Sir John Templeton said, “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”

Then, this is what Warren Buffett says, “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” In other words, Buffett is urging us to do the opposite of what others do: to be contrarians.

“Buy low, sell high” is the time-honoured dictum, but investors who are swept up in market cycles too often do just the opposite. Here is what Howard Marks writes in his book, The Most Important Thing –

“The proper response lies in contrarian behaviour: buy when they hate ’em, and sell when they love ’em. “Once-in-a-lifetime” market extremes seem to occur once every decade or so— not often enough for an investor to build a career around capitalizing on them. But attempting to do so should be an important component of any investor’s approach.”

Now, of course, being a contrarian is not going to be a profitable strategy at all times. After all, much of the time there aren’t great market excesses to bet against. And even when an excess does develop, it’s important to remember that “overpriced” is incredibly different from “going down tomorrow.”

What is more interesting; it can appear at times that “everyone” has reached the conclusion that the herd is wrong. What I mean is that contrarianism itself can appear to have become too popular, and thus contrarianism can be mistaken for herd behavior.

But then, the best investments I’ve witnessed for myself and others usually have these three characteristics – contrarian, challenging and uncomfortable (though being a true contrarian also feels comfortable). You have to catch falling knives.

As Marks writes in his book…

“It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling – and if our view turns out to be right – that’s the route to the greatest rewards earned with the least risk.”

To put it simply, we can learn a lot by watching the people around us. It’s how we evolved and reached the top of the food chain. But just maybe we should think very carefully about doing the same thing as everyone else.