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My full interview with Benj Gallander of Contra the Heard originally appeared in my national bestselling book, Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca.

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The key lesson to take from Benj Gallander is that you should constantly question yourself and the broader market. Do not be swayed by heuristics, preconceived notions, or sentiment. Logic should pierce through every investment decision that you make. There’s no doubt, though, that it’s tough to go against the herd. As Benj says in his book The Contrarian Investor’s 13, “Being a contrarian, at heart, is a matter of character. It is by no means for everyone, but for the person who is willing to be disciplined when the common view says, ‘You’re wrong, buddy; don’t you think the time has arrived to see reality?’”

While I do greatly respect Benj’s contrarian approach to investing and have seen how well it works for him, those kinds of stocks do not make up the core of my own investment portfolio. Only about 10% of my portfolio is comprised of contrarian stocks, as I found that over time I was being burned by “dog” stocks — those stocks that got beaten up but then
never turned around or got taken over. Clearly, I am not as good a contrarian as Benj.

Ultimately, you must be the judge as to whether being a contrarian investor works for you. Benj does admit that it can be tedious. “The valuation cycle — from an undervalued, out-of-favour stock at the time of purchase, through the period of recovery to full value and our sale — is irregular. Quite often, the market is slow to appreciate the improvements
in a company’s fundamentals — but when sentiment shifts, it often does so dramatically, as institutions and brokers gravitate towards strong performers and propel them even higher. For this reason, turnaround situations often more closely resemble the so-called J-curve of successful venture capital funds than the more linear progression of their big-cap, ‘growth’ brethren.” Even when the contrarian approach is working itself out, one must be patient and wait for pops in stocks or erratic upward price movements. Contrarian investing can be frustrating and unrewarding for those who do not share Benj’s cool temperament.

Interestingly, Benj tells me that some of his biggest profits have come from takeovers. “At any point in time, the companies in our portfolio will be at different points in this valuation cycle. When it happens that a large proportion of these stocks are toward the end of this process and are appreciating rapidly, we end up with another of those banner years. This natural variability is amplified by the effect of takeovers. Often these occur at substantial premiums and they are responsible for some of our best profits.” Perhaps you can focus more on takeover opportunities than on “undervalued” turnaround opportunities in your own portfolio.

Throughout my interview with Benj I could sense that while he was happy to talk about his achievements in the market, perhaps his heart had shifted to a different place over the years — his wife, two kids, and other endeavours such as being a playwright. But make no mistake, this has not hindered Benj’s performance in the market.

The following is an excerpt from Contra the Heard’s investment philosophy:

• Concentrate on turnaround situations and stocks which are currently unpopular but are likely to regain their lustre
• Focus on stocks that have the ability to increase in value by a minimum of 50%
• Carefully analyze corporations’ financial statements, concentrating on debt ratios and book values
• Analyze management’s ability to achieve stated goals Invest only in organizations that have existed for at least 10 years
• Pick takeover candidates well before takeovers occur, for near-optimal returns
• Normally sell a minimum of 50% of a stock upon achievement of our target, while “market timing” the remainder
• Practice patient investing while ignoring the daily pulse of the market
• Advocate diversification
• Remain independent of any broker, corporation, or financial institution
• Put our money where our mouth is by notifying readers of the Contra the Heard investment letter only of stocks that we actually buy
• Appreciate stocks that pay regular dividends

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.