Dear Fellow Investors and Friends

Hello again. Thanks for signing up. I’m Piet Viljoen.

Today is Thursday, the 14th of December. It is the 348th day of the year, 18 days remain.

During this week in 1791, America’s first national bank, the Bank of the United States, opened in Philadelphia. The B.U.S. blazed the trail for nearly every bank since it immediately went on a wild credit binge, lending largely to speculators in the emerging U.S. stock market. Then the bank over-reacted and stopped lending almost entirely, causing a credit crunch among stock speculators and helping to precipitate America’s first market crash.

The more things change, the more they stay the same. Today, 232 years later, despite a raft of laws, regulations, regulatory bodies, oversight committees, sanctions and even moral suasion, banks continue to blow up in America. And elsewhere. And markets continue to suffer as a result.

Quote of the Day

“Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero.”
Warren Buffett

You can’t regulate human nature out of existence. Given the choice of a gamble comprising a chance of making life-changing gains, a chance of losing everything, or a steady but unspectacular gain, most people choose the former. The popularity of the lottery is proof. I forget who said, “The lottery is a tax on people who can’t do maths”, but it’s spot on.

Crowd psychology is a topic of many studies – and most conclude that crowds behave very differently from individuals. Crowds take bigger risks and are much less considered and deliberate in their general behaviour. If individuals tend to prefer risky gambles, crowds will amplify that behaviour.

And what else is the stock market but the judgement of a crowd of investors, expressed as prices? This week, Anglo American declined sharply after a poor trading statement. This didn’t happen because someone thought long and hard and concluded that the company was worth 20% less than the day before. No, a crowd of sellers was involved – each seller trying to sell before the other.

And the only reason some of these were selling was because other people in the crowd were selling!

Banks were created to channel the savings of some to fund the loans of others. But regulators allow them to leverage their assets (the loans they make) by a factor of at least ten times. So for every R1 of deposits (i.e. savings) they take in, they can lend out R10. Of course, being so highly leveraged, the regulator also requires them to take on security as an asset from the people they lend to. And these assets are all, in one way or another, always valued at their market value – or marked-to-market, in banking parlance.

Adding leverage to a volatile pricing environment like a stock market is like leaving the drinks cabinet unlocked at a teenage party. You don’t know what will happen, but you know it will be messy. And that describes the banking business model in a nutshell.

Let’s do a bit of maths here. If you are leveraged 10 to 1, and the price of the assets you hold as security against your R10 of loans falls by 10% due to a crowd of people panicking, your equity has disappeared.

That is why banks fail – they have a long history of lending against highly valued assets and then getting wiped out when the asset prices correct. They can’t help themselves, which is why they are so heavily regulated today.

In fact, they are so heavily regulated that they struggle to compete in the market for loans; their processes are cumbersome, capital requirements are onerous, and decision-making is ponderous.

It’s no wonder a new growth industry has developed – “private credit”. These non-bank lenders are more nimble and less constrained by regulation than formal banks. And they are taking huge market share. Unlike banks who fund themselves in the public markets by attracting savings, private credit funds itself by selling notes to “private” investors. These notes are then collateralised by assets. And these assets are fair-valued at prevailing prices.

So, they are just like banks. But with fewer rules.

In financial market thinking, too much of a good thing is brilliant. Most credit providers, whether of the public or private kind, have always and will always subscribe to this line of thinking. That is why market disasters always involve high growth coupled with high debt levels.

In the past, banks were ground zero for this. Now, we have a new growth sector and, with it, an expanded ground zero.

Think Transaction Capital. And be careful out there.

“New highs are bullish”

1. Broadcom

If you haven’t been following the news, here it is: chips and cloud are two strong trends in the market. And that’s all you need to know for many investors.

Recently, Broadcom (which designs, develops, and supplies various semiconductor devices – i.e. chips.) acquired VMware (a cloud computing and virtualisation technology company).

Big acquisitions are generally not a positive indicator for future returns, but Broadcom’s acquisition of VMWare seems to be the exception that proves the rule. The management team has the most incredible track record of execution. They have a 60% operating margin and a 51% FCF margin.

Its metrics don’t scream value (23x forward P/E; 15x EV/EBITDA), but it’s in the sweet spot for what the market wants.

And so is its share price:


My take: Great businesses trading on reasonable multiples can be great investments. Broadcom is in this category. The Merchant West Global Value Fund owns it. I admitted as much in this letter a while ago.

2. Gold

On Monday, gold hit an all-time high:


A few weeks ago in Regarding…Vol 1, No. 13, I wrote about gold, so going to a new high was exceptionally fortuitous. However, it has reversed since then.

My take: I continue to have no idea what the short-term outlook is for the gold price, but I still think it is an essential hedge in a portfolio that aims to generate absolute returns in US$, with low volatility, like the Merchant West Worldwide Flexible fund (aka the cockroach). This fund holds a significant amount of physical gold. But, no gold miners. (See, for instance, Sibanye-Stillwater, below).

