Dear Fellow Investors and Friends

If you’re new here, welcome.

Today is Thursday, the 2nd of November, 2023. It is the 306th day of the year, 59 days remain. The Springboks are, once again, the rugby union world champs! They have now been the champions for 1 460 days, and have (at least) 1 473 days left of their reign. Enjoy every minute of every day.

31 October was Halloween in America, which is a fun holiday for children. I remember trick-or-treating as a kid growing up in New York. It was the best day of the year; full of masks and candy and carved pumpkins and staying up late. I still look back fondly on those days.

In Mexico, the 1st and 2nd of November is the holiday called Día de los Muertos, a much more adult and philosophical holiday. All throughout Mexico and places where the holiday is celebrated, people gather to celebrate and remember their friends and family who have died. There is real value in taking the time to process and create a ritual that allows us to come to terms with this inescapable part of our existence.

Better to be on good terms with death and to schedule an annual check-up than to be surprised and shocked by this inevitability. As the Stoics say, “Memento Mori”.

So, use this time to fondly say goodbye to the people you have lost and enjoy those you are lucky to still have with you. That’s all we can do.

Happy Dia de los Muertos!

Quotes of the day

“In many instances, value investing proves fundamentally uncomfortable, as the most attractive opportunities frequently lurk in unattractive or even frightening places.”

David Swensen

“Until we know we are wrong, being wrong feels exactly like being right.”

David McRaney

South Africa won the World Cup…again. That’s four times out of 8 attempts for a 50% hit rate. New Zealand has won three out of 12 attempts for a 25% hit rate. So, are we the best rugby-playing nation in history? Many will say we are. But what about the six tournaments we didn’t win – does that change the argument?

Even during this World Cup, while watching the knockout stages, it felt like we were losing most of the time. After destroying England in the first scrum in the 2019 World Cup final, it felt like we were on top and couldn’t lose. This time, first against France, then England and finally New Zealand, we were behind the eight-ball for seemingly the entire match, winning each one by pulling different kinds of rabbits out of the hat.

Our opponents say it was undeserved – I beg to differ. Only a team with strong character and even stronger processes can pull off three miracles. Setbacks to your plan can occur on how the ball bounces, the referee blows his whistle, or through injuries. But only if you have ingrained strong processes can you overcome these arbitrary events for which no upfront planning (forecasting?) can prepare you.

You need a strong character to endure these setbacks, implement your processes and get back on plan repeatedly. And this is exactly what the Springboks did on Saturday.

What the Springboks did – and what their fans went through – reminded me of how value investing works. A value investor tries to buy assets priced below their intrinsic value on the stock market (as an aside, value investing doesn’t work in private markets – but that’s a whole separate discussion). The market will generally only misprice an asset to the downside when things are messy – when the ball has bounced funnily. And business is inherently messy, as anyone who has ever run a business knows.

If you apply your valuation processes consistently, from time to time, you get the opportunity to buy a share in a business cheaply. But the timing of when to buy is always an issue – buying too early is common among value investors. The liquidity provided by public markets doesn’t always work to one’s advantage. Fixing a business takes much longer than most investors’ patience can stand, so the share price continues to decline, as those investors with good processes but weak characters sell out, thinking they made a mistake.

So, value investors always find themselves in a situation where they seem to be accumulating losses consistently. This is a painful psychological experience for most investors, which they will naturally want to avoid.

This is until one day when the market realises the turnaround has been successful, or there is a buyout at a premium or a big special divided, and the share price pops. If the value investor has done her work properly, the overall return would be satisfactory despite the long period of suffering. Over the past while, we’ve seen pops in Bell Equipment, Adcorp, Calgro and SCS Group plc due to take-over offers, special dividends or successful turnarounds. These “pops” have turned “dogs” into good investments. These are all held in funds I manage at Merchant West Investments and also some of our vehicles at RECM.

