Yesterday, I attended a fund manager lunch and presentation.
The fund manager is a deep contrarian stock picker, who has outperformed the market by an average of 3% per annum since setting up in Australia in 2006.
It’s an enviable record. Even so, when I spoke with him after the presentation he wasn’t sure whether to attribute the outperformance to luck or good management. He thinks he needs another 10 years of results to make a definitive call.
That just goes to show the long term outlook these guys have.
My guess is the outperformance isn’t due to luck. Rather, it’s precisely because of this focus on the long term. Short term factors have a much larger impact on stock prices than they should. If you have a long term view, you can take regular advantage of these short term mispricings.
The trick is to be able to see the mispricing rather than worry or panic about the short term issue.
After the fund manager discussed their contrarian philosophy and talked about some of their biggest positions (Woodside Petroleum and QBE Insurance) it was time for questions.
The first one was sceptical about the QBE purchase. The second questioner asked for an opinion on bitcoin and blockchain!
Maybe you don’t immediately see the irony, or maybe you do…
But I thought it was hilarious that a fund manager who has made a success out of investing in assets that seemingly everyone hates, received two questions from financial planners that effectively proved his point.
That is, QBE is worth looking at purely because of the general scepticism surrounding its business. It’s been a serial disappointer over the past few years.
And asking a contrarian, deep value investment manager for an opinion on bitcoin, arguably the hottest investment in the world right now? Really?
It just goes to show that most of us are not wired for investing.
In the market, long term outperformance comes with finding good value, and good value comes by finding stocks that are out of favour.
Buying out of favour stocks is hard for the average investor. As I said, we’re not wired for it. We’re wired for conformity and groupthink. In evolutionary terms, wandering too far from the tribe was a recipe for an early death.
Humans, in general, seek safety in numbers. That promotes survival, and evolution is all about efficiency and survival.
What would you feel more comfortable doing — or telling your friends about — having a few bitcoins in your newly created digital wallet, or buying the basket case global insurer QBE?
Even if you’re leaning towards QBE, you’re going to keep pretty quiet about it, right?
I am the sort of person that would lean towards QBE over bitcoin right now. Although having said that, it’s still in a downtrend and therefore doesn’t yet warrant a buy according to the Crisis & Opportunity methodology.
The reason I have that rule is that I know out of favour companies can stay that way for some time. I would rather wait for the worst to be over than get in too early.
Anyway, you get my point. Buying a stock that few are interested in seems like a better way to achieve long term returns than by jumping on a massively hyped up new asset class.
The other point to note about yesterday’s lunch was a minor but important anecdote from a financial planner that was there. I asked whether his clients were getting more comfortable with the stock market now that it had been going up for a while.
He said that while it was easier to get people to invest now, many were still coming to him with term deposits, wanting a better return but for no extra risk. He said many were still worried about another crash. The emotional scars of the GFC run deep.
Which is why the market will keep moving higher…
It might not do so immediately, but the psychology of the market is certainly not at the point that you should be concerned about a major crash.
With the market set to have another good day today, the ASX 200 is once again knocking on the door of 6,000 points. This has been an area of strong resistance. The market hasn’t been able to break through this level since the GFC.
The chart above shows the index moving back towards the highs of 2017, which were only around 50 points below the highs of 2015. If we crack though 6,000 and sustain the move, then it’s off to the races. That will see a lot of ‘cautious’ money move off the sidelines, which will push prices higher and stretch valuations.
Will that happen soon, or will the market correct again before making another assault on 6,000?
No one knows of course, but if the reasons behind any pullback look like short term profit taking, then buying at that point would be a good long term strategy.
Editor, Crisis & Opportunity