Two observations on investing

Two observations from a recent Allan Gray interview:

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'. 

Is VIX a measure of risk?

Stock 'fear gauge' flawed, Citi equity trading chief says

"A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it's an asset class and it's more traded for yield than protection," Pringle said. "The growth of structured products around VIX drove that move. In most cases, the VIX is sold to generate yield but during some stress periods, the weakness in the spot level triggers significant computer-generated technical buying from these products," he said. Pringle cited Citi trading strategy research showing tens of billions of dollars' worth of assets under management linked to the VIX through structured notes, which had to be rebalanced to reflect actual market moves. This dampened volatility, he said. The Citi data showed these VIX-related contracts make up about 34 percent of overall volatility trading on the S&P 500 and as much as 44 percent of the short-term, 2-month volatility."

Platinum was the hardest hit commodity by the financial crisis

-from Lonmin presentation.  Note, this is demand, not prices:

SA Platinum Stocks Update

Implats preferred.
Then Amplats.
Then Lonmin.

SA Listed Property Update - June 2013

The sector has now given back all of the first quarter’s impressive gains and is flat year-to-date.
As a result of last week’s price declines, the one year forward yield on the listed property sector has risen to 7.3%, while prospects for medium-term growth in distributions remain unchanged at 7% to 8% per annum.

Might be attractive to enter the sector at these levels. By way of indication, Growthpoint hit R23 this week, placing it on forward yield of 6.73%. R22.15 if possible will give an investor a 7% forward yield. 

Institutional money at equity overweight extremes

From Reuters article: "Great Rotation" may have already begun

"While this switch may be small, it helped boost the equity weightings of U.S. pension funds and insurance companies - a $25 trillion industry - to 45 percent at the end of the first quarter, the highest level since 2007, according to JP Morgan."

What is unclear is the seeming contradiction between this statement in the article and the image that they subsequently link to: "until now, the available data showed the flows driving stocks have come out of money markets, not fixed income."

Which makes me wonder how Alan Higgins can say "equities are under-owned at institutions. They are rebuilding. You are likely to see more of this over time."

Vodafone stupidity

I was about to build a large position in Vodafone on the basis of the Verizon Wireless takeout. Thankfully i managed to get out before this disaster occurred.

We all make mistakes. The reason I was willing to go heavily long Vodafone was that I believed the Vodafone board would have learnt from their prior decade of poor acquisitions. It seems that I was mistaken. Reminds me of Warren Buffett: "Always try to invest in a company that a monkey could run and still reward shareholders because eventually a monkey will run it."