Our shared investment philosophy is to buy shares of companies at a significant discount to our estimate of their intrinsic value. By 'intrinsic value' we mean the price that a rational, informed investor would pay if they were buying the whole company. This value can take several forms, making valuation as much an art as a science. It is never possible to pinpoint a company's intrinsic value with precision, but if our estimate is reasonably accurate we can meaningfully reduce the risk that we overpay. As an illustration, let us look at NKSJ, a Japanese insurer and holding in the Orbis Global Equity Fund. Since February 2012, NKSJ shares have fallen by about 15%, and in that time Orbis Global has continued to purchase NKSJ shares. Why? Orbis analysts believed NKSJ was undervalued near JPY1900 a share, so at JPY1600 - with the same long-term fundamentals - it looks even more attractive. Investors have long frowned on the sluggish progression of NKSJ's overall earnings, but headline earnings don't always tell the full story of an asset's worth. One way to value NKSJ is to break it down into three parts: 1) its life insurance business, 2) its property and casualty (P&C) insurance business, and 3) the excess capital beyond what is required to support them. While it is impossible to know the exact split, Orbis estimates that the parts are of similar value. The life insurance business is turning a very respectable profit and is potentially worth NKSJ's share price on its own. Unfortunately, the good work of the life insurance business has been overshadowed by the P&C business, where a poor pricing environment has dragged down earnings. But Orbis research suggests that P&C profits should improve over the medium term. In Japan, NKSJ is part of a tightly regulated oligopoly of large insurers. Part of the regulator's mandate is to ensure adequate industry profitability, and following a few years of weak profits the regulator is letting insurers raise prices gradually. As the more generous regulatory stance is reflected in insurance pricing, NKSJ's P&C profits should rise over time. Will that happen? One can never be certain, but the current share price affords significant room for error. The excess capital on NKSJ's balance sheet provides a buffer against tough times, and has considerable value on its own. Adding on the insurance businesses, Orbis concludes that the group's intrinsic value is far higher- perhaps almost double - than its current market price. Orbis and Allan Gray subscribe to an investment philosophy rooted in common sense: if you consistently buy assets for less than they are worth, over time that should prove sensible. Historically, our approach has rewarded patience and discipline - the patience to hold onto high-conviction ideas until the market recognises their worth, and the discipline to stick to our contrarian philosophy in challenging environments.

Investors are often classified as having either a growth or value style, a distinction Orbis has found difficult to apply to itself. While, like Allan Gray, Orbis always tries to own undervalued companies, a key part of any valuation is expected growth in earnings per share-the higher the growth rate, the better. Orbis analysts research individual companies to determine whether the value of a business significantly exceeds its market price, regardless of where that company fits on the growth spectrum. While the Orbis Global Equity Fund can at times have greater exposure to so-called 'value' or 'growth' names, this is a reflection of the opportunities available rather than an inherent stock selection bias. Still, it can be instructive to consider the Fund's positioning and its effect on performance. Of late Orbis has found an increasing number of opportunities among depressed shares that have lagged the market significantly. The resultant positioning, however, has hurt the Fund's relative performance as the laggards have continued to lag. At times the performance of individual shares will be sufficient to overcome such a headwind, but that has not been the case recently: since the start of 2010, your Fund has underperformed the FTSE World Index by an annualised 4%. Yet Orbis believes the current portfolio is positioned well for future outperformance. Today, the relative valuation of global laggards versus the FTSE World Index is at levels last seen during the height of the technology bubble and the peak of the financial crisis in 2008-2009. In both of those periods, laggards went on to outperform significantly. Your Fund's positioning in favour of laggards has not been extreme, but a number of recent additions do come from the laggard club, including semiconductor manufacturer Micron Technology. After a successful investment in Micron a few years earlier, in late 2011 Orbis began rebuilding the position after the share price dropped and Dynamic Random Access Memory (DRAM) prices fell to levels that would force weaker players out of business, allowing for consolidation and a better future for the surviving companies. Micron has survived and is actively consolidating the industry as the buyer of fallen giant Elpida. With this purchase, Micron has picked up state-of-theart manufacturing capacity at cents on the dollar, while raising its market share to 24%, joining Hynix and Samsung in dominating a consolidated market. Hopefully, this will result in more rational pricing and higher profits. In addition to this tailwind, Micron also offers a significant margin of safety, trading for less than the value of its tangible assets. This is far below the company's historical average, and may provide a re-rating opportunity should DRAM market conditions improve. Orbis believes Micron is much more attractive than the wider market at current prices, and like many currently attractive shares, Micron has been a laggard. If it continues to lag, your Fund's short-term performance will suffer, but over the long term, Orbis believes this and other investments will generate pleasing returns.

