What it means to be a true contrarian (and two stock picks from a seasoned practitioner)

Few of us would understand what it means to be a true contrarian investor. As much as we might try to convince ourselves that selling some stocks after they have run hard, or putting a little cash to work when markets fall 10% is contrarian investing, it doesn’t really cut it.

I say this not to be overly critical. But ask long-time contrarian, Orbis Investment Management’s Alec Cutler, what it means to be a contrarian and the differences become clear.

“The pain and the elation involved - mostly the pain - and how to have the backbone to stick with it, to be willing to be alone and wrong, not just wrong.

“Everyone's fine being wrong in a crowd. No one wants to be alone and wrong and poked at; 'Why did you do that? You're an idiot'”, says Cutler. 

Being a contrarian is uncomfortable and requires a level of discomfort most of us simply aren’t willing to tolerate. The other thing about being a contrarian, that Cutler describes as an even harder lesson to learn than becoming a contrarian in the first place, is being willing to change one’s mind. He learnt that lesson from billionaire investment legend, Allan Gray.

“I quickly learned with Allan that the conviction that I learned from Tony [a previous mentor] was to be held lightly.

“Allan could argue vociferously on one side of an argument - bull case or bear case. The next day, he could come in and argue the opposite and it drove us nuts.

But what we learned was he was willing to change his mind if a new bit of information came in that was worthy of that. So, no marrying something, no getting so wedded to an idea that you can't possibly be knocked off the block”.

Whilst not everyone wants to be a contrarian, those lessons are particularly valuable right now; when markets have been concentrated, a lot of capital is pointed in the same direction and things are potentially starting to unwind.

In the following interview, Cutler shares more about his investment philosophy which he has developed over multiple decades in markets. He also shares his take on the world in which we’re all investing, a take that is as interesting as it is unique. Finally, he shares a couple of companies that he likes right now and how they fit within Orbis' Multi-Asset Strategies.

Below is a summary of some of the highlights of the conversation but I strongly recommend watching the video for the full experience. 

The likelihood of meeting perfection is low

Cutler pointed out that US markets are currently "priced for perfection," which presents an opportunity for contrarian investors. 

"We love finding markets that are priced for perfection because the likelihood of meeting perfection is very low." 

He contrasted the US with regions like Europe, the UK, Japan, Korea and Australia, where expectations and valuations are significantly lower. "Maybe we're starting to see some up arrows, which is a wonderful setup for contrarians."

Margins and market sustainability

A key factor behind US exceptionalism, according to Cutler, is corporate profit margins.

"Historically, margins have been 6-8% in the US over a very long period of time." 

He explained that this represents a balance between companies and consumers. However, in the past 15 years, margins have risen dramatically. 

"US margins over the last 15 years have gone from eight, to 13, to 15%, and that's unsustainable to us."

He believes that AI will intensify competition rather than preserve these high margins, as it lowers barriers to entry for new businesses. 

"It's petrifying the mega-cap tech stocks. In fact, they're trying to execute state capture and become Trump's best friend. They were Biden's best friend. Why are they doing that? They're trying to put up barriers that can help them maintain those windfall profits".

AI in the context of transformative technologies

While AI is widely expected to be a game-changer, Cutler placed it in the broader history of technological innovations. 

"If you were to rank by importance the tech innovation over time, I'm not sure where AI would stack up, but I don’t think it’d be in the top five." 

He listed what he considers truly transformative breakthroughs:

1. Fire
2. The wheel
3. The steam engine
4. Railroads
5. Cardboard and the shipping container
6. PCs, Intel, Windows, email, the internet, and productivity software (1995-2005)
7. The smartphone

Cutler argued that the technological revolution between 1995 and 2005 - marked by the rise of PCs, the internet, email, and spreadsheets - was likely more impactful than AI will be. 

"The pickup in productivity during those 10 years was between 2.5-3%, which was a big impulse." 

However, productivity stalled after 2005, when smartphones and social media began to distract rather than enhance efficiency.

Looking forward, Cutler believes that AI will be an incremental shift rather than a singular revolution. "This will wind up looking normal and evolutionary - that's our assessment."

A changing world order

Cutler believes "the arrangement that we've all lived in... is changing dramatically." 

While some may point to Trump as a catalyst, Cutler sees a broader shift toward a world "defined by self-interest and very narrow alliances." He likens it not to the Cold War, but to a time before World War II — "all the way back to caveman times" — where trust is scarce, and nations prioritise their fundamental needs.

This breakdown in trust is forcing countries to focus on "national security, energy security, and food security," as without these, "you have none of the fun stuff above it." 

He references Henry Kissinger’s view that “the United States doesn’t have permanent allies or enemies. It has self-interest,” arguing that the world is now operating on that principle.

Impact on investing

With the new world order comes a more conservative investment approach. Cutler states, "We've reeled in the risk quite a bit," using long-dated Treasury Inflation-Protected Securities (TIPS) as the benchmark. "Everything has to beat that," he says, aiming for "a 6.5% to 7% return, risk-free, backed by the U.S. military."

He warns that investors aren’t used to the kind of returns that may come: "Minus five, minus seven, zero, minus two for four years... we could readily see that." Even if the S&P 500’s price-to-earnings ratio drops from 24 to 19, "it’s still expensive." This makes it harder to find equities that meet his investment criteria.

Stock picks

Cutler highlights Kinder Morgan (NYSE: KMI), which owns 40% of U.S. natural gas pipelines. He sees it as "an infrastructure fund that we can buy as an equity," bought when it was yielding "7-8%," backed by "a 12% free cash flow yield." 

With contracts structured as "take or pay" agreements, the company generates revenue regardless of demand. He argues that growing electricity needs will drive demand for natural gas, making Kinder Morgan a strong long-term play.

On the infrastructure side, Cutler favours Balfour Beatty (LON: BBY), one of the world’s largest engineering and construction firms. 

"If you ever go through Heathrow or Gatwick, you'll see Balfour Beatty," he notes, adding that they specialise in projects like "electric transmission lines, defence facilities, and infrastructure."

The company also owns a portfolio of military housing, student housing, and toll roads with stable returns. With "1.3 billion pounds" in infrastructure assets and "a billion pounds in net cash," but a market cap of "2.3 billion pounds," Cutler sees the core business as essentially free - making it an attractive investment.

A genuine diversification opportunity

Orbis has been investing in undervalued and ignored global stocks for over 30 years. Interested in long-term potential, rather than short-term performance, they focus on unearthing companies trading for less than they are worth, rather than timing market trends. With the investment landscape rapidly changing, and with valuations where they are today, Orbis' contrarian style and high value exposure offers a genuine diversification opportunity for client portfolios. Find out more.