I wrote about my notes of Howard Marks (Trades, Portfolio)’ talk at Google in my last article. During the Q&A session, Marks pointed out something I found out extremely interesting after reading my notes again. When talking about his early experiences of raising money for Oaktree, he pointed out the following facts:
“You had to find a few people and say to them 'you should do this because nobody else is doing it, so the prices are languishing'. After it works for a while then the rest jump on board. It’s interesting that in America, people intuitively understand the concept of contrarianism, but in many other cultures people will have a hard time understanding contrarianism.”
I don’t know how many readers of this forum are not from U.S. Charlie Munger (Trades, Portfolio) talked about how an asset manager just indexes the U.S market and invests the majority of the money in East Asia, where the market is much more inefficient. I’ve been advocating global investing for a while, but I rarely thought about the potential inherent merits of being a contrarian in a culture where unity is much more highly valued.
In the epilogue of Guns, Germs, and Steel, a great book recommended by Charlie Munger (Trades, Portfolio), Jared Diamond made the following observation:
“China’s frequent unity and Europe’s perpetual disunity both have long history. The most productive areas of modern China were politically joined for the first time in 221 B.C. and have remained so for most of the time since then. China has had only a single writing system from the beginning of literacy, a single dominant language for a long time, and substantial cultural unity for two thousand years. In contrast, Europe has never come remotely close to political unification……Europe still has 45 languages, each with its own modified alphabet, and even greater cultural diversity. The disagreements that continue today to frustrate even modest attempts at European unification through the European Economic Community are symptomatic of Europe’s ingrained commitment to disunity.”
There are many factors affecting the unity and disunity of China and Europe such as the shape of the coastal line and the way the geological axis is tilted, which you will find fascinating if you read the whole book. But that’s out of the scope of this discussion. So what if China is more unified and Europe is disunified? Then what?
It is the disunified Europeans that founded the U.S, so while the U.S is called the United States of America, the society itself is not as unified as the name suggests. This leads to the encouragement of individualistic thinking, which creates a more contrarianism-friendly environment, which makes it easier to be a contrarian in the stock market, relative to a culture that frowns upon deviation from the norm. This leads to an inherently more competitive market because market inefficiency caused by herding error is more likely to be exploited.
Then we go down a level of disunity, such as the individual countries in Europe. While there’s disunity in Europe as a continent, the disunity in each country is to a lesser degree than the U.S, but more than the eastern countries. It is probably still contrarianism-friendly, yet not as friendly as the U.S. I think this partly makes the case that the European market may not be as efficient as the U.S market.
China, Japan, Korea and Hong Kong, on the other hand, are much less contrarianism-friendly. China and Japan may be worse than Korea and Hong Kong. This unity and disallowance of deviation from the norm is deeply rooted in the eastern society. The risk of losing face is too high to justify a contrarian opinion. Combining the cultural biases with the super social proof bias caused by a very large population base (especially considering the population density), it is easy to imagine that:
- Market inefficiency is likely to be more frequent and may be more extreme.
- Because it is harder to be a contrarian, it is logical that the market inefficiency is less exploited.
- If the market inefficiency is less exploited, those who are willing to explore market inefficiency will be rewarded more.
I won’t comment on India because on one hand, I am aware that India is not as unified as the Eastern Asian countries but because the population base is so large, social proof can be extremely powerful. I’m not sure the degree to which the Indian society on the whole, tolerate contrarianism. Maybe those readers who are familiar with the Indian culture can share your insights.
