These attributes lead to a general tendency by market participants to chase the next big growth story while neglecting businesses that are facing temporary set-backs or undergoing periods of change and transition. It is at this point of change and consequential doubt that the market is most vulnerable to mispricing a company’s true prospects.
Adopting a contrarian approach to investing means that we can periodically face trying times, because there can be a lag – months or years – before the market recognises the intrinsic value of out-of-favour companies. Strong discipline is needed to adhere to the investment thesis and remain unperturbed by market volatility in both good times and bad. We minimize “case drift” by ensuring that each investment is supported by a written report that lays out the investment case in detail. Note, however, it is equally important to recognise when an investment case is not playing out due to altered fundamentals in the business. In the event of a company failing to meet our predetermined performance milestones, the shares are likely to be sold.