Shai Dardashti recently had the pleasure of sitting down for an interview with Matthew Fine, Lead Portfolio Manager of the Third Avenue International Value Strategy.
The following transcript has been edited for space and clarity.
MOI Global: Help us understand the nuance of ‘contrarian value’ vs. ‘conventional value.’
Matthew Fine: It is a topic near and dear to my heart. I think that when many people look at the investment management landscape they see, broadly speaking, two camps of active management: they see value investing as compared to growth investing – without necessarily realizing significant differences within the value investing camp.
I would define the camps within value investing as ‘contrarian value investors’ against the more ‘conventional value investors.’ By ‘conventional’ I mean what has generally been popularized by Graham and Dodd – and even more so cemented by the incredible success of someone like Warren Buffett, who describes investing in wonderful companies. The word ‘moats’ around those companies – i.e., defensible market positions – is often used. ‘Conventional’ value investing tends to be based upon forecasting continued success of wonderful businesses, and buying them and holding them for a very long time, while those businesses compound. That is all well and good.
The ‘contrarian’ value investor, on the other hand, would listen to that approach and say, ‘Yes, but what about price?’ In the sense that wonderful business tend to be priced like wonderful businesses, most of the time – which is problem number one. Problem number two for the contrarian is that the pendulum swings both ways – in the sense that even wonderful businesses have issues, from time to time. One example of late in the United States is Wells Fargo, which would have been considered a wonderful business before recent issues. Valeant would have been an extraordinary business, also Chipotle. These are fallen angels, which were priced as though they were going to compound virtually indefinitely – but of course that hasn’t happened. The contrarian, on the other hand, the camp which we are members of, tends to start from the position that we would like to enter a situation where many things have gone wrong with the business. It’s facing a number of headwinds –and if one or two, or many, of those headwinds can abate over time, then the business might do wonderfully better than is expected of that business. Of course returning to the issue of price: when many things have gone wrong with the business you tend to have a very different type of pricing associated with that business, hopefully that reflects – or even more than reflects – all of the issues that have gone on with that business. We are very much of that contrarian camp. It is a highly distinct approach from the conventional norm.
MOI: How did you become part of the ‘contrarian’ camp?
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