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Today is Thursday, the 19th of October 2023. It is the 292nd day of the year, 73 days remain.

On this day in 1987, the Dow Jones Industrial average fell by 22% to a level of 5321. This caused stock markets world-wide to crash in sympathy, and gave rise to the term “Black Monday”. Today, the Dow Jones trades at 33 500, which, if you had bought just before the crash at a level of 7 163, produced an annual return (including dividends reinvested) of close to 7% p.a.  If you had bought just after, you would have compounded by 1% p.a. more. This is not an insignificant difference, but also not earth shattering. I guess the message is – stick with your process and allocations and don’t try to predict markets – over the long term it doesn’t add huge value.

Quote of the day

“Success does not lie in sticking to things. It lies in picking the right things to stick to and quitting the rest.”

Annie Duke, author of “Thinking in Bets”

The word bear is derived from the Old English word “Bera”, which actually means “the brown one” and not “bear”. I picked up this interesting snippet from Darrel Bristow-Bovey’s book “Finding Endurance” – a book I mentioned a few weeks ago in letter no. 6.  Bristow-Bovey points out that this word, used by the Northern European tribes, originated as a taboo avoidance term. The tribes replaced their original word for bear – “arkto” – with this euphemistic expression out of fear that speaking the animal’s true name might cause it to appear.

The most recently famous account of not naming something one is very afraid of is Voldemort in the Harry Potter novels. Nearly every witch or wizard dared not utter his name and referred to him instead with such monikers as “You-Know-Who” or “He-Who-Must-Not-Be-Named”.

The term “bear market” is another such example. A bear market is a gut-wrenching, fear-inducing and panic-stricken downward movement in markets. No wonder no one calls it by its real name – a collapse. It’s too scary. It’s the event that hangs around, just outside the light from our warm campfire of optimistic stockbroker reports and hopeful fund manager reviews.

No one wants the collapse to appear, so no one dare say its name.

Of course, humans are very good at conquering their fears and overcoming adversity. In Shakespearean times, bear-baiting was one of the most popular sports. In this brutal test, a bear would be led into a pit and then chained to a stake by its leg or neck. As spectators cheered and placed bets, a pack of dogs – usually bulldogs or mastiffs – would be unleashed into the arena to torment and attack the bear. This was finally outlawed by 1835, but after that, bears were declawed and defanged and paraded around as “dancing bears”.

Today, Teddy Bears, Gummy Bears and stories like Winnie-the Pooh have finally subverted the bear from a fearful predator to a domesticated companion.

Central Banks in developed markets have done the same. Since the Global Financial Crisis of 2007, they have flooded the market with EZ money. They reduced interest rates to 0, and many countries had negative (!) interest rates. Unsurprisingly, with the cost of money so cheap, we have not had a collapse – sorry, bear market – since. Of course, cheap capital tends to get misallocated, and I would be very surprised if that did not happen this time.

In the meantime, it definitely feels like developed markets have domesticated the bear, while in emerging markets like South Africa, he is still alive and lurking, fangs and claws bared. After all, we have had proper interest rates, and therefore cost of capital, for the longest time.

What to do? I think I have found a useful way of thinking about and dealing with the situation, and I will share more detail over time.

“New highs are bullish”

1. Ozempic and Wegovy

Ozempic and Wegovy are all the rage. Guess who makes them?

Novo Nordisk

Source: koyfin

Yip, that’s a chart of Novo Nordisk, the Danish pharma company that manufactures a class of drugs called GLP-1, commonly known as Ozempic or Wegovy. I mentioned this company in letter no. 3.

Pharma companies invest billions into R&D and, every now and then, come up with a blockbuster. The value of this research can be viewed as an embedded option. The time to buy shares in these companies is when their pipeline is commonly regarded as being empty, i.e. when the market discounts the value of the option, not when they are all the rage and priced as if all their R&D will lead to blockbusters forever.  Drug patents have a shelf life, after which cheap generics replace them.

This is a chart of Novo Nordisk’s P/E, showing the high option value embedded in the price:

Novo Nordisk PE

Source: koyfin

Also, while Novo Nordisk and its competitors are riding high on optimism around Ozempic and other obesity drugs, some experts suggest that scaling these products could be more difficult than anticipated. One of the major challenges is likely to be developing robust data on the drugs’ effectiveness on Alzheimer’s, alcohol addiction, and other diseases that would increase their market share. Getting insurance companies to pay for these “miracle drugs” is also proving challenging without long-term data backing their effectiveness.

My take: Novo Nordisk is a good business, just not that good. And I don’t own it.

2. Fairfax


Source: koyfin

Canadian investment company Fairfax is trading at all-time highs.

I own it in the Merchant West Global Value fund. I also own Berkshire Hathaway, Markel and Westaim – all of which operate in the insurance market to a lesser or greater extent. And all of which, to a lesser or greater extent, have similar share price charts.

What’s going on?

The insurance industry has faced significant cost pressures over the last few years but has compensated for that by raising customer premiums. And there could be more where that came from. As usual, supply dynamics determine the economics of a cyclical industry. Most people will insure their houses and cars whether the GDP expands or contracts. Work-from-home and declining office occupancy rates notwithstanding, real estate owners still buy coverage for fire, theft, natural disasters, and other risks. So, demand for insurance is reasonably steady.

In the September issue of Grants Interest Rate Observer (to which I subscribe – and you should, too), they quote broker Aon plc as saying global reinsurance capital totalled $605 billion as of March 31, flat with the level in 2017. Over the five years through 2022, nominal world GDP in dollar terms grew by 23.6%, according to the IMF. On the July 27 earnings call, Arch CEO Marc Grandisson estimated that, in relation to demand, the shortfall in reinsurance-underwriting capacity is on the order of $50 billion to $70 billion.


