Investing against the consensus

Having quality investors, like many of those reading this post, is a huge long-term advantage for a company like Cobas Asset Management. Firstly, our analysis team can devote practically all its time to our primary task, which means rigorously investigating our best ideas and, what’s more, we can then unreservedly recommend investing in them. In this post I aim to highlight these advantages.

Nearly all the investments we make in Cobas are based on investment theses that run contrary to the widespread views held by the market (“consensus”). Holding divergent views and firm convictions, fruit of an exhaustive analysis, is essential for protecting our financial resources and achieving better returns than from other alternatives. The more contrary (and correct) the ideas, the better they will tend to be, given their lower stock prices and, consequently, greater potential.

Naturally, going against the “consensus” means going against the notions and prejudices that a priori most people hold about these companies, including ourselves. This is possibly the hardest part of our work, as it entails finding and analysing possible opportunities when our prior knowledge (before performing this analysis) is telling us not to spend any more time on them.

Detecting possible significant errors ASAP is absolutely crucial

When we come across “contrary” ideas, after many hours compiling and studying pertinent information, we like to contrast our preliminary findings with experts (competitors, suppliers, clients, former managers, consultants, regulators, other analysts, etc.) who possess profound knowledge of key aspects of the company in question.

This investment in knowledge is always beneficial, even when we eventually rule out ideas. Detecting possible significant errors as soon as possible is absolutely crucial. This continuous mental effort, together with a certain degree of humility, enables us to maintain a true valuation of the companies that make up our portfolio and be able to act – buying or selling shares – as appropriate.

Following this process, it can be seen that: when Cobas buys, it sets itself apart from the market; it is therefore only to be expected that its stock quotes evolve differently from the mainstream listings.

At this juncture, I’d like to make an important point. At Cobas, we rate companies and act accordingly; we do not attempt to guess the results for one particular period. So, if you read that a certain company is going to earn less than expected next year (i.e. they issue a profit warning), this does not necessarily imply that our evaluation was wrong, at least not to a significant degree.

In fact, these profit warnings often allow us to invest in companies we already fancied, but at a cheaper price, given that the market sometimes extrapolates short-term problems to standardised views of profit generation capacity. Of course, in the case of a profit warning, should we deduce material weaknesses in our valuation hypotheses, due to some mistake or unforeseeable event, we will be ready to quickly assess the new situation (price/value) and be in a position to react swiftly.

In conclusion, it is not our goal in Cobas to seek popularity through our ideas. We simply wish to reap the benefits of a job well done, knowing that conclusions can be drawn from our analysis that not everyone always finds intuitive. However, with the passage of time, we believe that most of these investment theses will seem obvious and bear their fruits. Many thanks for accompanying us on this journey.