expense reduction and Wall Street loved it. The stock soared. More
recently, though, as the market continues to reach new highs, the
stock price of this company has lost more than 50 percent of its
value. The market recognizes that this company’s competitors are
not only cutting costs but also taking chances with new strategies
for growth. These competitors are selling at twice the multiples.
Richard Pzena, from Sanford Bernstein, provides a good dis-
cussion of investors’ attitude toward risk. He addresses the prob-
lem of contrarian investing and how much courage it takes to really
be out of favor in the market. Because being out of favor is so
painful, he believes that the market operates efficiently by reward-
ing people for taking on that pain. In other words, if you buy the
market “dogs,” the stocks that are cheap because everyone hates
them, then you will be rewarded. The stocks will go up and you’ll
outperform. However, there is usually a period of time—several
quarters or more—where you will appear to be an idiot. Even the
family dog will wonder if you have meatloaf for brains. As Pzena
says of these contrarians, “Sometimes they will feel very lonely.
Everyone, their clients, their peers, the press—will question their
sanity. Such pressure keeps their ranks thin.” Pzena, well aware of
the emotional pressure on investors to conform, has helped struc-
ture the culture and reward system at Sanford Bernstein to encour-
age contrarian thinking.
This is why one of my tips—“Ask for help”—involves building
the right support system around yourself, to encourage risk taking.
But first let’s examine a thinking pattern that severely limits break-
through thinking... after a quick exercise to reveal your tolerance
for risk.Exercise
How much risk is right? This quick quiz will give you an idea of
where you fall on the spectrum.“R” Is for Risking Discomfort 17914-25 ware 179 1/19/01, 1:15 PM