Rob Formby
Quarterly Commentary

2019 Q1 Comments from the Chief Operating Officer

The first quarter of 2019 was characterised by a lot of “noise”: political noise as parties gear up for the general elections, noise generated by our energy supply crisis, the noise around crucial policy decisions, and economic noise around South Africa’s growth figures.

We are subjected to a constant humdrum from an overload of information that creates an atmosphere of uncertainty. This can lead to us making inappropriate decisions by extrapolating the bad news into our investments. Ignoring the noise can therefore increase our chances of long-term investment success.

Shutting out the noise

In his book Before Happiness: The 5 Hidden Keys to Achieving Success, Spreading Happiness, and Sustaining Positive Change, Harvard researcher Shawn Achor provides useful tips for long-term investors to reduce their exposure to investment noise. He gives four categories to identify and define noise, and by doing so, we can respond appropriately. He suggests asking the following questions:

  1. Is the information useable? If an event has no effect on your long-term investment strategy, then you should disregard it. 
  2. Is it untimely? If the information is likely to change by the time you are ready to use it, then it is noise. A good example of this is short-term market returns: By the time you can use the information to decide whether to invest, the market may have already turned the tide. 
  3. Is the information hypothetical? Is it based on what someone thinks might happen, such as economic predictions? If it is, then you should discard it. 
  4. Is it distracting? If the information that you receive distracts you from your long-term goals, then you should ignore it.
 Our investment team ... works hard to disregard noise and make good decisions regarding the companies we invest in

The information we receive can have a significant impact on our outlook and, ultimately, our decisions – even without us being aware of it. It is essential to learn to recognise when information is not useful and filter this out or ignore it. Our investment team is acutely aware of this and works hard to disregard noise and make good decisions regarding the companies we invest in. 

Finding signals within the noise

In his article, Nick Ndiritu looks at separating the noise from the facts around investing in frontier African markets. By looking at the businesses that have steadily built thriving operations on the continent, he presents a compelling case for attractively valued opportunities in frontier African markets that are well-suited to a patient contrarian investor. 

Similarly, Jacques Plaut considers the case for investing in MultiChoice. Much of the market has adopted a wait-and-see attitude towards the company after it unbundled from Naspers in March. By looking at its operations in the Rest of Africa, as well as its cache of highly valuable local content and exclusive sports offering through DStv – that gives it a strategic advantage over newcomers Netflix and Amazon – he explains why there is good value to be found in MultiChoice.

Are you invested in the right unit trust?

To be a successful long-term investor, one of the key decisions to make upfront is where to invest your money. Making sure that you know what you are getting from your chosen investment, and that this aligns with your objectives and investment horizon, is critical. When you are invested in the right unit trust, you are less likely to be swayed by investment noise that may lead you to make knee-jerk decisions during times of uncertainty.  In the Investing Tutorial, Lettie Mzwinila looks at the information that is available to you to assess whether the unit trust that you are interested in matches your needs and objectives.

 It is essential to learn to recognise when information is not useful and filter this out or ignore it

Recent returns in the Allan Gray Stable Fund have been more volatile than in the past. Stephan Bernard and Radhesen Naidoo take a critical look at the Fund’s positioning and performance as they assess whether it is doing what it promises “on the tin”. 

Warren Buffett once famously wrote in a shareholder letter: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” This quote has been adopted as a sort of a mantra by value investors. Alec Cutler, from our offshore partner, Orbis, explains why our investment strategy is not merely about “buying cheap stocks”, but instead about investing in good businesses when investor expectations are low. 

It is an unpleasant thing to consider: What will happen should I one day not be able to make my own decisions, in particular, decisions about my investments? Jaya Leibowitz explains the options that are available to investors, and their loved ones, should they be affected by severe mental incapacity, such as that caused by Alzheimer’s disease. 

The next few months in the run-up to and following the elections are likely to intensify the political and economic noise around us. It is important that investors recognise when information is not useful and then tune it out for better investment outcomes.

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