INVESTING IS OUR STRONG SUIT

A daily column on investing by Orbis Investment Management Limited

You may meet a senior representative from Orbis Investment Management Limited at the hotel. To make an appointment please contact the hospitality desk or call the Churchill Suite, room phone: 7554.

Styles of investing

Of course, there are as many styles of investing as there are investment managers, but there are some common groupings of approach that help to typify a manager's philosophy. The following is a brief description of these and how Orbis might be described.

The first major distinction is between passive and active styles of management. Passive managers do not attempt to add value by making independent investment decisions. They focus instead on creating returns that follow those of a benchmark such as a well-known stock index like the S&P500. Since they are not attempting to add to returns, they have low fees and are concerned to keep expenses to a bare minimum.

In contrast, active managers attempt to add to returns by making decisions that cause their portfolios to differ from their benchmarks. Orbis is an active manager. Active management can then be broken down into approaches to active management. The primary approaches are: technical, growth and value.

The technical analyst believes that probable future price moves can be determined by the past pattern of price moves. They believe in momentum; that rising stocks will continue to rise and vice versa. They used to pore over charts. These days they more often use computing power to identify the patterns that they believe indicate a change in trend. There are some quite sophisticated technical systems. Two of the better known are the Dow theory and the Elliott Wave Principle. Dow theory is based on the writings of Charles Dow, who was the first editor of the Wall Street Journal. It encapsulates the belief that prices trend and indicates how to identify when a trend might be changing. The Elliott Wave Principle presumes prices to move in waves; with bigger and smaller waves related by a mathematical series of numbers known as the Fibonacci Series. Neither of these two venerable techniques has been proven to add value, particularly after commission and other transaction costs are incurred.

The growth investor looks for companies with earnings that are growing. The approach follows from the fact that the value of a company is ultimately dependent upon its earnings. The distinguishing characteristic of growth investors is that they care little about the absolute price level and almost entirely about earnings growth. If earnings stabilise, then the growth investor moves on. Since the market generally rewards growth this is a risky game. When earnings flatten or disappoint, the share price of these growth companies often decline rather than stabilise with the earnings. Buyers of Internet stocks are buying purely on growth expectations since the companies that they are buying usually have no current earnings and the price is many times the net assets owned by the company.

Value investors, such as ourselves, try to determine the true or intrinsic value of a company by analysing such basics as its history, current circumstances, management, balance sheet and competitive position. This intrinsic value is compared with the current share price and used to identify those which are under priced and most likely to advance. The approach utilises to a minor extent a bit of each of the other techniques since it considers price, potential earnings growth and current circumstances of the company. Value investing is often associated with Benjamin Graham who promoted this approach and wrote the classic 1934 investment text "Security Analysis".

Tomorrow we will describe our value approach to investing in more detail.