Grants goes on to point out that reinsurance rates are rising. They jumped by 30.1% for January renewals and by 35% in July, according to Guy Carpenter & Co., LLC. They’re the fastest rate increases since 2005.

My take: the insurance cycle is on the up, which is good for risk underwriters. But watch out for capital coming into the market. Which, given alternative investment opportunities right now, might not take very long.

“New lows are bearish”

1. China

If you want to know how things are going in an economy, look at something other than government statistics – especially in China. Rather, look at mobility, property and retail.

So, here are the charts of China’s main airport (Beijing Capital International Airport), one of its biggest property developers (China Evergrande) and its biggest retailer (JD.Com):

Beijing Airport Co.
China Evergrande

Source: koyfin

And here is a thread off X from someone who knows China well – Michael Pettis. He has lived in Beijing for many years. He also spoke – very well – at a RECM conference about 10 years ago. At the time, he correctly, now with the benefit of hindsight, identified the problems that China faced and to this day continues to face.

My take: I don’t speak any of the Chinese languages, I have only ever been there once (for three days!), and I don’t even know any Chinese people (except someone who once worked at Naspers, if that counts). But I think things are not going well in China.

2. Hipgnosis

Hipgnosis were an English art design group based in London that specialised in creating album cover artwork for rock musicians and bands. Remember albums? You might recognise some of these:

Album covers

Hipgnosis is also a closed-end investment trust that invests in song rights. It is listed on the LSE under the ticker SONG. This is its share price:

Hipgnosis share price

Source: koyfin

According to their website, Hipgnosis earns “Sustainable earnings, uncorrelated to global capital markets, with sources of income from across the spectrum of music consumption patterns, made up of millions of microtransactions such as streaming, physical purchase, downloading, synchronisation, performance, licensing and merchandising.”

In short, Hypgnosis owns the rights to songs, which generate cash flows whenever they are played. The value of song rights is their future cashflows discounted to present value. And if you manage your catalogue well, you can increase those cash flows by getting your songs played more often.

Sounds great. Of course, there’s always a catch.

The catch is that Hipgnosis bought their songs when interest rates were of the ground-hugging kind rather than the high-flying kind they are now. No matter how well you market your songs, if your growing cash flows are discounted by 8% instead of 2%, your songs are worth less. Much less.

While the market still bought into the story, Hignosis traded at a premium to NAV, making it easy for them to raise cash to buy more songs. With higher interest rates, management missteps and some dubious corporate activity, Hipgnosis trades at a big discount to book today. This makes it impossible to raise new capital cost-effectively.

Hipgnosis price to book

Source: koyfin

My take: no matter how uncorrelated you think your business is to global markets, most businesses basically boil down to a stream of cash flows, the present value of which depends heavily on interest rates. And higher interest rates mean lower valuations, even for songs.

Did you know?

1. The number of US employees working 2 full-time jobs is at a record high.

Full time jobs

2. At the same time, US bank credit growth is now negative year-on-year for only the second time – the only other time was after the GFC.

Credit growth

3. US bank share prices are now at just about an all-time low relative to the broad market.

Bank vs. market

My take: there are significant stresses in the USA that are not reflected in the stock market indices.

4. Possibly not unrelated to the economic environment in the USA and China, the price of second-hand watches continues to decline from the very high levels reached in 2022 after the Covid panic. The good news is that value retention remains high: the big three’s second-hand prices still commanded a 27% premium vs retail prices in 3Q23.


My take: the mimetic envy is still strong with this one. But let’s see how this develops, preferably from the sidelines.

What I’m reading

The most striking thing I read this week was the latest Memo from Howard Marks, called “Further thoughts on sea change”. It is a piece that should be read more than once and thoroughly digested by anyone active in investment markets.

You can read it here.

What I’m listening to

When I started this letter, I resolved not to make it a soapbox on which to sell anything, be that investment products or socio-political opinions. But events in Israel and Gaza over the past week or so have superseded this intention.

And the reason is simply that with the unfolding circumstances, anti-Semitism has yet again reared its despicable head. That, coupled with uneven reporting by even the very few publications that have been worth reading – up to now – has forced me to say something.

The absolute hate that comes so easily from the mouths and keyboards of people who should know much better has been a complete shock to me. I have little faith that knowing better would shift these clearly deep-seated prejudices because they are simply based on hatred. A hatred likely an intergenerational, learnt ideology propped up and fed by anti-Jewish propaganda and misinformation spread across platforms aiding and abetting an intentionally curated perception.

I can’t keep quiet about it. I have always called out wrong things. And this is a wrong thing.

And if you think the “whatabout” arguments, that there is some moral equivalence between the actions of Hamas and the Jews in Israel, hold any kind of water, listen to this podcast by Sam Harris.

Finally, when you think about all the terrible things happening in Israel/Gaza, the last thing you should do is trust the news. I read this piece from Epsilon theory this week, and it drove it home once more – the news media have become purveyors of opinion, not fact.

Okay, rant over.

What I’m watching

This Rugby World Cup has properly captured our attention. Sunday night’s match against the French once more affirmed that South Africans never give up.

Rugby is not just a game to us. It is the hope. We don’t have much of it these days. In his post-match interview, Siya Kolisi said, “It’s about the people back home. That’s what’s driving us. Win or lose, they will see that kind of fight that you saw out here today.”

We all need to fight for South Africa with that same heart and soul. Only then can we have a positive future in this country. And I believe we can.

In any case, on Saturday, we will “once more unto the breach” just like this guy in this TikTok video.

Let’s be positive. And still very careful out there.

Piet Viljoen