The Courage to Be a Contrarian
Genuine bargains exist because most investors avoid exactly the situations that produce them — being early looks identical to being wrong.
Klarman argues that securities offering a genuine margin of safety don't appear randomly — they cluster in situations most investors actively avoid: complexity, uncertainty, bad recent news, forced selling, or simply unpopularity. A security is rarely cheap because everyone likes it and no one has noticed; it's cheap because something about it is making other investors sell or stay away, often for reasons that have little to do with the business's actual long-term value.
This creates the book's central psychological challenge: acting on this kind of opportunity requires buying exactly what feels uncomfortable, often while the price continues falling for a while after purchase, with no way to distinguish in the moment between "early and eventually right" and "simply wrong." Klarman treats this discomfort as an unavoidable, permanent feature of the strategy, not a sign something has gone wrong.
| What creates the unpopularity | Why it can cause genuine mispricing |
|---|---|
| Forced selling (index removal, fund liquidation, margin calls) | The seller isn't selling because of the business's value — the selling pressure is indifferent to price |
| Complexity (spin-offs, unusual capital structures, bankruptcies) | Requires real analytical work most investors won't do, leaving less competition for the bargain |
| Recent bad news, even if temporary or already fixed | Sentiment often lags the actual resolution of a problem, keeping a price depressed after the real risk has passed |
A natural response to this discomfort is to look for more certainty before acting — more information, more confirmation, a clearer signal that the price has bottomed. Klarman's argument is that this instinct, however reasonable it feels, is self-defeating: by the time a contrarian bet has enough confirming information to feel comfortable, the price has typically already moved to reflect it, and the margin of safety that made the opportunity attractive in the first place has shrunk or disappeared.
A company faces a lawsuit that depresses its stock price for a year while the outcome is uncertain. An investor who waits for the lawsuit to actually be resolved before buying gets certainty, but by then the stock has typically already re-rated upward to reflect the resolution — the discount that existed specifically because of the uncertainty is gone. The margin of safety was only available during the period of genuine ambiguity, which is exactly the period that felt most uncomfortable to act in.
- Genuine bargains cluster in complex, uncertain, or unpopular situations precisely because those conditions keep most other investors away — competition for a mispriced security is lowest exactly where it feels least comfortable to look.
- There is no reliable way to distinguish "early" from "wrong" in the moment a contrarian position is losing money — Klarman treats this as a permanent, unavoidable feature of the approach, not a signal to change course.
- Waiting for more certainty before acting is self-defeating as a general rule — by the time genuine confirmation arrives, the price has usually already moved to reflect it.