Hello and welcome to the first entry to my new blog, where I aim to provide Temple Bar investors with an insight into the investment decisions we take. In this first entry I talk about some of the underlying principles behind our investment philosophy.

In general, the job of a contrarian investor is to buy the shares of unloved companies which the market believes have structural issues which will in all likelihood prove hard to overcome. The expressions we typically hear at our time of purchase are ‘this industry is in structural decline’ or ‘the business model is broken’. Typically our job is to search for reasons why this may not be the case and/or to ascertain how much bad news the share price has already discounted.

Over the years we have discovered that the market typically over-reacts to some short-term news – who remembers when the tobacco stocks were going to be litigated out of existence or the tenanted pub companies were going to be marginalised by their larger competitors in the managed pubs? Things change, supply and demand moves back into equilibrium and views extrapolated into the future are shown to be seriously misguided.

However, it is wrong to give the impression that we are particularly confident when we make our purchases. While fund managers like to give the impression that they can forecast the future with great accuracy, the truth is that their forecasts are purely reasonably well informed guesses (whether they like to admit it or not). Therefore, we do not stand in the way of these ‘falling knives’ with 100% certainty we will be proved correct – and history sadly shows we are not 100% correct. Instead we stand in their way knowing that ON AVERAGE we should be ok. Looking back at some of our successes, it is clear that there was more than a bit of luck involved. However, that is an important part of our process. We try to buy at reasonably distressed valuations. At these levels, news has to continue to be bad to drive prices lower and any good news (forecast or otherwise) should prove positive.

Clearly it is our job to remain objective and unemotional when other investors are panicking but we still have feelings and therefore are often sympathetic to the concerns that other investors might have. Rather like parents waiting anxiously for their teenage kids to get back from the pub in one piece, we worry about our holdings: are regional newspapers in terminal decline (Daily Mail)? Are CDs a thing of the past or at best a commodity often bought cheaper at Amazon or Tesco (HMV)? Can the price of tracksuits and footballs possibly get any lower (JJB)? And is anyone likely to be watching Emmerdale in 10 years time (ITV)? In fact, in all likelihood such stocks shouldn’t be on our portfolio if they didn’t cause us some concern.

However, not everything we do is about investing in stocks that other investors believe are ‘value traps’. Another expression we often hear when we are buying is: ‘It’s cheap….but I can’t see what’s going to make it go up’. As if this job isn’t hard enough already, we’re now apparently expected to find cheap shares, correctly identify the reason it’s going up (the ‘catalyst’) and pinpoint the time during when it will happen.

It isn’t clear whether this belief in ability to time entries into the market with such precision is driven by over-confidence or the demand of clients (and sometimes colleagues and bosses!) to continually generate performance. Whatever the reason, instant gratification is in vogue and investors have no time or space for deadbeats on their portfolio. The consequence is increased turnover (‘I’m selling it, it’s dead money for six months’) and heightened focus on short-term performance (‘I’m performing well this week’).

This is nothing new. ‘The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel they must take home some money every day, as though they were working for regular wages’. This quote comes from an investment classic ‘Reminiscences of a Stock Operator’ written by Edwin Lefevre in 1923!

Our equity portfolio has evolved over the last four years from one predominantly focused on the ‘I can’t see why you’re buying that stock’ holdings to the ‘I can see why you’re buying that stock but I wouldn’t just at the moment’ holdings. That probably gives us greater confidence in the prospective returns of the portfolio but clearly with no view on how long it will take to generate those returns!

We finished making our bed earlier this year and other than pushing a few pillows around have nothing to do other than lie in it. We remain big bulls of the largest stocks in the market and have been happy to further top-up the likes of BP, Royal Dutch Shell, GlaxoSmithKline and HSBC in weak periods. Other than that portfolio activity remains very low.

This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities.