We look for unpopular shares which means we need to go against the crowd
By being contrarian, we aim to buy investments that the rest of the market disregards or undervalues, rather than investing with the crowd. When a stock is popular with the crowd, the price tends to be driven higher (because there are more buyers than sellers of a stock). When a stock is unpopular, it means there is less competition to buy it. There are more sellers than buyers of the stock, so its price tends to be lower.
How do we do this?
We do this by focusing on valuations: we assess what we believe a company is worth, and we only invest where we believe that the stock price that we will pay is currently substantially lower than the value we are getting. The diagram below shows this.
Our investment philosophy
Why is a contrarian approach hard to follow?
Most people find it difficult to follow a contrarian approach. It is especially hard from a psychological perspective. It is difficult to be different and especially when it comes to having to go against the crowd and invest money in stocks that are currently unpopular, which is what our approach requires. We are all susceptible to ‘herd behaviour’ and we find safety in doing what everyone else is doing. However, at Allan Gray we won’t follow an approach if we don’t believe in its merits and have the results to prove its success.
So, does this approach work?
Yes. We believe in this contrarian approach because we have applied it successfully for over 40 years globally. During this time, we have refined and developed the approach. This includes the techniques for training successive generations of fund managers to apply this approach with continuity so that we can continue to be different and achieve differentiated investment results for our clients.