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Patience rewards with outperforming investments

Investment outperformance always occurs in cycles. Simply put, some underperformance precedes outperformance. The important issue is that, over time, the outperformance must outweigh the underperformance.

The cycle of underperformance followed by outperformance is due to investors not being able to predict the future accurately, which leads to an over and under estimation of value resulting in an opportunity. In other words, to do better than the market, you need to find something that the market does not yet know about. This “know-how” comes from research in finding an investment that is underperforming its true potential, before that true potential is discovered leading to its real value being realised and outperforming. This can require some waiting and patience.

An example to illustrate this is, Orbis has had some disappointing performance over the last year as it has underperformed the market by 12%. However, over the last 30 years, the Fund has – on average – outperformed its benchmark (World Equity Index) by a massive 4% per annum. This equates to your investment being worth three times more than if it was invested in the benchmark. Then again, these returns have not been in a straight line. There have been eight previous periods where the fund has underperformed its benchmark by more than 10%. Interesting to note, is that on each of these occasions the Fund has recovered in the following year.

Orbis’ philosophy of buying cheap value stocks instead of exciting, fast-growing companies has proven to be a winning strategy. The risk with exciting companies is that often the growth prospects are seen to be infinite resulting in them being overvalued and eventually underperforming.

Alternatively, value companies usually have growth prospects that are underappreciated or are going through temporary difficulties. It can take some time for the market to realise these better prospects, leading to an initial underperformance, which precedes the outperformance.
Over the last few years, these “exciting” expensive stocks have become more expensive making the investment environment difficult for a value investor, such as Orbis. This investment approach may be frustrating as the performance of the Orbis Equity Fund suffers, but the silver lining is that some of the value stocks are even cheaper and are being further added to. Currently, stocks in the Fund are trading at above average discounts to their intrinsic values, which should support good future outperformance. Simply put, some patience is required.

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