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.

Investing in Equities

Of the major classes of assets, equities are generally considered to be the type that will generate the greatest returns but will experience more risk as they do so. They also offer significant opportunities for active managers.

Both theory and practical experience support this first conclusion. The theory is based on the premise that when an investor is presented with a choice between two investments and he expects each to have the same average return, he will prefer the less risky one. This is because there is more chance that the risky one might have experienced a poor return when the investment is sold. Steady gains are preferred to those that gyrate wildly. Accordingly, risky investments should have higher returns than those with less risk. As time passes and the effect of volatility becomes small in comparison to the accumulated gains, the distinction becomes less significant. Equities are generally riskier than bonds or cash; their prices are more volatile. In general, equities can be expected to have higher returns on average than cash or bonds.

A review of average returns for various asset classes reveals that equities, over the long term, have in fact generated higher returns than either bonds or cash. This is why most long-term investors traditionally have a fairly significant proportion of their portfolio in equities. However, do not overlook the qualification about long-term investing. If you are investing for less than five years, the volatility of equities may well result in your experiencing a poor or negative return. Investors looking back over five years since 1925, would see that 35% of the time there would be a decrease in the US stockmarket. This is not unique to the US market. For the last 34 years, the Japanese market has experienced a similar incidence of declines

The diversity of equities also creates more opportunities to take advantage of in-depth proprietary research.

Most investment managers take a "top-down" approach. First they determine, from their economic outlook, which countries to invest in, then which industries and finally which companies. As a result, they are often buying or selling shares based on industry or country factors and not company-specific factors.

For "bottom-up" investors, like Orbis, this offers opportunities. Bottom-up investors first look at shares which appear to be attractively priced and then only limit their focus on these companies when they consider their portfolio to be too concentrated in a particular country or industry. We often find great companies that are selling at very reasonable prices because the average investor has lost faith in that country as a whole.

As a result of being able to identify these opportunities, we think that investing in equities offers far more opportunity to add value than can be achieved using other asset classes. It is important that we do our own research. We are generally most excited when our view differs from the common outlook. This is often when the greatest opportunity arises. While it can be discomforting to differ, it is when others come to share your view that the rewards are reaped.