Contrarian by Nature

All investors agree that investment success depends simply upon buying low and selling at a higher price. But in practice, this can be very hard to achieve.

In order to buy low, you have to buy when others are not interested. To sell at a higher price, you must sell when others are buying. Psychologically, it is very difficult to stand at odds with accepted wisdom. Indeed, many studies suggest that people prefer to be wrong as part of a crowd, rather than right on their own. The social opprobrium that arises from holding a non-conventional viewpoint and the fear of being proved wrong when everyone else is right are powerful forces that tend to enforce herding behaviour. (This is expressed by the cliché, “You don’t get sacked for buying IBM”. Even if the decision is the wrong one, you’re not likely to be blamed if everyone else is doing the same thing.).

Value investment helps to automatically guide investors away from the mentality of the herd. By investing only in those companies that are substantially undervalued, the value investor automatically concentrates on companies that, for whatever reason, are currently out of favour. At the same time, by holding companies only whilst they represent good value and by continually searching markets for more undervalued companies that could replace existing holdings, value investment helps to ensure that these stocks are sold once their share prices start to diverge from the realities of their business situations.

These factors help to reduce the danger of the boom and bust cycle and can even turn it to the value investor’s advantage. The strict focus on values helps to inform the value investor of when to buy stocks that have been irrationally marked down as a result of fear. That same focus helps the value investor to ignore market euphoria and sell once the price starts to lose touch with the intrinsic value.

Value investment cannot pinpoint the bottom or the top of the market. But by applying strict value criteria and by looking for companies that are viable and sustainable businesses, the value investor maximises the chance of doing what every investor should be doing – buying low and selling at a higher price level.