Forecasting

2017-01-25T05:38:56+00:00 January 17th, 2017|

Time to forecast?

It’s that time of the year when many pundits provide an opinion on what they forecast for the year ahead. Some even go so far as to predict what the exchange rates or market indices will be as at the end of the year.  A good way to check out how good these forecasters are is to look at their previous forecasts and check how well their predictions panned out. Inevitably, these forecasts are more wrong than right.

If 2016 has thought us anything, then it is that we are poor at forecasting and predicting outcomes. There are far too many variables, including behaviours and emotions that influence what happens in the social, political and economic environments and they all influence each other as well. Thus, to be able to predict outcomes with high levels of certainty is an impossible task.

At Lunar Capital, even though we make decisions about the future, we do not forecast or predict what the future will bring. We analyse the current landscape, try and understand the risks in the market (expecting also that there may be risks unbeknown to us) and make investment decisions based on this assessment. Typically it means that we do not invest on the basis of a single outcome. Similarly, we have a longer term horizon in our investment decisions.

In a previous blog, Growth at a Fair Price, we outlined how we make investment decisions. In this blog, we will use this methodology to re-assess our decisions.

 

Reviewing our Investment Themes

At the outset, it is important to note that we are primarily a South African based fund. Our mandate limits us to have a maximum of 25% in offshore assets. In the offshore portion of our fund, we have a bias towards technology and pharmaceutical/biotechnology businesses.

In the table below, we relook at the key investment themes we identified when we launched our fund last year. We assess whether the investment theme is still valid or not and what are the possible investments we could make to take advantage of that theme.

 

 

Figure 1 – Reducing costs of Wind and Solar

 

Valuation and Investment Strategy

The next step that we take is to value these businesses to determine if they meet our investment criteria. We typically look at price earnings ratios, cash flows, return on equity, net asset value, debt to equity ratios, etc. We also assess other qualitative measures like management, industry dynamics as well.

From this we determine the businesses we want to invest in and how much we want to invest. We then construct a portfolio that we are comfortable with under the circumstances and given our assessment of the value and the risk.

This is by no means a guarantee of success, and we are sure that we will make some decisions that will turn out unfavourably. But at an overall portfolio level, we think an approach like this has a better chance for success than if we tried to forecast say the Rand/Dollar exchange rate and bet on that outcome.

 

Warning

 There are no guarantees in the investment world. Similarly, whilst we share our investment philosophy and strategy with you, we are by no means suggesting or recommending that you follow our advice and buy into the companies that we mention. We hope however, that it helps you in choosing an appropriate investment strategy for yourself.