A Contrarian Approach

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

— Ben Graham

Intelligent investing requires the appropriate temperament as much as sufficient knowledge. The stock market can be approached as a giant casino or as an irrational market that occasionally offers opportunities to purchase sound businesses at great prices. Investors often give in to casino-like behavior, producing casino-like results. Ben Graham wrote:

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble...to give way to hope, fear and greed.

A contrarian approach doesn’t entail taking positions just too be different; however, we find that attractive investment opportunities usually reside in un-crowded places. The ability to buy and sell stocks each second often leads investors and investment managers to engage in value-destroying behavior. We follow Graham’s teaching – “Investment is most intelligent when it is most businesslike.” We attempt to buy wonderful businesses that are offered at attractive prices due to bouts of market irrationality. We recognize that over short periods of time, markets can behave in entirely irrational ways, but that eventually value wins out. We look to own a relatively concentrated stable of attractive, well-managed businesses whose earnings march up over time.

Engaging in such contrarian behavior can result in periods of under-performance. Markets are rational only over the long-term. One value investing institution reported losing 60% of their business because they trailed the market in the late 1990’s by avoiding technology stocks – a call that later turned out to be prescient. British economist John Maynard Keynes wrote:

Worldly wisdom teaches that it is better for reputation to fail conventionally then to succeed unconventionally.

Going against the market, if that is the action dictated by prudently managed independent research, requires emotional discipline and strong conviction. For investment managers, it requires a solid working relationship, trust and confidence with clients.