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A tale of two outlooks: Where to find value in the Market

by | Insights, Uncategorized

It’s the best of times, it’s the worst of times, as Dickens might have said. At every conference and around every braai, South Africans are being told that everything’s going to the dogs.
Meanwhile, the same South Africans are relentlessly being told by the investment space that now is a great time, because the opportunity is rife when most people are scared. It can feel a bit like being the flag in a tug-of-war game. So, we’ve pulled together a few thoughts to help keep your sanity intact in this post, well, interesting of times.

Outlook 1 – Value isn’t a place, it’s a period

First, the good news – investors of the Warren Buffett philosophy of ‘sell when people are smiling, buy whenever everyone’s terrified’ have plenty to sink their teeth into. As Allan Gray noted recently, household name stocks like Apple and Netflix are currently overpriced, while just about everything else is really cheap to buy.

There is ample evidence to show that buying undervalued stocks at an uncertain time and holding on to them for a long time works. The current market or devaluation of certain stocks now really doesn’t matter very much.

In wealth creation, plenty of studies show that it’s not about who is currently winning the game but rather how long you’re in the game for.

Allan Gray’s Orbis Global Equity Fund, for example, has outperformed by an average of 4 percent, year on year for 29 years. However, this is an average – the fund underperformed several times in that period,  sometimes by more than 10 percent. Yet those who’ve hung on since 1990 will find their stock worth triple its value when compared to investing in the benchmark for the same duration. This shows the shortfalls of following trends and changing allegiance too often in the investing game. In other words; it can be the best of times when markets seem like the worst they’ve ever been.

Outlook 2 – Investment growth tends to be non-linear

This outlook is in direct contradiction to anything you’re likely to hear around a braai. ‘My investment was worth X in January, it’s worth this much less now,’ most people fume. Or, they’ll ask for a fund’s performance figures in the past twelve months.

Most seem to think of it as a game of chess – you move forward one step or backwards one step, depending on the strength of the pieces in your arsenal, and whoever’s moving forward most is winning. This is like saying Autumn ‘wins’ over Summer come February – it fails to take into account the cyclical nature of markets and investing.

In this way, it’s safe to say that the investment game is frustrating and frightening if you don’t know the steps. Rather than chess, investment is more of a Foxtrot, and almost always works in a ‘two steps forward, two steps back, one more step backwards, one lateral shift no one quite understands and then four forwards’ pattern. It’s advancement, but not linear advancement. Look at nature. Where do you ever see organic growth being linear?

See for yourself which outlook works, but remember to always take full advantage of whatever ‘times’ you find yourself in.