Value Investing: Finding Solace In Discomfort by Ayrton Dick, Burgundy Asset Management.
Value investing is not supposed to feel good. It’s supposed to be uncomfortable, even painful at times. In certain parts of the cycle we will feel validated, but it is only after we have endured long periods of discomfort.
By definition, value investing goes against the consensus. Sir John Templeton captured this idea well when he said, “If you want to have better performance than the crowd, you must do things differently than the crowd.” There is safety in adopting the crowd’s view, so value investing naturally feels counter-intuitive. When the average investor believes a company’s fate is questionable, but our in-depth research suggests otherwise, it takes mental fortitude to buy and own it. Conversely, when the consensus has jumped on yet another investing bandwagon, it takes extraordinary discipline to abstain. We must maintain our convictions and not succumb to the consensus view. Knowing that this discomfort can last indefinitely makes the suffering more agonizing.
But if it were easy, everyone would do it.
Contrarianism is what enables superior long-term investment results. To generate alpha we must capitalize on the irrational behavior of other investors. We must do what appears to be wrong at the time by buying when everyone is selling. The anchor of intrinsic value, our calculation of the price that a rational buyer would pay for a company, helps us in this task. Seth Klarman put it well: “Value investing is at its core the marriage of a contrarian streak and a calculator.”
Acting when there is a wide discount to intrinsic value, particularly when there is intense selling pressure, is uncomfortable. Unless you can buy at the absolute bottom, buying when everyone is selling will result in short-term losses. Howard Marks captured this when he wrote, “Being too far ahead of your time is indistinguishable from being wrong.”
It is for this very reason that we must partner with like-minded clients. For our clients to achieve superior investment performance they must also demonstrate the same discipline as our Portfolio Managers. We must all endure discomfort together. Or better yet, find solace in discomfort.