The Art of Contrarian Investing: Inside The Mind of a Contrarian Investor

Dan Bristow: Can you describe to me, maybe put in your own words, what contrarian investing is, and do you need a certain type of mindset or temperament to be a contrarian? And how does that differ to maybe more traditional, classic styles of value investing?

Zahid Kassam: Yeah, sure. I like to say we zig when others zag and when the market zags, and so I do think you need to be wired a little bit differently. It's the classic being fearful when others are greedy and vice versa. We like to say we're just wired to run towards the burning building, not away from it, and so that's just different. Margin of safety is very important to us, and when we say margin of safety, we're really talking about price paid, so we're very valuation sensitive when we do our work. We care a lot about asymmetric opportunities, and that's really within a wide range of outcome valuation-based framework is the way we think about it. I think the temperament piece that you raise is really important, and I give some examples of being hardwired to run towards the burning building because I do think you have to think differently.

I also think you need to be patient. A home like MFS is a perfect place, a long-term culture that allows you to take that contrarian viewpoint, let the crisis pass, and wait for sunnier days. And so those are a bunch of the things I think about in terms of being contrarian.

What makes the contrarian strategies different from other classic value strategies? There are a couple different areas of opportunity we've learned that we've been better at over time, so it's not just your classic deep value stuff. We do deep value, but when we say deep value, we don't mean the cigar butt type companies, the terminal value risk companies. We're really talking about capital cycle investing, so more supply side, constrained type of investing. We do restructurings, as well, so that gives a little bit of different flavor, more idiosyncratic opportunities to generate good risk adjusted returns.

And then distrusted compounders with the controversy. Sometimes we call them distrusted growth, distrusted quality, and that way there's always something, there's always a dislocation somewhere in the world to take advantage of, and so that you're not just praying that value works. You can generate returns hopefully better through the cycle, as well.

Dan Bristow: So let's maybe just dive into the process in a little bit more detail. How do you and the team go about uncovering investment opportunities, and how do you think about constructing the portfolio?

Zahid Kassam: A lot of it is whatever Mr. Market chooses to serve up to you, and it's whatever others don't want. We start to get interested wherever bad news is already embedded. Ideas will come from the specialist platform, the sector teams, the geographic teams. Ideas might come from other generalists, as well, and I think we use screens a little bit more than others, and that's really just an unemotional way to say, here's a heat map of the world. Here's where all the dislocations are. It might be an illustrative place to look into and figure out where to do more work.

In terms of portfolio construction, it comes back to the risk-reward asymmetry and valuation sensitivity. So the cheaper the valuation is, the more bad news a stock is discounting, the more asymmetric the upside versus downside is, the larger the position size. If I could tackle it the other way, what doesn't get a large position in what we try to screen out, the terminal value risk companies, excessive financial leverage is the enemy of a contrarian investor. It doesn't give you room to wait for the crisis to end for the turnaround plan to take hold, so you really want to give yourself breathing room there. And complexity is very hard for us, as well, very complex businesses, policy risks, these types of things. We try to screen them out in the first place, but they're not really a large part of the portfolio construction at the end of the day either.

 

The views expressed here are those of the speakers. These views do not necessarily reflect the views of MFS or others in the MFS organisation. No forecasts can be guaranteed. 

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