Value Investment Research | Port Wren Capital | Going Against the Grain

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Many years ago I would purchase old solid wood furniture typically hardwoods like Oak and Maple at yard sales or local flea markets. They were all well made but had some type of minor surface problems, maybe a water stain or perhaps there was never any polyurethane applied to protect it. But, that was never an issue since I knew how to refinish wood.

One of the key rules about refinishing wood is that when you sanded any type of wood, you always sand in the same direction of the wood grain. Or put another way, never ever sand against the grain. In refinishing, it made perfect sense. However, in investing it does not. In investing, you want to obtain the highest possible return on your investment. To do so means you have to go against the grain on many different fronts. As Sir John Templeton, stock investor and founder of the Templeton Fund said, “You can’t outperform the market if you buy the market. Chances are if you buy what everyone is buying you will do so only after it is already overpriced.” He goes on to quote Bernard Baruch, advisor to presidents, which was very succinct: “Never follow the crowd.” If you want to achieve gains through investing in stocks, you must realize that you must go against the “grain” or the norm of the masses. Most investors would refer to this type of an approach as a contrarian strategy.

You can look at it from another perspective, in statistics; you have a normal distribution or bell shaped curve where each band has a width of one standard deviation. This is often called the 68-95-99.7 rule. But the point is that most fall within the 68%, with the smaller percentages on the outer edges. These outer edges are referred to as outliers. In investing the potential for higher gains are found while looking in the regions of the outliers, not within the normal 68% realm.

Another point worth making especially today is with a large number of day traders. They place a lot of emphasis on a very short time cycles when looking for returns. Some call this “hyper short term” focus. While others call it speculation investing. But, regardless of the terms you use. While more are focused on the short term cycle, the money again is on taking the long-term view. You need to employ the opposite approach to that of the majority to increase your odds.

Additionally, many investors spend a lot of time and effort trying to predict the future of the market by focusing on the overall market trends and the economic outlook. It is the practice of more successful investors, to acknowledge that the market is made up of individual stocks. And that individual stock move on their own accord and not based on the movement of the overall market. I have seen many individual stocks increase in bear markets, as well as, an equal number of those decreasing in a bull markets. Thus, for higher gains, focus on individual stocks more than on overall market outlooks.

Sir John Templeton also said, “People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful. Do your homework.” Naturally, he is talking about conducting research on a possible investment prior to actually investing in their stock. More specifically use fundamental analysis. This is another approach that intelligent investors use that speculators do not. And one that makes a major difference in one’s results.

In summary, learn from those who have already traveled the road that you are on and glean from their proven experience and hindsight. Taking their advise will reward you many times over compared to just simply ignoring their advice. And take the path less taken by the masses.

One of the many benefits of our service is that we take the road less traveled and reap the rewards. We find specific investment opportunities using security analysis research to find undervalued opportunities for our subscribers in our PWC STOCK REPORTSSM service. And you too can reap the rewards.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

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Going Against the Grain