Interview 014_Craig Bodenstab
Jun 21, 2013
byInvestment in Japan
Company: Orbis Investment Management Limited
Craig Bodenstab is Director of several of the Orbis group companies. He is the head of the firm's Investment Counsellor Group, which is responsible for sevicing its large institutional clients and investment consultants, and is also accountable for the firm's global Trading operation. Craig holds a Bachelor of Commerce from Dalhousie University, a Master of Business Administration from Columbia University and London Business School, and is a Chartered Financial Analyst. Craig joined Orbis in 1998 and prior to that had experience at Swinburne University of Technology, First Bermuda Securities and most recently as Managing Director of Cameron Capital Management.
Please describe your investment philosophy and how you invest.
“Fundamental, long-term, contrarian”. We are fundamental investors in the sense that we try to think like business owners when evaluating investment opportunities. That means we seek to invest in shares of companies that trade at a significant discount to our assessment of the intrinsic value of the business—intrinsic value being what a prudent business person would pay for the company. We aim to sell when a company’s share price reflects its intrinsic value and when we can identify more attractive investment opportunities elsewhere.
While we believe the share prices of such companies will eventually reflect their intrinsic value, the timing is uncertain, so we always take a long-term view. By looking at data going as far back as possible, we try to judge the normal range of a company’s profitability and valuation over many market cycles. Whenever we buy a stock, we are prepared to wait for three to five years—sometimes much longer—for the share price to close the gap with our assessment of its intrinsic value.
Last but not least, we are contrarian. Our philosophy—both as a firm and as investors—demands a contrarian approach. We often find that the companies we like best are the same ones that are least liked by others. Our portfolios typically include companies, sectors and countries whose prospects are deemed to be deteriorating or worse than average in the eyes of many market participants. We believe that much of our past success results from our fiercely independent, contrarian way of thinking.
Of course, being contrarian is very different from being blindly contrary, or simply doing the opposite of what everyone else is doing. The market ends up being correct most of the time. So we must concentrate our resources on only our very best ideas, where we believe we have an edge and where we strongly believe that the market will at some point come to share our view.
Describe today’s current investment opportunities. Why global equities?
We are bottom-up stockpickers. Rather than trying to form a view based on macroeconomics and top down analysis, we look at the world one company at a time. By taking an unconstrained, global view, we can apply our core skills of individual company research and stock selection to the most compelling opportunities at any given time, wherever they may be, while avoiding stocks and stockmarkets where valuations appear expensive.
The past few years have been particularly challenging for stockpickers. Valuation dispersions have increased somewhat of late and while not extreme, are more constructive than we have seen in some time. All else being equal, greater dispersion should make it easier to find compelling value through stock selection. We also believe a portfolio of carefully selected equities is today likely attractive relative to bonds. Following a more than three decade bull market, bonds now appear more expensive to us, and we would therefore prefer a portfolio of equities that appear to offer good value.
Please explain why you have decided to enter this industry.
Our firm exists to help our clients achieve their long term financial goals. Money empowers by affording more choice, and if we’re able to deliver a superior return for our clients, we can make a meaningful difference in their lives. For an individual or family this might mean a nicer home, a better education or a more comfortable retirement. For institutional investors, it might mean better retirement benefits for their employees or more scholarships for a university endowment fund. If we are successful in our efforts, we can have a tremendous impact on many people, and I think that makes working in our industry incredibly fulfilling. But of course, this work can be much less fulfilling over the short term, as investors try to extrapolate recent
trends to make long term predictions. To add value for clients, I think it’s essential to stay focused on the long term.
What do you see as the biggest risks in today’s environment?
Tough question – I’m not sure that I can say with much confidence, but I’ll try to answer your question. In my view, the single most important risk factor that investors face – in this environment or any other – is the permanent loss of their capital. We therefore place considerably more emphasis on avoiding permanent capital losses than on the risk of underperforming our benchmarks or other investment managers. The possible bubble in “low risk” assets such as cash, and maybe more so in long-term bonds, is one of the largest we have seen in some time. Areas of the stockmarket that are seen as “safe” – such as consumer staples shares – have also become very popular and possibly expensive. While this may seem sensible in a highly uncertain environment, if the price one pays for safety is too high, it could be risky.
What is your ultimate investment belief? What do you try to achieve, and what would you never do?
As best we can, we try to give clients what they need, as opposed to what they want. Our experience in the run-up to the tech bubble is a good example. Understandably, one thing clients want is strong relative performance, and in the late 1990s, our performance was relatively poor. In our view, the valuations of TMT shares weren’t justified, so we weren’t comfortable putting our clients’ capital at risk in those names. As the bubble grew, many stocks with already-high valuations saw their prices climb even further, and managers who held them did quite well. We faced a great deal of pressure from our clients to buy TMT shares. We chose not to, and lost over a third of our clients as a result. Ultimately, our view was vindicated when the bubble burst, but disappointingly many of our clients were not there to benefit – that was the real tragedy.
Earning the trust and confidence of our clients in the long run is everything – without it, we have nothing. This is a trust business and a highly competitive one at that. We once had a prospective client who wanted to give us a very large sum of money to manage, expecting consistent and significant outperformance each year. While we have confidence in our ability to generate respectable returns over the long term, it would have been irresponsible of us to accept their subscription knowing fully we could not deliver consistently on their expectation. As a result, and to the client's surprise, we suggested they not invest.
How best would you protect client assets?
From an investment perspective, avoid paying too much for shares.
Please recommend your favourite books on investment.
One would be Against the Gods: The Remarkable Story of Risk by Peter L Bernstein.
Please recommend any media source you check on a regular basis.
I regularly read the Financial Times, The Wall Street Journal, and The Economist.
•This article originally appeared on June 21, 2013. Any views presented in this article are as of such date and are subject to change.
•This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.