Orbis has recently been able to invest in a number of great, growing companies at very reasonable valuations. One example is Walgreen, the largest pharmacy network in the US and a top 10 holding in the Orbis Global Equity Fund.

Nearly two-thirds of the US population lives within three miles of a Walgreen branch, and this population is getting older. The ageing population in the US is a powerful long-term trend. By 2020, over 16% of Americans will be above age 65, up from 13% in 2010. This should drive an increase in prescriptions, as the average American over 65 fills nearly three times more prescriptions than the average 18-65 year old. And when these people head to the pharmacy, they will have a wider variety of generic drugs to choose from, with 2012 and 2013 expected to see the largest waves of generic drug releases in history. In the initial months after a drug goes generic, the gross dollar profit for pharmacies is exceedingly high, averaging nearly four times that of the original branded drug. All of this bodes well for Walgreen.

Despite the fundamental strength of Walgreen's business, the stock has come under heavy pressure due to the loss of a major relationship with Express Scripts, a pharmacy benefits manager (PBM) that administers prescription drug programmes for large institutions. Because of the dispute, about 6.5 million Walgreen customers have been unable to fill their prescriptions at their local pharmacy since 1 January 2012. The timing could hardly have been worse as Express Scripts is in the process of buying Medco to create the nation's largest PBM. The consensus view is that Walgreen offers little more than a commodity product that could be marginalised by its PBM clients. Orbis has a different view. In drugstores, Walgreen operates in a duopoly with CVS Caremark, which is also the largest PBM in the US. Express Scripts cannot exclude Walgreen without increasing CVS's negotiating power, so Orbis believes the companies will restore their relationship.

This uncertainty has allowed your Fund to buy a high-quality franchise for a highly attractive price. The market prices Walgreen stock as a 'generic' when Orbis thinks it should be priced as a 'brand'. After adjusting for an asset sale, the stock trades at just 13 times its last 12 months adjusted earnings, a 25% discount to CVS. Walgreen's balance sheet is pristine and its management has a great record of using its large cash flow to return capital to shareholders. In Orbis' view, Walgreen's share price has the potential to nearly double over the next four years as it enjoys revenue growth, rising net margins and a re-rating to reflect its 'brand' status. If this proves true, Walgreen should produce very pleasing returns for your Fund.

Globally, the big picture has been tough to ignore as of late. Whether it is Europe's sovereign debt crisis, political gridlock in Japan, or government intervention in the US, there is plenty to worry about. This has made markets volatile and highly correlated - but does it make stock picking harder?

The consensus view is 'yes', and it has even become fashionable to argue that stock picking is dead. Unsurprisingly, Orbis has a different view. When correlations are unusually high, investors are effectively tarring all companies with the same brush. This creates significant mispricings and can present attractive opportunities to patient investors.

Nowhere is this more apparent than in the technology sector. In the 'lost decade' since the technology, media, and telecom bust, there has been a prolonged consolidation in which undisciplined and money losing companies have been eliminated. What has emerged is a roster of companies that have built world-class franchises with unmatched scale and distribution, particularly in emerging markets.

Just look at Apple. Its success in the US needs no introduction. But Apple also has substantial exposure to emerging markets, many of which remain relatively untapped. In China, the potential is staggering: only one in 10 of China's 960+ million mobile subscribers use a 3G smartphone, and Apple's smartphone market share there is just 10%.

The story is similar globally: despite the high profile of the iPhone, Apple accounted for just 17% of smartphones shipped worldwide last quarter, and a mere 5% of all mobile phones sold. As consumers continue to ditch traditional mobile phones for smartphones, Orbis believes Apple's iOS and Google's Android will become the dominant smartphone platforms.

At its recent US$405 share price, Orbis estimates that Apple offers a 14%free cash flow yield after adjusting for net cash and investments of US$87per share. This valuation implies that Apple is worth about seven and a half times its current annual cash flow. We view this scenario as unlikely given Apple's strong product pipeline, disciplined culture, and favourable exposure to long-term trends. At its current valuation, investors effectively pay nothing for a 'call option' on Apple's future product innovations.

When macroeconomic concerns drag on good and bad companies alike, there are often opportunities to buy exceptional companies at a substantial discount to intrinsic value. Waiting for the market to recognise that value can be frustrating, but contrarian investors have historically been rewarded for their patience.