Howard Marks, a well known investor, has identified how investment fashions rarely repeat in exactly the same way. Instead he points out that the underlying process is a recurring one. Let me relate what he describes:

Ø An idea is born when an undervalued asset is discovered;
Ø Its undervaluation attracts attention, as do pioneering investors' early gains;
Ø The undervalued asset's popularity rises, attracting more and more adherents, even as 'undervalued' moves to become 'fully valued';
Ø It turns into a mania or "bubble," and price becomes immaterial;
Ø Eventually, the last potential buyer is convinced and comes on board;
Ø With no one else left to continue the trend, the bubble of overvaluation is ripe for bursting;
Ø When followers experience the first price declines, disillusionment sets in; and
Ø One-time devotees flee en masse, and the bubble results in a crash.

South Africa is showing signs of being somewhere between the last potential buyer and the bubble. This appears to be the case for the currency and certain industrial counters such as the retailers. I am not sure how Wal-Mart can justify the high price they are prepared to pay for Massmart (which is somewhere above twenty times earnings). They are not alone. It looks like NTT of Japan also paid a high price for Didata. We are not sure what HSBC will pay for Nedbank, but all these deals are being done when the currency appears to be increasingly overvalued. I accept that we are living in a lower interest rate environment and Africa may have potential for growth, but all the above purchases don't make sense to us. These are classic examples of what we refer to as the institutional imperative. Their timing is poor and desperate, but they just cannot help themselves.

The Gentleman of Omaha puts it quite nicely: "What the wise man does in the beginning, the fool does in the end."

We as an investment house have continued to sell local assets and transfer the proceeds offshore, mainly into the USA, and for the first time, into Europe and the United Kingdom in a meaningful way. The strong rand continues to dampen our returns, but those who are more objective will realise the portfolio has returned 9% over the month of September in US dollars. These returns are credible when compared to those of offshore markets. All the other major indices, with the exception of emerging markets, have given returns less than that of the portfolio since the beginning of this year. In terms of Howard Marks' process, we are, I hope, taking the first step towards making a successful investment by purchasing an undervalued asset. It is not popular to invest in the USA and the western world, but as South Africans who believe that history repeats, it seems to us we are faced with a once in a lifetime opportunity to purchase large companies offshore at very good prices. The currency, an important component of our investment return, is in our favour. Many of the companies we own are purchasing their shares with the proceeds of bonds issued at interest rates below their dividend yields!

We are starting to witness behaviour which typically indicates something is amiss: South African investors are bringing back their offshore exposure! I will leave it to you as to where this idea fits into Howard Marks' process, but this feels too familiar and it does not have a pretty ending.

In conclusion, I hope investors believe that what we are doing is what the wise man does in the beginning, while the fools are buying high-yielding currencies. We certainly think we are doing the right thing as we invest substantial parts of our own wealth into the Nedgroup Investments Bravata Worldwide Flexible Fund. I have no idea when this world will rebalance, it could go on for a lot longer than most of us in the investment business will be able to bear, but it will rebalance and our reward should be substantial.

From time to time, I like to look at the transactions over the last six months and see how well our tactical (i.e short term) decisions have worked out. A few things stood out for me. It was period of very little activity and if there was, it was mainly to lighten our equity exposure. It was pleasing to notice, with the exception of one trade, all investments generated positive results.

The South African part of the portfolio continues to do very well in line with our other domestic mandates we manage at Aylett and Co. Besides our new two investments in RECM & Calibre and Astrapak, the only material transaction was our switch into Investec from Nedbank. We are not fond of switches - besides making stockbrokers richer, we are not relative investors. For us, the long-term prospects of Investec are more appealing. Nedbank was a good investment, purchased at a time when it was an unpopular decision and made us reasonable cash. We will keep investors updated on this 'switch'.

Mr. Market of the US has never let us down and is now giving us chances to purchase back shares that we either lightened on, or shunned owing to elevated price levels. Notable purchases were Excelon, H&R Block and Walmart. On the sale side we decided to reduce our exposure to an old stalwart Alas the law of large numbers is against us and Mr Buffett side, stalwart. Alas, Mr. himself has continously cautioned us against having high expectations. The Burlington deal was a big one and was done at a price close to fair value. The railroad is a capital intensive business and will consume cash, something we as investors in Berkshire have not been accustomed to.

