Here’s a great interview with Rob Arnott on The Long View Podcast with Jeff Ptak and Christine Benz. During the interview Arnott provides some great insights into the best way to succeed as a contrarian value investor. Here’s an excerpt from the interview:
Ptak: Widening out, let’s imagine I’m a novice investor, and I’m trying to cut through everything to figure out what really matters to future stock and bond returns. So, can you walk us through how one might have answered that question, let’s say, 30 years ago, and how we’d answer it today?
Arnott: Well, for better or worse, I was in the business 30 years ago. And the notion of growth and value was very much part of the investing parlance; the notion of contrarian investing and performance-chasing was already part of the language of investing. And so, 30 years ago, the assertion would have been if you’re a value manager, you have an edge on average over time. If you’re a contrarian investor, you have an edge on average over time. If you buy what’s newly cheap, on average over time, you’re going to win, especially if it’s been cheap for a long time. The tired cheap stocks that have been out of favor for a long time historically had really demonstrably superior performance.
Those messages are just as applicable today as they were then. Now, what called that whole thesis into question was the tech bubble. Roll the clock forward 10 years. You had said 30 years ago. If you go back 20 years ago, people were saying, “Well, I have some investors say to me, I never want to talk to another value manager as long as I live.”
We’re in the only business in the global macroeconomy, the only major business, where price doesn’t seem to matter to the customer–in fact, where the customer likes things when they’re more highly priced. Imagine if Tiffany’s put out a banner sign saying, “Special pricing 20% up from last year,” and people were bashing down the door to get in. Imagine Cartier across the street had a banner sign saying, “All prices marked down 20%,” and people thought, “Oh, something’s wrong with Cartier. I’m never going to go in there.”
That’s the way people think about investing. And it’s deeply embedded in human nature. Anything that’s given us, joy and profit, we want more of it. And anything that’s given us pain and losses, we want to get rid of it.
So, something that’s given us pain and losses, well, there’s no such thing as a bargain that hasn’t inflicted pain and losses. So, what do I find when I talk to people about asset classes that are out of favor, unloved, or bargains? People will say, “Yes, but … look at this narrative for why it can’t come back.” Emerging markets today, why would you want to go there? We’ve got a trade war. The emerging economies are struggling. The politics is unstable.
We’re a species that is deeply wedded to the notion of narratives. I’ve heard it described that narratives are what differentiates humankind from other animals, an interesting thesis. But you don’t get a bargain in the absence of fear.
You don’t get a bargain in the absence of pain and losses inflicted on the way down, and you don’t get fear in the absence of a narrative for why things are going to get worse before they get better. In fact, that narrative is often true. Things do get cheaper until they don’t. And nobody knows where that turn is.
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.
You can listen to the entire interview here:
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