In hindsight, investing, like many other pursuits, looks easy. At some point most investors will have said to themselves, "Ah, I should've bought (sold) that!" It is easy to kid yourself into thinking that if the same events were to take place again you would make the right decision, however in reality it takes determination and independent thought to not only analyse a situation correctly but also to act.
Bluescope Steel (ASX: BSL) was the second highest performing stock last financial year (FY) in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) – the first was Magellan Financial Group (ASX: MFG). Adjusting for the 1-for-6 share consolidation, Bluescope's share price rose from $1.62 at the start of FY2013 to $4.67 at the end, a return of 188%. Magellan, by the way, returned a mouth-watering 367.5%!
Interestingly, the investment cases behind these two companies one year ago was completely different and required different approached in thinking about value. The investment case for Magellan centred on growth and understanding the trajectory of earnings the increase in funds under management (FUM) would have on the firm.
It also helped if one could have understood the dynamics that would lead to the enormous and swift increase in FUM. From a valuation standpoint, it meant having the confidence that earnings would grow significantly, making what looked expensive in the near term, reasonable value in the medium term.
Bluescope on the other hand required a different approach, which could be described as contrarian. A year ago, many analysts and investors had written Bluescope off, expecting it to go to the wall as many other Australian manufacturers sadly have. However, a careful understanding that while things were far from ideal for Bluescope, the market was being far too negative required contrarian thinking and the confidence to act.
A careful analysis of the facts showed that Bluescope still had some decent businesses, it was dramatically cutting costs and it was paying down debt, which meant the company had potential to turn things around.
Foolish takeaway
The returns achieved by investors in Bluescope are a prime example of what works in investing. As hard as it is to stand apart from the crowd, generally the best value is found where the crowd is not.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
