Rob Dower
Quarterly Commentary

2017 Q3 Comments from the Chief Operating Officer

Over the course of history, scientists and engineers have made steady progress, with each discovery or innovation building on the last. On the other hand, many social sciences (including economics) have made improvements in understanding human behaviour, but not very much in changing behaviour. Humans tend to repeat mistakes.

Take mining as an example. The industry has enjoyed significant engineering and scientific progress over time. Every few years new techniques and equipment emerge to identify and extract mineral deposits more efficiently. But there are also recurring human challenges that must be tackled. Mining companies need to avoid common decision-making biases, for example, by using conservative commodity prices, capital budgets and project plans when they develop or expand mines instead of extrapolating recent high prices, or of falling prey to optimism. Once a project is underway, wise managers are aware of “sunk cost” decision traps, where they may be tempted to pour good money after bad. Poorly timed or poorly executed capital allocation decisions at a high point in the commodity cycle can risk an entire mining group if a large project is undertaken on overly optimistic price, cost and execution assumptions. In his article on valuing commodity companies, Rory Kutisker-Jacobson finds some of these pitfalls in Anglo American’s historic decision making.

South Africa’s mines face additional challenges. Gold and platinum mining in South Africa is labour-intensive, difficult and dangerous. Wages have increased well ahead of inflation for a decade. Other input costs, like energy, have risen even faster over the last few years while the prices of many of our mined commodities have languished. The industry and its responsible government ministry are at odds over licensing, investment and transformation. Like fishing rights, mining rights are theoretically separable from the skill required to exploit them, so they are contentious to allocate and extremely vulnerable to corruption.

Under this kind of uncertainty most mining companies have simply not been able to responsibly make the long-term investments needed to expand capacity and may be missing the beginning of the latest cycle. At exactly the time when they should be ramping up to meet increasing global demand, mining employment and production are both locked in a steady decline. For the sake of our country, political leaders have to prioritise growth in employment and investment over arguments about sharing the shrinking pie, business leaders need to be beyond reproach on transformation, and neither can afford to disengage.

What will happen to the price of bitcoin?

Jacques Plaut writes about bitcoin, which is also mined, albeit not often underground. We can’t claim to have the answer to what heights or depths speculators will drive the price of bitcoin, nor whether or not it is the currency of the future. Jacques’ somewhat sceptical article demonstrates an approach to analysing virtual currencies that mirrors our approach to valuing shares and other assets, and explains why bitcoin is not a likely investment in your Allan Gray portfolios.

Where to from here for emerging markets?

Knowing how we analyse and pick shares, you may be wondering how we apply this thinking to countries or regions. The short answer is that we don’t. Our portfolios are built by comparing the attractiveness of individual stock ideas and we guard against making predictions about a whole sector, country or region. Looking at the Orbis Emerging Markets Equity Strategy, Woojin Choi, from our offshore partner Orbis, explains how we and Orbis use our core skill – assessing the relationship between the share price and fundamentals of individual businesses – to invest in a collection of businesses that must each stand up to careful scrutiny to earn their place in our portfolios.

How to make good decisions

As investors, we don’t always realise how our decisions are inadvertently based on predictions. When we decide to switch between unit trusts, we are making a prediction about their future performance; when we worry about short-term underperformance, we are predicting a pattern of this continuing into the future; when we race offshore when the rand plummets we are predicting that the currency will only get weaker in the future. Rather than basing your personal investment decisions on predictions, Lettie Mzwinila offers some rules for better decision-making.

Our guest writer for this issue – Morgan Housel – echoes this sentiment. Morgan is an expert on behavioural finance and investing history. Having seen the investing world from several different angles, he suggests that there are four skills that govern most outcomes. Making accurate predictions is not one of them.

Introducing the Jakes Gerwel Fellowship

Most of you are familiar with the good work that the Allan Gray Orbis Foundation is doing in developing entrepreneurial talent in our country. As a premium scholarship provider, the Foundation has country- wide contact with school principals and teachers, and has seen from close quarters the incredible potential impact of teaching excellence in schools.

In April 2017, the Board of Allan Gray Orbis Foundation Endowment gave the commitment to create the Jakes Gerwel Fellowship to honour the legacy of a true, high-impact teacher who was also the Foundation’s inaugural chairperson and a close confident to former President Nelson Mandela.

To give you some insight into what the Jakes Gerwel Fellowship is about, Jeremy Gibbon looks at the state of education both in South Africa and globally and discusses how the Fellowship aims to achieve its vision by identifying, educating and equipping demographically diverse individuals who have the potential to make a significant impact in education.

If you know of any talented young people who want to play a leading role in developing our country, and see the classroom as a powerful channel to do so, please send them in the direction of the Fellowship.

Thank you for trusting us with your savings. 

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