Not investing in “the market,” an index or ETF, but in companies and managements in 2011

In my last quarterly letter, I commented on the events of August and September.  I wrote: “In the months of August and September investors have become very jittery about a number of factors.  Doubts about sovereign debts, particularly Greece and Italy, have sparked fears of further banking meltdown.  Observers were surprised to watch the tragicomedy of US budget negotiations followed by ratings downgrades.  In addition, as lawsuits develop, companies like Bank of America and Citibank have halved during the course of the year.”  This has captured the character of the quarter in question and explains a lot about its volatility.  At the end of the quarter ended 31^st October, Kurm experienced a lot of volatility and recorded a loss of nearly 12% for the quarter.  Kurm still continues to outperform over longer periods.

Investors in general had become comfortable and even complacent, as was reflected in high stock market valuations in July.  However, it has not taken long for concerns about global growth and financial stability to hurt valuations.  Europe’s continuing crisis now casts a long shadow over investors.  The indebtedness of the developed market governments, the general state of their and their nations’ finances, and the poor quality of the assets of developed world financial institutions are certainly causes for concern.  This is then compounded by fears of inflation and slowing growth in the developing world.  However, in the midst of all this generalised fear, there are, as always, opportunities to be found.

In developed markets, many businesses have valuations which are very attractive to any investor who thinks like a long-term businessman rather than a day-trader.  Specifically, as mentioned in my last letter, Kurm has investments in US financial institutions.  Many of these are trading at prices which take into account any possible bad news and, at times of fear, the bad new priced may well not actually materialise.  Many of these businesses have fixed themselves, and have a very strong core business whose value is masked by the mistakes of the last half decade.  When markets realise the underlying economic strength of the core businesses, prices will eventually return to more realistic (higher) levels.  Last quarter, I wrote: “the underlying companies could actually liquidate themselves and the investor would make at least twice the money reflected in stock prices… Single digit p/e ratios and discounts to tangible book reflect the widespread panic in the markets.  They also represent unique buying opportunities.”

Despite very bad macroeconomics and demographics, there are still many outstanding businesses in developed markets.  After all, we are not investing in “the market,” and index or ETF, but in companies and managements. Sometimes the fears themselves create opportunities, such as with the US financial sector.  In the last few months I have travelled extensively in Latin America, Russia, and the Middle East to understand and acquaint myself with opportunities, business systems and economies.  This is in addition to my earlier travels in southern Africa and Asia.  The emerging and frontier markets are clearly vibrant, thriving, sometimes bustling, and very optimistic.  While it is true that India has inflation and infrastructure problems, China’s growth is uncertain, Kenya has experienced a liquidity shortage, Vietnam is grappling with its financial system, the long-term picture is very positive.  However, one has to identify the right vehicle for investment and pay the right price.

Today’s markets will reward patient long-terms investors and are already punishing short-term, leveraged investors.  I will next write to you about investments in Mongolia and Russia, and will update you with news of the US portfolio too.