"Where is the market going to go?"
From its peak in May, the JSE had declined from 42000 points to about 38100 points to the end of June, a fall of 9%. This drop caused some clients, not many, to call to say they felt it would fall further. These kind of calls always raise two questions: one, if they knew in May the market was going to fall why did they not call then and two, if they did not know the future then, why will they know the future now? We believe that no one really ever knows what will happen in the future and listening to the many soothsayers on radio and television is a waste of time. It is the facts that matter in investing, not emotions. Furthermore how come no one phones when the market has gone up 10 per cent to inform me that the future is unclear?

"Why hold so much cash?"
As markets go up and certain investments reach our target prices we sell. If no ideas present themselves at the time, we sit on the cash. We will patiently wait until Mr Market provides us with an opportunity to purchase securities that were equally as attractive as the ones we sold. Sometimes we may need to wait for quite a while. This is an active decision we take. Some investors feel that we should not be paid to hold cash, but it is our belief that the choice to hold cash is a decision taken by us to avoid the permanent loss of your capital. Is that not what we are paid to do? We believe that our fact sheets do a very good job of telling our investors how much cash we hold and if investors are uncomfortable with our cash holdings, they need to take that into account in their asset allocation decisions. Of course they risk the chance of missing out when we do invest.

"What is it worth?"
Recently we had a young student spend three days with us as part of a job shadow program and during the investment part of the assignment, valuations were discussed. He pointed out to us that his accounting teacher had asked the question: "How much does the Berkshire share cost? To which the student replied: "No sir, you should ask how much is it worth?" It is said, ask an Englishman how wealthy someone is and they are likely to respond: "He is worth 20 000 a year". Nothing is mentioned about his asset value. The value of an orchard is not determined by its trees and land but by the income it produces. Investment in rare coins, French wines and precious metals do not produce income, this is pure speculation and your return is dependent on someone else paying a higher price for them later. The value of an asset is the sum of the future cash flow, over the life span of the asset, discounted at an appropriate rate.

Reading
Reading books is an important part of success and waking up each morning a little smarter cannot be a bad thing. There are many books written on investing, but none of them will make you rich. It is the ones that really make you think about investing that will be the most rewarding and are deserving of your time.

The Nedgroup Investments Bravata Worldwide Flexible Fund delivered a return of 14.9% for the 2012 calendar year. Since inception, the Fund has preserved the purchasing power of every rand invested and has recently managed to get closer to our goal of providing investors with inflation plus 5%. It is also pleasing to note that a significant amount of this return was made with reduced risk.

We do not trade very much, preferring to follow the advice of Charlie Munger; letting the investments work for us. Too many investment managers proclaim to be long-term investors, but rarely hold their counters for more than a year. Informed investors will note that many of our shares have been held for more than five years. Berkshire, Redwood Trust, Delta and Bowler Metcalf are good examples of these long-term investments.

A further attribute of the Fund was its ability to hold counters that in the short term, fell something like 50%, but to add to them as they declined so as to enjoy returns of 50 to 100 percent once they recovered. Redwood Trust, CEMEX, Berkshire, Gameswork Shop and Jumbo Retail contributed significantly to our long-term performance. With the exception of Berkshire, most South African investors will not recognise these companies and it is our intention going forward to continue to look for similar companies to invest in.

Of course we did have some large detractors of performance, mainly The Washington Post and Dell. Unfortunately, these were large holdings and certainly held us back. We have had to scale back our expectations, but feel that the current share prices reflect too much pessimism.
We added new investments and in line with our thinking to try and introduce some uncommon ideas, Loews (an industrial conglomerate) and Leucadia (a mini Berkshire) were purchased. Philips was also added to the portfolio as it shrunk its business to three divisions from five.

As mentioned last month, we are excited about the future. The investments are not overpriced despite some having run quite hard over the last few weeks and longer term they should do well. The Mayans were wrong about the world ending! It is likewise futile to predict the future about markets, we would rather just do sensible things with our investments, try not to lose capital and be independent in our thinking.

Just as we were getting used to all the uncertainty in Europe, the monetary authorities and their respective governments decided that one euro in Germany is not worth the same as one euro in Cyprus. If we think carefully about what happened, these actions indicate that until there is fiscal union in Europe, this experiment will continue to throw out all kinds of surprises.
There is another experiment taking place. The Japanese have appointed a new reserve bank governor whose intention is to emulate the greatest of all central bank governors, Helicopter Ben Bernanke. Not wanting to be left out, Super Mario (Draghi), who proclaimed early after his appointment, "I will do anything it takes to preserve the euro," has also climbed onto the bus of printing money. All of these actions are unprecedented and we do not know how it will end. These reserve bank governors have shown us how to get onto the bus, but not how to get off.

We highlight the above scenarios because we continue to believe that investors have not yet adjusted to the "new normal". Expectations seem to be out of kilter and the markets appear to still have a casino-like feel to them. In many cases, sins of the past have been forgotten and investors rewarded by the three wise men, but perhaps I should say, "The three dark horsemen of the apocalypse." Who knows, maybe the newly appointed governor of the Bank of England will become the fourth horseman?

The Fund holds a lot of cash. We have sold shares as they reached their target prices set years ago. Opportunities are scarce and risk is rising. I often hear the phrase 'cash is trash' but no-one mentions the opportunity cost of holding something that you cannot sell in order to buy something of much better quality. We do not know what the future holds, but we can protect ourselves by purchasing assets with strong franchises that will retain some form of pricing power. When we cannot find opportunity, our cash will pile up. Investors need to take this into account when entrusting their capital with us. They also need to know we will invest should markets correct. Our thinking has always been that the longer your time horizon, the lower your risk as an investor. Much of our success is because we have a 5 to 10 year time horizon and the Fund is suitable for such like-minded investors.