Contrast this experience with the experience of momentum or growth investors. Or, as I like to call them, “the feel-good guys.” The stocks these investors like to own always have a good story attached, and the share price is always going up. And, importantly,  everyone else owns them, too. No pain is involved; it’s all just Kumbaya by the campfire.

Until the story falls apart, as it almost inevitably does, and anyone who has run a real business will tell you – trees don’t grow to the sky. So when this happens, our feel-good guys lose a ton, turning the overall return from owning the investment into a poor one, sometimes even disastrous. Recent examples include EOH, Transaction Capital, Steinhoff, Sea Limited, or anything Cathie Wood from Ark Investments ever touched – 4IR or other.

Delayed gratification is not a choice most people make naturally, especially when there are negatives associated with the delay. This phenomenon explains many things in markets, amongst others:

  • why value funds are so much smaller than growth funds, despite their superior long-term performance;
  • why so many charismatic CEOs are selling a story rather than managing their businesses;
  • why so few people can be value investors, thereby ensuring the factor doesn’t get arbitraged out.

As I see it, investors can choose between a long period of pain culminating in a short period of joy – like supporting the Springboks—or a long period of joy culminating in a disastrous loss – like supporting the All Blacks.

I know which “kant” I’m on.

“New highs are…”


With markets the way they are, I will skip the new highs / new lows section this week.

Instead, I would like to pay homage to legendary market strategist Byron Wien, who died this week. His annual “10 surprises” list became required reading on Wall Street (and down here in Bree Street).

A few years ago, he published a list of life lessons under the heading: “Here are some of the lessons I learned in my first 80 years. I hope to continue to practice them in my next 80.” Unfortunately, he only got ten years into the next 80 before he died. These lessons resonated with me.

So, in honour of his legacy, I would like to share Bryn Wien’s life lessons with you:

  1. Concentrate on finding a big idea that will make an impact on the people you want to influence. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
  2. Network intensely. Luck plays a large role in life, and there is no better way of improving your luck than by knowing as many people as possible.
  3. When you meet someone new, treat that person as a friend. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally, you will be disappointed, but your network will broaden rapidly if you follow this path.
  4. Read all the time. Don’t just do it because you are curious about something. Have a point of view before you start reading and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.
  5. Get enough sleep.
  6. Evolve. Stay at risk throughout the process.
  7. Travel extensively. Attempt to meet interesting local people wherever you travel, and stay in touch with them throughout your life. See them again when you return.
  8. When meeting someone new, try to find out what formative event happened in their lives before they were seventeen. It is my belief that some important event in a young life influences everything that occurs afterwards.
  9. On philanthropy, my approach is rather to try to relieve pain than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social lustre in a community. They don’t need you. Social services, hospitals and educational institutions can make the world a better place and help the disadvantaged.
  10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they are in their 40’s. Try to get there as soon as you can.
  11. Take the time to give those who work for you a pat on the back when they do something good.
  12. When someone extends a kindness to you, write them a handwritten note, not an email. Handwritten notes make an impact and are not quickly forgotten.
  13. At the beginning of every year, think of ways you can do your job better than you have ever done it before. Write them down, and look at what you have set out for yourself once the year is over.
  14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Shortcuts can be construed as sloppiness, a career killer.
  15. Don’t try to be better than your competitors. Try to be different. There is always going to be someone smarter than you, but not always someone more imaginative.
  16. When seeking a career coming out of school or when contemplating a job change, always take the job that looks like it will be more enjoyable. If it pays the most, you’re lucky; if it doesn’t, take it anyway. I took a severe pay cut to take each of the two best jobs I had, and they both turned out to be exceptionally rewarding financially.
  17. There is a perfect job out there for everyone. Most people never find it. Keep looking.
  18. When your children are grown, or if you have no children, always find someone younger to mentor. You’ll be surprised at how much you learn in the process.
  19. Every year, try to do something new that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends, or travelling to an obscure destination alone. This will add to the essential process of self-discovery.
  20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

RIP, Mr Wien.

