By Daniel Needham
“The central principle of investment is to go contrary to the general opinion, on the grounds that if everyone is agreed about its merit, the investment is inevitably too dear and therefore unattractive.”
-John Maynard Keynes, Letter to Jasper Ridley, 1944
Contrarian investors are most active—or stand apart from the crowd the most—when we believe markets to be the least efficient. Like Warren Buffett, I believe markets are frequently efficient, rather than always efficient, which means that it’s possible for active managers to outperform, albeit difficult. The key is to identify environments where market efficiency drops—that is, when investors are behaving irrationally. As valuation-driven investors, we base that identification process on fundamentals and discipline.