have been discussing what the academics today call “behavioral finance” before such a thing became a part of our academic lexicon.

The primary premise of the book is stated quite clearly in the first few pages: “Human behavior is fully as important as, if not more important than, statistical behavior." Mr. Neill goes on, in ensuing essays, to talk about not just “that” popular opinions are often wrong, but why this is so. The historical examples he provides are further reminders that “this time it’s different” is a hollow phrase uttered by those who do not study history and are therefore doomed to repeat it. And, even though it is sometimes a frustrating read to today’s readers, the genius of this book lies in the quiet insights and pieces of market wisdom spread randomly therein (perhaps too randomly for some!). Stick with it, however, and I think you’ll be rewarded with a reflective read of Humphrey Neill’s views on the value of patience, the assessment of risk, and the importance of asking “why?” at regular intervals during the investment process. Do this and you will become a better investor.

Finally, as one devotee of contrary investing wrote on the subject:

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. – Sir John Templeton

Disclosure: No positions mentioned.

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