Did you know?

1. The zebra effect

The zebra effect is a well-known trait in herd animals that explains why they don’t want to stand out. Zebras are hard to individually study. It’s nearly impossible to track a single animal for long, as it gets lost in the herd. All the stripey animals look the same!

One scientist devised a plan – he would paint a big red dot on one zebra to track and study it over the long term. The unfortunate result was that lions hunted the marked zebra with ease. End of study.

For herd animals, getting lost among others is a survival mechanism. Humans are also herd animals, hence the human desire to conform. This is also why indexing is an attractive investment strategy for most people. To outperform, an investor has to do something completely different from the herd or the index. Conversely, this is not a comfortable place for a herd animal, and they can’t stick with it long enough for the active strategy to pay off.

I still find it strange that so many South African investors – especially large pension funds – prefer to invest with large institutional “index-tracking active” managers at a high fee rather than have 80% of their money in a low-fee index fund enhanced with some fringe allocations to properly active and alternative investments. Herd animals shunning the herd is a significant market anomaly.

My take: The benefits of scale the large active fund managers enjoy give them a huge marketing budget, enabling them to keep up the pretense that the gatekeepers – actuarial consultants and DFM’s – buy into.

2. The slowing EV market

The EV market – outside of China – seems to be slowing down. The past week has given us a few data points (from Grants Interest Rate Observer):

  • General Motors withdrew its stated ambition to build 400,000 units by the middle of next year, following Ford Motors’ July decision to delay a 600,000 EV annual production pace to late 2024 from the end of this year.  On Thursday, Ford likewise postponed a $12 billion spending initiative to increase its EV manufacturing capacity.
  • At the crux of the problem is a capital-intensive sector investing in unproven EV strategies amid rising costs, rising rates and slower demand,” writes Morgan Stanley analyst Adam Jonas.
  • “People are finally seeing reality,” Toyota Motors chairman Akio Toyoda declared to The Wall Street Journal last Wednesday, referencing declining growth expectations for electric vehicles.

Could this be the problem:

Tesla margin

My take: technological change is driven by consumer preference, as expressed in free marketplaces. In the absence of non-market, government-driven subsidies, it’s not clear that consumers are buying into EVs at the rate which is priced into their share prices. It’s also not clear that the EV manufacturers – as businesses – are any different to the carbon-driven OEM’s.

3. 24 years of playing FTSE

The UK’s FTSE is at the same level it was 24 years ago. That’s just about a quarter of a century of doing nothing! Over the same time frame, the JSE/FTSE All Share Index is up by a factor of 10, or a 10% p.a. growth rate. Over that same period, the Rand has depreciated from R10 to the pound to R23, for a 3,3% annual depreciation rate. So, your local investments would have been 7% p.a. better off than your friend’s investments who moved to London at the turn of the century.

FTSE 100 stock market index

My take: If you are negative about your South African investments, be careful what you do with your Rands. The grass is not always greener on the other side. In fact…

What I’m reading

For some light-hearted reading, here is a post of some snippets of Sam Bankman-Fried’s testimony in the FTX fraud trial.

File under “If it weren’t so sad, it would be funny.”

What I’m listening to

Episode #702 of the Tim Ferris podcast, where he interviews Morgan Housel. Housel wrote one of the best books on thinking about money: “The Psychology of Money, timeless lessons on wealth greed and happiness.”

I gave a copy to each one of my sons, and maybe they’ll even read it one day. The podcast is another wealth of sound advice and clear thinking.

Listen to it on either Apple or Spotify. It will be two hours well spent.

What I’m watching

Here is an interview with Tim Price entitled “The War on Cash”. Tim is a fund manager in London who sometimes strays too far into the “conspiracy theory world”, but his logic and recommendations are sensible.

That’s it for this week. You can’t be too careful out there, even if you are a world champion!

Piet Viljoen