Don't be contrarian for the sake of it: Hugh Giddy

Are you a crowd-pleaser or are you a contrarian? asks Hugh Giddy, senior portfolio manager at Investors Mutual. 

Although it wasn't initially intended as advice, it's the best piece of question he has ever been asked in his career to date, and so he asks this question of himself and his investments. 

"You have to think for yourself ... But it's so easy to read other people's opinions - including people who seem very smart - and say 'yes'. Even if you don't consciously follow that opinion," he said.

On one hand, consensus opinions are already priced into the market, he argued. But on the other hand, sometimes the consensus is right and you've got to be happy with the consensus. Don't just be a contrarian for the sake of it. 

Giddy is a highly competitive fund manager. He doesn't believe in pandering to weakness and thinks decision-by-committee is a dangerous pastime better suited for planning office fitouts than investing. His team are also smart and competitive, he concedes, but at the end of the day, he is the one who has to wear any mistakes. So there's little room for error in his books.

"There's no 'I' in team, but there's a 'me', I keep getting told," he laughed.

"I think all fund managers are competitive, and I'm sure I'm competitive. We like to win. We like to perform," he said. 

Managed Fund

Investors Mutual Australian Share Fund

Australian Shares

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What are you really buying?

IML is among Livewire's 100 Top-Rated funds, as decided by Lonsec, Morningstar and Zenith. It was founded by Anton Tagliaferro in 1998. Giddy joined IML through a merger with his existing funds management business, Cannae Capital Partners, in 2010. 

When buying a stock he wants to know two things: what is the quality and what is the value? Neither should stand isolated from the other. 

"The investment philosophy, we call it quality and value ...  if you think that the price you pay is the most important thing, logically that makes sense. It's extremely important what you pay, but what are you buying?"

Value investors are in it for the long-game. To be in this game, you need to know how to pick a winner, back it, and stick with it through thick and thin because you truly believe in the underlying fundamentals. 

But that doesn't mean you can ignore price entirely. It just means getting more bang for your buck. 

"We want something that's actually a good car, say a Peugeot. That's a well-made car, got great reviews, long durability and is a good price versus the Mercedes. There's nothing wrong with the Mercedes, lovely car, but probably for three times the price you're only getting 10% more car," he said. 

That said, being a value investor doesn't mean foregoing growth. Quality businesses also provide good, double-digit returns. You can be contrarian in this space and find the unexpected gem. 

"People get confused between growth and something exciting, versus something really solid and sustainable," he said.  

"But solid and sustainable don't have to be boring. It can be boring, like our packaging business we have lots of packaging companies. Or it can actually be quite exciting, like CSL, which has grown more than double-digit effectively, over its listed life since 1994," he said. 

CSL listed on the ASX in 1994 at $2.30 per share and at its peak last year (pre-COVID) it was roughly $330 per share.

CSL from late-1990s to now. Source: Google. 

Where are we in the investment cycle? The not-so Roaring '20s 

But today's market, flooded with retail investors with very little experience, it is hard not to chase the shiny bauble. It's hard to keep the attention span to reap the rewards of investing for the long term. 

"We're at euphoria," he said of the market cycle today. 

"Dogecoin was a joke coin and I don't have a nice word, but... suggestible.... people have followed Tweets ... to buy things that I believe have no value (now), and in time will probably have no value," he said. 

"But all these pointers could point to the fact that nobody is worried about something going wrong ... The number of people who think that the future is golden is the vast, vast majority."

Giddy makes reference to Money Week magazine's December 2020 issue featuring Janet Yellen in a 1920s flapper outfit on the cover. He sees this as indicative of where market sentiment is at. But believes that sentiment is misplaced. 

Source: Money Week.

"Magazine covers talk about how the future is bright and glowing," he said disparagingly. 

"And it sort of sounds appealing to come out of the pandemic and growth's going to be that fabulous, great growth," he said. 

People feel like it's the 1920s again. A time when we came out of the Spanish Flu into a decade of glorious growth.  

"Except we start from such a different position. We start with the stock market at a crazy valuation. Back then the stock market was on probably a fifth of the valuation it is now. You start with debt levels that are crazy, compared to debt then, and there's a whole lot of things that are different that suggest that that's a complete pipe dream," he said. 

Markets are feeding a frenzy that Giddy feels is unsustainable and an inferior way to invest.

Market (in)efficiency

 The biggest myth he's ever come across about markets is the idea that markets are efficient. 

"I believe that we are all - and I'm sure I'm subject to it as well - subject to our emotions, our egos, our primaeval kind of instinct to want to belong," he said. 

"And so that's why I think contrarianism's important, but not for the sake of being contrarian. When the whole herd moves one away and you have people who I thought were quite smart, buying into bitcoin and being evangelists and so on. And people converting after it's already gone up, however many thousand per cent and so on," he laments. 

Growth is great, but sustainable growth is better. Fast growth, he said, is always more expensive. Afterpay is a great example of this. 

"Say like Afterpay, for example, is very, very expensive because it is growing very fast. But to me I'm not sure that they have a moat, because PayPal comes up with an announcement, they're also offering buy now, pay later. It's going to be cheaper for the retailer," he said. 

Hugh Giddy

Senior Portfolio Manager & Head of Research

Investors Mutual Limited

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