Fund managers, surgeons, political leaders and football managers. You don't often hear them saying "I got wrong" and talking about their mistakes, but contrarian fund manager Alastair Mundy says it's important to admit when you got it wrong so you can learn from your mistakes.
Mundy, talking at the Morningstar Investment Conference, shares some of the lessons he's learnt since he started managing money in equities at age 26. History, Mundy says, supports investing in out-of-favour stocks and being a contrarian is about being an expert in out-of-favour stocks rather than an expert in a sector or region.
Some of Mundy's top tips for being contrarian are:
- avoid 'groupthink': if you're an optimistic, talk to a pessimist, and vice versa;
- examine all alternatives: don't come up with just one forecast, build up a range of scenarios and a range of solutions for dealing with those scenarios;
- play the averages: accept that sometimes you'll get it wrong but if you're any good you should get it right more than you get it wrong;
- be patient: don't feel that you have to do something, if the investing environment isn't right then don't part with your cash;
- make sure what you're buying is cheap: what people call 'value traps' are often 'growth traps';
- establish your circles of competence: if your tennis backhand is rubbish, just slice everything. "You must take the opportunity to pass on the questions you don't know the answer to," Mundy says;
- watch market share moves: Mundy prefers industries where market share is relatively stable;
- look for early warning signs: analysts continue to focus on profit & loss accounts but sometimes the greatest clues are in the balance sheet.
A final point, for investors who think that fund managers have the advantage of meeting company management before deciding whether to invest in the company's shares, encouragement may be taken from Mundy's tip that he doesn't meet with management before buying the shares, partly because they're unlikely to tell him the bad news. He'd rather rely on his own research and sentiment.
