WE follow the discipline of value investing, as practiced by our role models, foremost amongst them being Warren Buffett and Charlie Munger. The key tenants underlying value investing are-

• View the ownership of shares as an ownership in the underlying business, rather than a piece of paper to be traded regularly. The stock market is a place to own businesses with good long-term fundamentals at attractive prices, rather than a casino for stock trading, as many people envision it.
• Buy with a margin of safety, where your calculation of intrinsic value is well below the market price. This leads to protection of principle on the downside even if your analysis is wrong, and creates huge wealth on the upside if you are right.
• Be a contrarian in terms of psychology, to successfully buy low and sell high. As the stock market sometimes operates at irrational extremes of greed and fear, the rational investor can take advantage of the markets manic depressive personality.

Our experience of investing in Pakistan’s capital markets over the last two decades has led to a conviction that value investing outperforms massively in the Pakistan context. Here are some of the top reasons why-

• Pakistan suffers from a large perception arbitrage; reality is significantly better than the perception. In times of macro and political stress, this arbitrage widens considerably, creating the opportunity for large capital gains.
• Pakistan’s closed economic system is fairly predictable in terms of its boom and bust patterns, where busts usually result from a balance of payments crisis. Calling the economic cycle correctly allows for huge alpha generation. Most world economics are fairly open, where the timing of economic cycles is much harder to predict.
• Despite the multitude of economic challenges, Pakistan has demonstrated strong growth across a range of cyclical and consumer sectors based on its demographic, income, and migration trends.
• Some Pakistani corporates have strong corporate governance and a growth mindset that are on par with regional peers, but offer much more attractive valuations. These companies have generated huge wealth for their shareholders in the long-term.