There is a paradox at the core of fundamental investing: the future is unpredictable and yet to value an asset one needs to have a view of the future.
What appears ‘obvious’ today, may be very different in the future
Let’s say you want to buy a store-front property on the main street in your suburb or town. You do thorough research. You find that foot traffic has been growing, vacancies are low, and rents have been rising comfortably above inflation. The town is prosperous, drawing income from diverse industries. Buying the property seems like an obvious choice. A few years pass and a new shopping centre is built a few miles away. The foot traffic on your street starts to decline and a few weaker businesses are forced to shut down. Vacancies rise, rents fall. Property owners hold out for a better price, and property valuations slide slowly. Would you invest in that storefront property now? And if yes, at what price?
The future is fundamentally unpredictable
You know your town and the property in question very well. You know how much money it makes today. Yet, its future cash flows are truly uncertain. Could empty storefronts drive away even more traffic, causing additional empty storefronts? Or will lower rents attract new business, leading to a return in foot traffic?
The dynamics of national and global industries are even more complex. There are many more competitors, suppliers, distributors, technologies, products, regulations, currencies, changing demographics and shifting lifestyles.
Even if it were possible to build an intricate model of the world, it would still be impossible to predict industry dynamics beyond the very short term. Unpredictability is inherent not only in the economy, but also in many other natural ecosystems, from plankton in the Baltic sea to predator-prey networks in national parks. Some scientists suspect that unpredictability is a fundamental property of life.
A successful investment strategy must address the investor’s paradox
The unpredictability underlying the investor’s paradox is fundamental and inescapable. A successful investment strategy must work with this unpredictability and address the investor’s paradox.
Share
Equity Trustees Limited ABN 46 004 031 298, AFSL No. 240975 is the issuer of units in the Allan Gray Australia Balanced Fund ARSN 615 145 974, Allan Gray Australia Equity Fund ARSN 117 746 666 and Allan Gray Australia Stable Fund, ARSN 149 681 774 (Allan Gray Funds) and units in the Orbis Global Equity Fund (Australia registered) ARSN 147 222 535, Orbis Global Equity LE Fund (Australia registered) ARSN 613 753 030 and Orbis Global Balanced Fund (Australia registered) ARSN 615 545 170 (Orbis Funds). Allan Gray Australia Pty Limited ABN 48 112 316 168, AFSL No. 298487 is the investment manager of the Allan Gray Funds.
Past performance is not a reliable indicator of future performance. There are risks involved with investing and the value of your investments may fall as well as rise. This represents Allan Gray Australia Pty Limited and Orbis Investment Advisory Pty Limited’s view at a point in time and may provide reasoning or rationale on why we bought or sold a particular security for the Allan Gray or Orbis Funds or our clients. We may take the opposite view/position from that stated, as our view may change. If this article is authored by Orbis, it does not prohibit the Orbis Funds from dealing in the securities before or after this article is published. This article constitutes general advice or information only and not personal financial product, tax, legal, or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person and may not be appropriate for you. We have tried to ensure that the information here is accurate in all material respects, but cannot guarantee that it is.
You should consider the relevant funds’ Product Disclosure Statement (PDS) or Information Memorandum (IM), as applicable, before acquiring, holding or disposing units in the Allan Gray or Orbis Funds. The PDS or IM can be obtained from
www.orbis.com.au and www.allangray.com.au.
Target Market Determinations (TMDs) for the Allan Gray products can be found at
allangray.com.au/PDS-TMD-documents,
while TMDs for the Orbis Funds can be found at www.orbis.com.au on the 'Forms' page under 'How to Invest'. Each TMD sets out who an investment in the relevant Allan Gray or Orbis Funds might be appropriate for and the circumstances that trigger a review of the TMD.
Managed investment schemes are generally medium to long-term investments. They are traded at prevailing prices and the value of units may go down as well as up. There are risks with investing the Fund and there is no guarantee of repayment of capital or return on your investment. Subject to relevant disclosure documents, managed investments can engage in borrowing and securities lending. A schedule of fees and charges is available in the PDS.