By the way, you can read more about “the cockroach” in this relatively recent article by Stephen Cranston at Citywire.

“New lows are bearish”

1. Sibanye-Stillwater

Most mining companies are run by engineers who are horrible at capital allocation – they buy high and sell low. The reason for this is their natural affinity (and ability) to execute complex products, rather than generating free cash flow. Impala’s most recent acquisition of RB Plats is a case in point. In Sibanye, you have a situation where the CEO bought well once (in the case of Lonmin). Despite the fact that everything else has been a disaster – Uranium, Palladium, Lithium – for a time, he was regarded as a visionary. I think that time is over now.

Sibanye Stillwater

My take: In the land of the blind, the one-eyed is king. I did own this stock, under the misguided impression that the king could see, but sold (fortunately quite a while ago) when I realised his remaining eye had impaired vision.

2. Bayer

Bayer is a life science company whose history can be traced back over 150 years.

Bayer splits its operations into three major segments:

  1. The pharmaceuticals segment focuses on prescription medication supplemented by speciality therapeutics in areas such as oncology.
  2. Consumer health mainly provides over-the-counter (OTC) medication.
  3. Crop Sciences contains seeds, crop protection and non-agricultural pest control products.

Due to low efficacy, the pharma and biotech company aborted a large late-stage trial testing a new anti-clotting drug. While failures are common in this field, this was the company’s most promising development project.

This adds to their existing problems of ongoing litigation and high debt levels. Until management can deal with these things as well as the conglomerate structure, the stock is uninvestable.


My take: Pharmaceutical businesses are great when they are good but terrible when they are bad. And Bayer falls into the latter category.

3. Twilio

According to Wikipedia, Twilio is an American company based in San Francisco. It provides programmable communication tools for making and receiving phone calls, sending and receiving text messages, and performing other communication functions using its web service APIs.

Yes, after that I still don’t know what they do, but they are an excellent example of what happened to many 2021 darlings. TWLO’s valuation decreased from 475X EV/EBITDA in less than three years to 11X EV/EBITDA! And from 43X sales to 3X sales. Talk about multiple compression.

And it’s worse than expected because adjusted EBITDA overstates profitability since they add back share-based compensation (and SBC is high at Twilio). Twilio has never achieved positive actual EBITDA margins.

This meme is probably appropriate here:

Twilio meme

And here’s the share price:

Twilio share price

My take: The speculative juices are still flowing on this one – but I still wouldn’t touch it (and many other stocks like it) with someone else’s bargepole. It’s over 75% down from its highs.

Did you know?

You can’t trust much out there

Last week I posted a video clip which purported to show amazing AI in action. Well, it turns out it was fake news.

My take: This just further goes to show that the split between the real, analogue world and the fake digital world will just increase going forward.

What/who can you trust? Real-world interactions.

What I’m reading

I continue to be amazed at the world’s response to the atrocities of October 7 and the criticism of Israel’s reaction, especially in the light of the mealy-mouthed testimony by the 3 Ivy League presidents. The failure of the liberal world order to deal with these intellectual inconsistencies might possibly lead to some adverse outcomes, as outlined by renowned historian Niall Fergusson in this article.

As always, Sam Harris has a good view on this topic in these podcasts:

“What is Islamophobia” and “The war in Gaza”

What I’m listening to

For the holidays, here is a “best of” list of podcasts for the year. It should see you through to January. This is the link: Top podcasts for 2023

Also, my friend Mark Rosin (of the Friday Song fame) has released his “best of” music lists for 2023. They are always well worth listening to. I warrant you will find stuff you love but have never heard of in there somewhere:


Apple Music

What I’m watching

The calendar, as it counts down to the holidays!

And with 18 days left in the year, that means 95% of the year is behind us. The lyrics to “Time” by Pink Floyd come to mind:

“And you run, and you run to catch up with the sun but it’s sinking
Racing around to come up behind you again
The sun is the same in a relative way but you’re older
Shorter of breath and one day closer to death
Every year is getting shorter, never seem to find the time
Plans that either come to naught or half a page of scribbled lines
Hanging on in quiet desperation is the English way
The time is gone, the song is over, thought I’d something more to say”

A somewhat less than optimistic POV, but then again Pink Floyd was an English band. For me, the takeaway has always been to pause, take a breath and enjoy the moment. And as we head into the holiday season, I hope there will be many such moments for you to enjoy.

Hanging on in the English way is no way to live one’s life. It didn’t work for them in the Rugby World Cup, and it definitely won’t work for us here on the Southern tip.

This will be my last letter for the year. I wish all of you a safe, peaceful and restful Christmas holiday season. Even if you’re not taking a break, try to take it easier for a week or two. I will definitely have something more to say early in January.

Piet Viljoen