In his last-ever television interview, Bruce Lee famously advised “Be water, my friend.” I watched the interview years after it was filmed, when snippets of it were revived in a successful BMW advertising campaign. Bruce Lee – much admired by my siblings and myself when we were kids – was talking about life in general, and how one should evolve, adapt and be flexible to overcome difficulties, like water flowing and taking the shape of the environment that contains it.
This is undoubtedly true in many facets of life. However, there is at least one exception: it is the wrong approach to investing.
An investment philosophy must keep faith with certain immovable principles. We need to protect ourselves from our own emotions and biases. We must resist the temptation to buy whatever is in fashion, or to hold on to failed investments to not realise our losses, and so forth. Once our principles are defined, we cannot change them. We cannot, unlike the genius Groucho Marx, say “Those are my principles, and if you don’t like them… well, I have others.”
In my view, one fundamental principle is to be “contrarian”. We must swim against the current, rather than be borne along by the waters of the market. Once in a while, the tide of the market ebbs, exposing a few gems and treasures. That is precisely our chance to pick them up doing the opposite of what everyone else seems to be doing.
A recent example is provided by commodity companies in 2016. The market thought that commodity output would continue to fall, and commodity prices would stay so low that for many players in the industry they would wouldn’t even cover the costs of extraction. In short, the commodity industry was in life threatening condition.
Swimming against the current, however, the insight was inevitable that this situation could not hold forever – the World needs commodities on a daily basis, they cannot be replaced somehow, magically. There was a big opportunity to be contrarian and invest in commodity companies. Another matter entirely, of course, was predicting how long the market would remain irrational re this fact.
Having said all this, it’s a lot easier to say than to do the right thing. While we await our opportunity, the market relentlessly raises the pressure on us. In the short term, it bashes us with the stick of relative underperformance and customer impatience. At the same time, the market teases us with the carrot of simply letting go and allow the tide to raise our little boat just like everyone else’s…
Here I am reminded of the Internet bubble. Those were hard times for some investors who refused to buy into the fashionable stocks, which seemed set to rise indefinitely on the back of unique visitors, users, market share… For some those were elusive arguments, and even today their real substance largely escapes me…
Finally, to be a contrarian, you need to be confident about your own investments. And that’s not easy either. The truth is the market isn’t stupid. Quite the reverse: when it really counts, the market is highly efficient and sophisticated. It can be just a little slow to react. Sometimes, even, very slow. But only a fool would ignore that the market is made up of thousands of highly trained, highly committed professionals who work from dawn till dusk in search of investment opportunities. They use state-of-the-art resources, including complex algorithms and supercomputers. So we cannot go against the market for the sake of it. It is crucial to identify the specific, relevant points that the market is getting wrong.
These points will frame our investment idea. And in the end it all has to be as simple as possible, to avoid the risk of something going wrong in an overly complex investment thesis. Yet, the simpler the investment idea, the harder you need to work to get it ready. There is no way out of hard, focused work.
In early 2015, we studied the case of Samsung Electronics. The company was – and still is – an undisputed leader in many industry segments. But its wide diversification makes it difficult to analyse. In 2015, having separated the wheat from the chaff, we found there was a simple and clear case, which boiled down to the market extrapolating recent margins on mobile phones to 10% or less, which was penalising the company’s valuation.
This view was a highly pessimistic one. Those margins were the outcome of recent inventory difficulties, competition from Apple in China (after the launch of the first large-screen iPhone), and the new entry of high-end Chinese brands. Yet the company had a plan which – if anyone would only listen to it – explained how it was going to improve that margin to restore it to normal figures. And one third of its market cap was… cash! The rest is history.
So, we need to follow well founded investment principles, patiently withstand pressure until opportunities arise, and build simple and robust investment ideas. Doing the right thing isn’t easy. But still, in investment the vital point to remember is… DON’T be water, my friend, when you invest!