Failing Unconventionally on Wall Street

In Glen Arnold's book, The Financial Times Guide to Value Investing: How to Become a Disciplined Investor (2nd Edition), Arnold discusses how failing unconventionally on Wall Street can cause you to lose your job while the consequences of failing conventionally are minimal. As he put it, "No one will fire you for buying IBM." You get into trouble when you lose money going against the crowd and failing - whether its trading in unfavored small-cap stocks with low liquidity or trading in exotic instruments that few understand.

So how often do you outperform trading in the conventional, popular stocks? Rarely. The bottom line is people can survive on Wall Street through following popular opinion and succumbing to mediocrity. Equity analysts and economists who forecast stock prices or trends in the economy tend to cluster their predictions towards some mean value. It's rare to see the brave analyst who steps outside of that cluster and becomes the outlier, sitting by him or herself. The fate of those who do make extreme calls falls into two categories: stardom or defeat.

Meredith Whitney's career has skyrocketed after accurately upgrading and downgrading financial stocks in the midst of the crisis. The 90% of the other analysts who missed the signs, however, clustered around a mean and were safe in their protective cushion. They all get it wrong and how can you fire all of them? The ones who got fired were the ones who lied on the other extreme, upgrading stocks at exactly the wrong time when the 90%  had hold ratings.

Although the equity analysts are just one example that I may have taken it to an extreme, most asset managers know they are at risk of massive withdrawals and possible closure of funds if they fail unconventionally. My question is as follows: Is this the correct type of environment to have in Wall Street's financial firms? Is it acceptable to have mutual fund managers rush in to buying Google at the end of the quarter just so they could claim it was in their portfolio? In my opinion, the threat of losing your job is a big incentive to accept mediocrity but it eliminates the creative spark necessary to take advantage of opportunities in the market. On the other hand, this type of pressure is a form of risk-control to ensure people don't step out of line and recklessly lose client's money. If I'm ever fortunate enough to work in asset management for a financial firm, I'll be forced to wait for the perfect opportunity to make a contrarian move where I know I'm absolutely right but if it that opportunity never presents itself, well, I'll just be a number in the averages.