In a financial ecosystem that is increasingly bombarded by information overload, investors often give into short-term market hysteria. However, contrarian investing emerges as a compelling strategy for investors who are aiming for long-term capital appreciation, and thus form the ability to cut out the short-term noise. By definition, contrarian investors swim against the prevailing market tides, making investment decisions that are often in stark contrast to the general market sentiment. This approach doesn’t just shield investors from the cacophony of ‘noise’ ubiquitous in modern markets, but it also positions them uniquely for substantial long-term gains.
How does one cut out the noise?
In today’s hyper-connected world, investors are inundated with an unrelenting stream of data, news, and opinions. This barrage, while informative, often morphs into ‘noise’ – which essentially becomes a flurry of distractions that lead investors to make impulsive decisions fuelled by fear or greed. Contrarian investing, with its emphasis on independent analysis and deviation from popular opinion, inherently demands a disconnect from this clamour.
Contrarians rely on thorough, objective analysis rather than trending headlines or hot tips. They delve deep into financial statements, assess market cycles, and often engage in a level of due diligence that most investors overlook in the rush to follow the hottest trends. This intense focus on fundamentals and a willingness to embrace unpopular positions helps contrarian investors sidestep the emotional rollercoaster of the markets and avoid the pitfalls of herd mentality.
A perfect example of a Contrarian are the fund managers at Contrarius Investment Management Limited (Contrarius). At Contrarius they follow an investment strategy/philosophy that is unpinned by four core principles:
Valuation-based principle: Their investment strategy prioritises stocks believed to be trading below their intrinsic value, buying when they’re undervalued and selling when they reach what is believed to be their true worth. This approach accepts that market recognition of a stock’s true value can be unpredictable, and actions based on intrinsic valuation might seem premature. The focus is on avoiding permanent losses and instead capitalising on discrepancies between market price and intrinsic value.
Contrarian: Rather than traditional value investing, which might focus narrowly on stocks with low price-to-earnings or price-to-book ratios, their philosophy has a contrarian bend. It considers the intrinsic value but avoids “cheap” stocks that carry high earnings or price risk due to cyclically high earnings. The approach recognizes that a low market price doesn’t necessarily mean true value, especially if it reflects cyclically high earnings rather than sustained growth potential.
Long-term Approach: Their philosophy is geared towards long-term wealth creation, with a typical investment horizon of five years or more. It emphasises that short-term market prices are influenced more by sentiment and immediate earnings outlooks, whereas true value reflects long-term business prospects.
Fundamental Research: Investments are chosen based on detailed, proprietary ‘bottom-up’ research to determine a company’s underlying intrinsic value. This approach isn’t swayed by short-term market sentiments but focuses on comprehensive understanding and analysis of the business itself, how it generates cash flows, and in turn how it creates value for their investors.
This four-pillar approach has led to consistent long term outperformance, as depicted in the image below.
In summary, the investment philosophy is a long-term, value-driven strategy that diverges from traditional value investing by adopting a contrarian approach. It’s grounded in meticulous research to assess intrinsic value, looking beyond short-term price influencers, and focusing on the fundamental, long-term worth of a business.
How does this lead to long term capital appreciation?
Contrarian investing is not about being contradictory for the sake of it; it’s about recognizing and capitalising on opportunities that the majority overlooks. Often, this means buying when others are panic-selling and finding value in assets that the market has irrationally undervalued. This approach ties in with one of the oldest principles in investing: buy low, sell high.
Market overreactions – to both the upside and the downside – present opportunities. During market downturns, when most investors are offloading their assets, contrarians are on the hunt for undervalued stocks. They understand that market sentiment can be overly punitive, and what seems like a bear market could actually be a treasure trove of opportunities with robust long-term prospects.
Similarly, in a bull market, contrarians are cautious of overvalued stocks that the market has pushed to unsustainable prices. They are not swayed by the euphoria and are ready to sell or even short sell if their analysis indicates a bubble or irrational exuberance.
This counter-cyclical approach to investing can be incredibly rewarding, but it requires patience, courage, and substantial research. The fruits of contrarian investments are often not immediate. It takes resilience to withstand the pressure of going against the grain, and the true payoff of contrarian positions usually materialises in the long run.
The Risks and the Rewards of following this approach.
Contrarian investing, while potentially lucrative, is not without risks. Unpopular decisions can sometimes be wrong, and market trends can persist much longer than one might anticipate. Furthermore, an asset that seems undervalued might be cheap for valid reasons. Thus, a successful contrarian investor needs to couple their convictions with rigorous research and sound risk management techniques.
However, for those who do their homework and have the fortitude to bear with the interim discomfort, the rewards can be significant. History is replete with examples of successful contrarian investors, such as legendary figures like Warren Buffett and Howard Marks who have time and again demonstrated the long-term value of investing based on intrinsic value assessment and personal conviction rather than popular sentiment.
At InvestLife we believe that a contrarian view has a place in our portfolios as it offers clients a unique set of returns. We acknowledge the risks posed by investing in such a manner and we do not suggest this fund manager to clients who are more risk averse than others. The Contrarius Global Equity management style is a big draw card for us. We believe in taking profit, and not just letting the value of a holding run in perpetuity. Contrary views on value investing, that does not focus on cheap opportunities but rather on good quality businesses through a unique and contrarian method of value investing. This management style works as a great diversifying in comparison to Ninety One Global Franchise and Lindsell Train.
The image below nicely depicts how there is a low correlation between Contrarius and the other two long term value investment funds in our preferred portfolios for clients.
The low correlation refers to how two funds’ returns and asset allocations match versus each other. Ideally you want a very low correlation to ensure that you do not have a scenario play out where all the funds within a portfolio perform poorly at the same time. This can ensure returns are spread across the portfolio in such a way that long term capital preservation and growth can be maintained.
In conclusion, in an investment landscape that often resembles an echo chamber, the contrarian approach offers a refreshing alternative. It encourages intellectual rigour, emotional discipline, and a steadfast focus on long-term capital appreciation. By cutting out the noise and looking where others overlook, contrarian investors place themselves in an enviable position to seize opportunities that the herd misses. In the end, while the path of contrarian investing is less trodden, it is one that leads discerning investors toward sustainable growth and impressive long-term returns.
