![]() This means we are offered some protection if things turn out worse than we forecast (i.e. We invest in businesses when we believe their share prices are below intrinsic business value. As a result, rather than tracking the market, what we focus on is looking obsessively at what can go wrong, looking for a 'margin of safety' and focusing on the valuation risk, earnings risk and balance sheet risk of our specific holdings. We define risk in terms of permanent capital loss. Most traditional measures look at risk as the chance of being different or more volatile than others. How we define riskĬoupled with our contrarian approach to investing, we also have a different approach to risk. Often this leads to better margins for the incumbents. There is little new competition and some players may well leave the industry. On the other hand, a stagnating economy or industry does not attract the brightest entrepreneurs. In a rapidly growing economy the profit cake grows quickly, but increased competition may mean your slice does not grow at all. Rather than overall economic conditions, or even industry trends, the profit and return performance of an individual company are importantly determined by the competitive landscape. If someone did you the favour of telling you which would be the winning economy over the next 100 years, it is not clear that that is of any help at all in directing your investments. Looking at the blue bars, the growth in real dividends per share over time, amazingly you see very little correlation with economic growth. ![]() The analysis uses real dividend growth per share as a proxy for earnings, largely because earnings are impacted by accounting changes. Graph 2 shows the overall economic growth rate and the per capita growth rate of 14 countries over the 20th century. But is this top-down model a good representation of the real world over time? And how has the variation in growth rates between countries impacted on the growth in company profits in those countries? Allan Gray Chairman Simon Marais conducted some research into this question. The top-down modelĬonversely, many managers start their analysis by looking for high-growth countries or industries in the belief that these will then lead to a high-growth profit pool, which in turn will result in attractive performance from the shares of companies with exposures to these areas. This 'bottom-up' approach to investing involves detailed analysis of the business, its income, expenses, outlook and positioning within its industry. Fundamental value is the value a prudent businessman would place on a business. It is our experience that understanding companies and investing in them when they represent 'fundamental value' is far more rewarding than trying to predict economic, political and share market trends. When we analyse a possible investment we look at the return we expect to receive over a four-year period. We use a 'bottom-up' approach to investingĪllan Gray and Orbis share a common investment approach and ethos. While we are not 'buy and hold' forever value managers, we do give our investment theses time to play out. In our view, this is a zero-sum trading game, and quite different from our own approach to investing. Although there are many ways to make money, we think that six months is simply too short a time to capture anything much more than market noise. The average holding period on the New York Stock Exchange (NYSE) has dropped to just six months from three to six years in the 1970s, and closer to 10 years in the early 1940s (see Graph 1). This quarter they turn the spotlight on Orbis, and investment managers in general, as they take a look at the second aspect of long-term performance experience: money manager behaviour over time. Focusing on investor behaviour, they emphasised the need for investors not to chase recent winners, especially once they have carefully selected managers instead, they should try and focus on long-term goals. EXECUTIVE SUMMARY: In the Q2 Quarterly Commentary, Jonathan Brodie and Trevor Black of Orbis discussed the fact that long-term outperformance requires a partnership between the investor and the manager.
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