A brave new world?
Warren Buffett, long sceptical about tech stocks and one of the guiding spirits of contrarian investment, has finally succumbed to the charms of GAFA. By buying into Amazon last month, having already bought Apple in 2016, the legendary investor has sprung a fresh surprise and confused some of his disciples.
His decision attracted all the more attention as the rather odd state of the current equities market has left many an investor scratching their head. A new and implacable logic seems to have gripped the market, polarising it between tech stocks and predicable stocks, pushing everything else to one side. Investors seem to have forgotten an essential factor, value. And rock-bottom interest rates, meant to stimulate risk-taking, are instead encouraging them to focus on a single type of company.
So is this the end for contrarians? Or have they simply gone quiet? If we are to navigate this new and polarised world, we need some new pointers. Contrarian investing does not just mean trying to “catch the falling knife” by buying stocks after a market plunge. Contrarian investors look to buy stocks that the market has overlooked, that are trading at a discount and undervalued, an approach that sometimes makes them look much like value investors. However, it is not enough for a company just to be undervalued. Value in itself is only a reflection of expectations and these may turn out to be ill-founded or deceptive.
The emergence of new and world-changing economic models further complicates matters. The strategy of the GAFA firms, who have created natural monopolies with virtually unlimited scope for expansion, makes it hard for contrarian investors to bet on sectors that have caught the eye of the giants. Take retail and media, for instance, both of which are wide-open to disruption. The lack of visibility on how various businesses may play could lead investors to steer clear of them, whatever value they seem to offer.
Fashions have always been a factor in markets and to avoid blindly following them is a winning long-term strategy. The rise of ETFs, coupled with fund-flow approaches, encourages herd behaviour that ignores whole swathes of listed stocks. Over recent months, markets have migrated away from some companies that are far from being “disrupted”, are generating cash and are sitting on undervalued growth prospects. These are the targets of choice for private equity funds, which usually sign up for longer term bets.
In this brave new world, which we are all still learning to live with, we still put our faith in one of Buffett’s golden rules: “Be fearful when others are greedy and greedy when others are fearful.”
Olivier de Berranger
Avec la complicité de Frédéric Buzaré