Our European and UK part of the portfolio has grown over the years. The businesses we own in large are not European, they are large multi-national companies domiciled in Europe. Their exposures to emerging markets are growing and we are purchasing this growth at low multiples when compared to investing directly in emerging markets.

The portfolio has done well when measured against the markets and global investment managers available to South African investors. While we would like for markets to go up in the short term, our focus is on purchasing good companies at good prices and not overpaying. The intrinsic value inherent in these companies continues to grow and we patiently wait for the market to recognise the value. The strength of the rand has masked some of the good work we have done and this is reflected by the portfolio outperforming the MSCI by almost 10 per cent.

Peter Lynch, author of the renowned investment book "One up on Wall Street" proposed that, from time to time, one should look at one's portfolio as a "Garden of plants". Our job as fund mangers is to ensure that we pluck the weeds and leave behind the roses.

At Aylett & Co, instead of looking at the portfolio in its current form and running the risk of pulling out the roses, we start off with blank piece of paper and select assets and then compare the existing portfolio to the new one. It is an objective way of selling shares that do not appear in the "new portfolio". There weren't many new ideas for the South African portfolio.

The shares we do hold still have some value. AECI, in the long term, is worth in excess of R90 but the strong rand provides some headwinds and reduces profitability - otherwise this would be a larger position. We have sold Nedbank in favour of Investec, which is also a bank, but should benefit from rising markets far more than the high street banks owing to its diverse global business as well as its asset management business. Lewis will benefit from lower interest rates as its funding costs will be lower, but they should be able to write more business. The strong rand bodes well for the purchases they make of products offshore. It is a company that will produce significant cash flow which will go into the expansion of offshore. new stores. Delta although not as cheap as in the past, still has some significant upside. It trades under cautionary.

Most of our assets are offshore and perhaps the cheapest share in the portfolio is the Washington Post. In the past, we have written about the investment merits and the quality of the management team. Barron's, an influential financial newspaper, recently wrote a piece saying it was worth at least double the share price. We have some other quality companies that will do well over the years. These are Coca Cola, Johnson& Johnson and Wal-Mart.

To end off we have high dividend yielders in Media Set, Nokia, Redwood Trust and Energy Resources. Finally, the rand provides a cheap entry point into these quality assets.

Two of the biggest contributions made to investment philosophy by Benjamin Graham (Warren Buffett's mentor) are the concepts of 'a margin of safety' and 'Mr. Market'.

Generally, investing involves looking at a business operation and, if deemed attractive, purchasing it at a large enough discount to what you think it to be worth. Graham pointed out that the safest way to invest would be for one to incorporate a generous margin of safety into the valuation price of the underlying asset.

He also suggested that one should view the market as an emotional partner called Mr. Market. He proposed that when Mr. Market was in a very good mood, he would be prepared to pay a lot more for a share of a business and hence, this was a good time to be selling the asset. Conversely, when Mr. Market was pessimistic and was prepared to sell shares for a lot lower than their true worth, Graham advocated buying these shares from this emotional partner. It is clear that when Mr. Market presents himself in this pessimistic manner normally, the investor can purchase assets with a large margin of safety.

When one looks at our current markets, it appears that our partner is very optimistic. Normally, this is not a good time to be buying assets and certainly not in emerging markets. Secondly, the current valuation of stocks leaves little room for that all important margin of safety.

We live in a time where we have extreme deficits, high unemployment and very low interest rates. National debt is expanding to levels unseen before against the background of little inflation. How will this end? We don't know, and trying to predict the future will only get us into trouble.

Warren Buffet provided us with an additional rule to add to Graham's two principles. Instead of just looking for 'any' business at a discount, one should, in fact, look for a 'good business' at a bargain price. At Aylett & Co, we will not hesitate to invest in good businesses at fair prices despite the fact that short-term prospects for the economy look poor and pessimism abounds.