Value Column von Hans Peter Schupp
6 DECEMBER 2023
Follow the lemmings – or rather your own conviction?
We often queue thoughtlessly, often like lemmings. We follow the crowd because they will be right. You ask yourself, why do such questions affect me when it comes to investing? Well: „It is impossible to achieve outstanding performance unless you do something different from the majority,“ investment legend Sir John Templeton once philosophized. But just being different from the majority is certainly no guarantee of good performance, even if Sir John was one of the investment icons.
Always following the crowd
Value investors are well aware that different is not necessarily better. Their investment style has been suffering for 15 years. At first it was the „Magnificent Seven“, as the tech giants Alphabet, Apple, Facebook, Tesla, Amazon, Meta and Microsoft are known. Today, it is particularly companies from the field of artificial intelligence „that no portfolio should be without“. A trend that no investor wants to miss out on. You want to be part of the performance party and will be asked about the latest quarterly figures of AI companies. Stupid if you’re not invested. Valuations are irrelevant, the story is the party theme.
We have had that before, but it didn’t work out
The majority are invested in such shares, but those are certainly no longer bargains. The good performance leads to further investments by investors. „The trend is your friend“ is the saying. A stock market saying to which a contrarian value investor replies: „I ever find an idiot who is willing to overpay me.“
The valuations of most high-flyers can no longer be justified by fundamentals, but everyone is in. You want to have a say. In stock market jargon, this is disrespectfully referred to as a „maidservant bull market“, a term for rising stock market prices that are mainly driven by purchases by uninformed small investors and indicate the final phase of a speculative bubble. And this brings us full circle back to Sir John Templeton’s statement on outperformance. Or as Warren Buffett says: „When the tide goes out, you can see who has been swimming without swimming trunks.“
The „shaky“ and the „hard-boiled“
The stock market does not always run parallel to real economic developments. Prices fall sharply until at some point the „shaky ones“ have sold off all their securities, while the „hard-boiled ones“ have been able to collect them cheaply, as André Kostolany characterized the two predominant stock market types.
The average investor is a herd animal, a lemming so to speak. And anyone who thinks this is a rather negative characterization is right. Because the mass of investors lose money and the vast majority of fund managers perform worse than their benchmark index. But why is that?
The answer is as simple as it is obvious: psychology. When shares go up, everyone wants to be in on the gains. And when the stock market plummets, everyone wants to get out. As quickly as possible and at whatever price. What is psychologically understandable and is well explained in the field of behavioral finance in the stock market is also the reason why investors do not perform better, but predominantly worse than the market as a whole. They follow the herd and therefore cannot be better. And they only sell when prices are already nosediving.
Courage and conviction
We are in the „hard-boiled“ camp. We do not follow the market, but we use its mechanics. We buy when everyone else is selling and we sell when everyone in the market is looking for shares. This often takes courage, because going against the prevailing opinion is not always easy. But as a contrarian value investor, we are used to such situations and wait for favorable opportunities. The portfolio of our Contrarian Value Euroland fund has an average P/E ratio of between 5 and 6 (e.g. Salzgitter with a P/E ratio of 1.5, W&W with one of 5.5 and Eni with 6.0).
Meanwhile, together with hedge fund manager Martin D. Sass we are amazed: „The stock market is the only market that people run away from when there is a sell-off.“
We have nothing to add to that.
Translation for convenience only!
The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.
