EDITOR'S LETTERMerryn Somerset Webb
Wise contrarians win out
“What the wise man does in the beginning, the fool does in the end.” That’s how Howard Marks of Oaktree Capital began his talk at the 2013 Value Investor Conference last week. He explained what he sees as being the three stages of a bull market.
The first happens when a few people begin to believe that things will get better. The second comes when most investors realise that improvement is actually underway, and the third when everyone is sure that “things will get better forever”.
This last one – think the second quarter of 2007 – is characterised by the “extreme brevity of financial memory” and so by the same silly justifications over and over again. “This time it is different” people say, usually just before they point you to an investment that “is so good that the price doesn’t matter” – when in fact, all that matters is the price.
The key to success is getting in during the first stage and out during the last. How? As ever, it is simple, but not remotely easy. If you want to prevent yourself being the fool, you have no choice but to be consistently contrarian, to build “uncomfortably idiosyncratic portfolios” and, as Mark Twain said, to remember that “whenever you find yourself on the side of the majority, it is time to reform”.
• Read the full editor’s letter here: Wise contrarians win out.