“So, ironically, if you’re a value investor, if you’re a contrarian investor, you can’t succeed unless you’re willing to look and feel like an idiot for a period of time, until the turn happens. If you’re willing to look and feel like an idiot, you will average in gradually and, at the turn, you’ll have big exposure. That’s the best way to succeed as a contrarian. And it’s very difficult. It goes against human nature.” Rob Arnott–Research Associates
I remember my early 20’s when I developed a deep obsession with reading, much of which was centered on investing and history. The data was very clear that the most successful long-term investment strategy was value investing. When you invest, you are buying something that based on a careful analysis of the fundamentals and future discounted cash flows, trades at a discount to its intrinsic value, and therefore should appreciate over time as the cash flows are realized. The key to realizing those returns are twofold. Firstly, one must be patient as the timing is never predictable, and different strategies go through cycles of outperformance and under-performance. Secondly, one must be willing to look stupid for a time, when other strategies are doing better, as you need to be prepared for the harvest to take full advantage.
We are in a very manic market, where gambling is as high as I’ve seen since the late 1990s. Manias don’t tend to end well. While it can be frustrating to not benefit from these speculations, there is comfort in knowing that we have the most deeply undervalued portfolio in our history. We have investments in profitable companies trading at 20-70% of book value per share, and 3-5 times price to earnings ratios. You don’t get these types of opportunities without disconnects between price and value. These stocks pay very large dividends, unlike the glamour stocks of today’s environment. Those dividends will be extremely valuable over these next 3-5 years, as bond-yields are so immensely low, while overall market valuations are quite high. As the economy starts to normalize a bit, that same rush to buy all these glamour stocks, could turn into a rush to sell, while our undervalued and attractively cash flowing companies, could see quite a bit of inflows come in. That mean reversion can be very lucrative for us and lead to a very strong cyclical run, but we have to be patient for the turn, which we will be.
Morningstar had a great interview with Rob Arnott, where he breaks down in tremendous detail the opportunity in value stocks, which is better than it has ever been. Here is a link if you have some time to enjoy it: https://acquirersmultiple.com/2020/09/rob-arnott-how-to-succeed-as-a-contrarian-value-investor/