Two observations from a recent Allan Gray interview:
One of the free lunches in investing is for a company to invest and build scale without the market pricing in this growth potential. If the share remains flat after all this investment, you get all that growth for free. Note, the investments must be NPV accretive.
The fair value of the share is a number that one does not expect to materialize, to ever exist. It is instead a blended number based on either averaging different valuation methodologies, adjusting for risks or mean reversion. In this instance, the nature of the Tencent business meant that it would be all-or-nothing. The fair value would not rely on the best case scenario, one would discount this possibility to allow for a margin of safety. Unless during the investment period one binary outcome becomes inevitably more likely than the other, the Fair Value will not capture the true eventual value (i.e of Tencent ends up winning). But this is part of the value investors investment process. This is also partly why value investors sell too early, allowing for the option value that is evident to materialize, but perhaps not being exposed to the vulnerability of being tested by the business reality right at the end. The equivalent, in poker parlance, of 'betting on the river'.
1) "...even SA Breweries interestingly enough if one had to take a relative performance of South African Breweries relative to the stock market, while it was building its empire it was actually a very poor investment, which is something quite fascinating"
One of the free lunches in investing is for a company to invest and build scale without the market pricing in this growth potential. If the share remains flat after all this investment, you get all that growth for free. Note, the investments must be NPV accretive.
2) Naspers: "...we did perhaps two or three separate reports on Tencent trying to understand the competitive position in China and I guess it was one of those shares that the winner takes all, it’s a network affect. As more people go on Tencent more of their friends join, which means more of their friends join and they really did come to dominate the market there."
The fair value of the share is a number that one does not expect to materialize, to ever exist. It is instead a blended number based on either averaging different valuation methodologies, adjusting for risks or mean reversion. In this instance, the nature of the Tencent business meant that it would be all-or-nothing. The fair value would not rely on the best case scenario, one would discount this possibility to allow for a margin of safety. Unless during the investment period one binary outcome becomes inevitably more likely than the other, the Fair Value will not capture the true eventual value (i.e of Tencent ends up winning). But this is part of the value investors investment process. This is also partly why value investors sell too early, allowing for the option value that is evident to materialize, but perhaps not being exposed to the vulnerability of being tested by the business reality right at the end. The equivalent, in poker parlance, of 'betting on the river'.
