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The power of paradigm shifts

Speaker:
Nick Grace
Title:
Portfolio manager
Based in:
London office
Investment experience:
22

NICK GRACE: I spent about 17 years as a global commodity analyst, and what it taught me very, very early on is that I think too many people start with valuation. In my opinion, too many people start with valuation as a screen or as a mechanism to identify where they want to do their analysis. And what I learned very early on is that it doesn’t make sense to say a copper company is expensive or cheap until we know “Are we in a $3 copper world, or are we in a $1 copper world?” And the paradigm shift we’ve seen over the last decade with the emergence of China has clearly shifted us from a $1 copper world — where that was the situation in the first 10 years of my mining career — to an environment where we’re in a $3-plus copper world. So that’s important; that’s where I spend my time.

I try to identify what environment [we are] in, and then, once I’m confident about whether it’s a $1 world or a $3 world, I then work with the analysts to put that through the valuation models that they have — and then we can have the discussion about whether something is cheap or expensive.

My argument is we need to understand demand, because that’s what changes quickly and that’s what really drives these stock prices. So I moved to Tokyo for four years and started spending time in China once a quarter from around 1994. And that experience really taught me that if you can identify paradigm shifts, or structural changes — of which, arguably, there are not too many — but if you can identify one of those, they are incredibly powerful and long-duration events.

The emergence of China and BRICS was one which was obviously very pronounced, but there are other ones: cloud computing, shale gas here in North America (I can name some others). So I tend to think about the world in terms of “where are the structural changes coming?” And that allows me to have a duration longer than most people.

So I really think we need to focus on getting the inputs right. Our competitive advantage is that we have a longer duration than most of our competitors. So I can sit and think about those parameters over a much longer time period rather than doing mechanistic screens on valuation.

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