The Art of Contrarian Investing: A Distinct Approach To Value

Dan Bristow: How do you think the MFS investment structure and global research platform plays into this style of investing? And maybe compare that to other firms that only focus on value investing?

Zahid Kassam: Yeah, sure. I mean, before I joined Contrarian and I was on four sector teams and I covered stocks in multiple geographies. So I feel like I have a little bit of the inside scoop here for sure. And I think I'm a living, breathing embodiment of the research platform. And so the way I think about it, I mean I think what I've learned over time is that the core work is very much the same. How does the business make money? Looking at the valuation, digging through the historical financials to see why they've moved through the cycle. In what ways competitive landscape, that core work is all the same. Our work list and our funnel of where we spend our time might look a little bit different because we are looking at where everyone else is running away from and where the bad news is already in the market.

So I'd say the front point is maybe a little bit different. And then the end point, we do tend to work on broader ranges of outcomes than a lot of other investors, and that's really where a lot of the risk-award asymmetry work comes in at the end. So kind of at the concluding part, I'd say when I think, I mean just having specialists all over the world, sector specialists, boots on the ground is just a huge competitive advantage. I think about markets nowadays in particular are moving so fast, stocks are moving so quickly, a growth stock is very quickly becoming a value stock is very quickly becoming a restructuring stock. Everything is moving so fast. And so to have a specialist team that enables you to hit the ground running is just a huge competitive advantage when panic strikes in the market to be able to move quickly on an individual security, it's just a huge advantage.

Dan Bristow: So you've mentioned margin of safety is something that's critical when you're starting a position in the portfolio. Why is margin of safety so important?

Zahid Kassam: And people have different variations of how they think about margin of safety, for us, it's about price paid, it's valuation-based asymmetry and protecting downside risk. And we think paying a low enough price relative to the intrinsic value of the company is the way that you protect capital on the downside. Then we put it in case the analysis is wrong, which sometimes we are, you protect capital even in that downside case. And so that's an important piece to it.

Probabilities matter as well, we think. And so the lower the price paid, the less certain you have to be about the future. And we're not forecasters, we think of ourselves more as discounters. Again, where is bad news already in the price? But we don't have to forecast as much. And the way I like to think about it is when something's out of favor, the odds are in your favor. And I think that goes to the margin of safety piece.

Balance sheets are the other thing I'd say. There are a lot of things going on in a contrarian portfolio, and so balance sheet leverage is something we tried not to throw on top of that as well, I think as I've mentioned before, is the enemy of the contrarian investor. And so it protects downside risk. It gives you room to add, conviction to add even if things are not going well in the short term, to really see yourself through to better days on that individual opportunity.

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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