In a previous post we talked about the paradox at the core of fundamental investing: the future is unpredictable and yet to value an asset one needs to have a view of the future. A successful investment strategy must address the paradox.
Our investment strategy embraces the investor’s paradox
The future is unpredictable and we embrace this with our fundamental approach: in-depth company analysis is the foundation of our work. But the aim of the analysis is not to predict the future but rather to assess what different futures may mean for a company. In other words, we respect unpredictability, we prepare for it, and – and this defines our strategy – we make unpredictability our ally.
1. We respect unpredictability
We can’t predict the future and we don’t try. Instead, we work out what resources a company has to meet the challenges and opportunities the future might bring. Through this disciplined process, we map out what’s possible for a company and what may be likely.
2. We prepare for it
We diversify. We cannot know in advance which companies will have great futures and which ones will fail. What we aim to achieve is that the ‘winners’’ winnings more than offset the ‘losers’’ losses, and the portfolio delivers healthy returns overall.
3. We make unpredictability our ally
When the future of a company appears ‘obvious and certain’, we remain mindful of unpredictability, but become confident of one thing: that the future will surprise.
We therefore avoid the ‘obvious winner’, because among all the things that are going right, at least one or two are likely to sputter. Most importantly, we take a closer look at the ‘obvious loser’, because among all the things that are going wrong, at least one or two are likely to go right.
Long-term, fundamental, contrarian
As the English philosopher Francis Bacon said: ‘If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties.’ Embracing uncertainty is at the core of our long-term, fundamental, contrarian approach to investing. The way we invest is more than a ‘style’. It is a way of thinking based on working with our real, unpredictable world from the most rational standpoint available to us today.