As the 1890s unfolded, two brothers – young enterprising high-school dropouts – watched from the sidelines of a small bicycle shop they owned in Dayton, Ohio as man tried to achieve first sustained powered flight. Newspapers featured dramatic images of a man in a hang-glider but manned powered flight remained an elusive dream.
The aircraft of the day were just too unstable and easily tipped over in gusty winds. This instability remained the stubborn obstacle to manned flight, even though much funding and top engineering brainpower was focused on finding an inherently stable aircraft design.
The Wright brothers had an important insight
If the human pilot was given fine control over the aircraft, aircraft instability would cease to be a problem. This was a truly contrarian idea, which went directly against the wisdom of the day. Funding their experimental prototypes out of the earnings from their bicycle business, they tested ways to control an aircraft.
But going against conventional wisdom is never easy
Many prototypes and many failures later, the brothers were near desperation and about to give up. “Man will not fly for 50 years,” uttered Wilbur Wright in 1901 in one of these dark moments. In the end, they achieved sustained powered manned flight in 1903. And even after their first flight, the brothers faced scepticism and accusations of bluffing.
The Wright brothers’ idea had turned out to be the breakthrough that made manned-flight possible and has changed the world. It took many more years to upend conventional wisdom fully, but ultimately their ideas became the foundation of modern aeronautics.
Contrarian thinking, applied to investing can also yield extraordinary results
In the same way that the Wright brothers’ contrarian approach to flight yielded extraordinary results, so it is with investing. Challenging conventional wisdom, seeing things differently and investing against the grain yields superior returns. It is Allan Gray’s contrarian thinking and investing that truly defines who we are and what we do.
Popular companies tend to be fully priced and generate poor long-term returns
According to conventional wisdom, companies that have generated strong and growing earnings in the recent past are very highly regarded by investors and advisors alike. Most extrapolate the recent past far into the future and obsess about varying degrees of upside. Brokers and analysts have field days marketing the company’s wares to receptive investors who sleep well at night knowing they have invested in a well-regarded company. Little time is devoted to what can go wrong. The end result is a company that is, at best, fully valued. More often than not, these companies are priced for perfection and generate poor investment outcomes over the long term.
We seek out companies that while unpopular now, offer compelling value in the long term
Instead, we seek out companies that have underperformed significantly in the recent past, usually due to some previously unforseen bad news associated with the company or the industry in which it operates. Once loved, these companies rapidly become pariahs of a fickle investment community as there is a rush for the exits. They are often vilified in the press. Some of these companies may fail, but the vast majority offer compelling value for long-term and patient investors like Allan Gray.
I like your way if thinking, it’s interesting. I notice you have increased your holding considerably (over the past few months) in Arrium; where do you feel they will be in 3, 6, 12 months, or 3 to 5 years even?
Just that their main product (other than steel) is iron ore and the market is currently over supplied with Gina throwing in a few million tonnes later this year, will iron ore ever recover? Where do you see it?
Love to hear your thoughts.
Hi Andrew,
We have taken a long term view on Arrium, the reality is that if we look at a share price under 20cents, we are buying the entire company for $2B, yet to replace the business and its assets would cost in excess of $4B.
When it comes to Iron ore we have to be completely honest… we have no idea when or if iron ore prices will recover. Our investment thesis valued the iron ore business as one not generating any significant cash flow in the foreseeable future and as such ascribed it zero value.
A detailed report on Arrium will be included in our next quarterly report due out mid April. We will be sure to send you a copy when published.
Thanks for your honest reply Simon, which is inline with my thoughts on Arrium and the price of iron ore, appreciated. For your sake, and mine, I truly hope Arrium has a great future! Blogging is a little new to me, hence I have only replied on discovering its existence.
Andrew