Dear Fellow Investors and Friends

If you’re new here, welcome! And welcome to everyone else, of course. I do appreciate you taking the time to read this

Today is Thursday, 23 November, the 327th day of the year – 38 days remain until the end of the year. In the USA, it is Thanksgiving Day. Yesterday, all the turkeys that were living their best lives – carefully looked after in a warm hutch and being fed every day – were slaughtered. Today, they will be served as a main course to families all over America.

Don’t be a turkey.

Quotes of the day

“If you don’t own gold, you know neither history or economics.”
Ray Dalio

“Gold is money, everything else is credit.”
John Pierpont (JP) Morgan

“When the truth is uncertain, our brains resolve uncertainty without our knowledge by creating the most likely reality they can imagine based on our prior experiences.”
David McRaney (Author of “How Minds Change”)

“It takes considerable knowledge just to realize the extent of your own ignorance.”
Thomas Sowell

Why do we invest? I would guess that most of us are driven to save – i.e. we defer consumption today – so that we can consume more tomorrow. And the only way we can be in a position to consume more tomorrow is if our savings increase in real terms over time. And that can only happen if we invest our savings.

Put simply, our investments have to grow at a rate in excess of inflation. That sounds simple, but in practice it’s not easy.

It’s not as easy as investors think it is to forecast what the future will look like and then put together a set of assets that will benefit in the event of the forecast being correct. There are a number of problems with this approach.

  • Most forecasts are simply an extrapolation of current conditions. And when these conditions change, you face a turkey problem.
  • Markets tend to be efficient at pricing the future. So even if your forecast is accurate, asset prices react in strange, unexpected ways.
  • Human beings are inherently herd animals. They are uncomfortable outside the warm embrace of the group. And group think is an obstacle to successful investing.

A good way to get around these problems is to put together a set of assets (i.e. a portfolio) that consist of an allocation to asset classes that react independently and differently to future economic outcomes. And then to leave it alone. This is by far the hardest part of any investment process.

An asset class that can play an important role in one’s portfolio is that of hard assets and specifically gold. Hard assets have had a hard time ever since the GFC of 2008, when developed world Central Banks employed a policy of easy money via low and even negative interest rates. Of course, fiscal authorities responded by taking on huge amounts of debt, creating rapid growth in money supply. This monetary heroin juiced financial assets like bonds and growth stocks. Traditional 60/40 portfolios (i.e. portfolios that contained 60% equities and 40% bonds) fared particularly well in this environment, negating any need for portfolio insurance in the form of hard assets.

Insurance is important despite the current consensus that gold is a barbarous relic. To understand why, let’s do a bit of time travelling.

If you owned the equivalent of $1 in the year 1000AD, and were able to invest it at, say, 2% p.a. you would have close to $400mn today. And in the year 1000AD, the total global population was around 275 million people, and I guess around half of these people owned at least $1 worth of assets, i.e. around 135 million people.

Today, only 0,8% of the world’s population are millionaires, or 60 million out of 8 billion. Why aren’t many more people rich? I can think of a couple of reasons:

  • There were no banks a thousand years ago in which to deposit your money to earn interest. And even if there were, they would have almost all gone bankrupt at some point. The oldest bank in the world, Banca Monte Dei Paschi di Siena, got going in 1472 and has had to be bailed out many times, most recently in 2013.
  • Currencies tend to get debased over time. That’s just how governments work, since time immemorial. They run up large debts to keep the voting base happy, and instead of paying back the debt, they take the easy way out and inflate it away.
  • The human condition is one of envy. You want what your neighbour has. And if you are a country, you will go to war with your neighbour to get their stuff. If you win the war, you take their stuff. Wars have destroyed significant savings pools over time.

If your savings were in a bank that went bankrupt, in a currency that was debased or in a country whose assets were lost in a war, your savings are gone. And this has happened more often than we tend to assume in our risk evaluation processes. Much more often. This is why there are fewer rich people around today than you would otherwise expect, and why Dalio encourages us to learn from history.

Hard assets in the form of gold, diamonds and other precious metals are less vulnerable to the risks of debasement or confiscation. They are portable and maintain their value in real terms.

In 1908 a new Model T cost $850. An oz of gold was $19. So, a car cost 40 oz’s of gold 100 years ago

Today, a Toyota Corolla (with satnav and wi-fi) costs $24 000. An oz of gold is $1900. So, a car costs 13 oz’s of gold today.

So hard assets, and specifically gold, are an important supplement to a portfolio of financial assets.

Traditional 60/40 portfolios will struggle to protect your financial assets from a turkey moment, which has happened more often than we care to remember.

Adding that barbarous relic, gold, could.

“New highs are bullish”

1. Cresud, or anything from Latin America

This week, Javier Milei was elected president of Argentina. For those that don’t know, he ran on a libertarian platform, which implies hard money and small government. This is the exact opposite of what Argentina has endured over the past 100 years, when it used to be a rich country. Despite the mainstream (socialist) press predictably getting their knickers in a knot about this anti-globalist phenomenon, shareholders have voted with their money and in an overwhelmingly positive way.

Here is a chart of Cresud – a holding in the Merchant West Global Value fund – up 20% on the day after the election results, to a new post-Covid high:


Cresud owns significant tracts of farmland in Argentina and Brazil, and also runs an agribusiness in Argentina, Brazil, Paraguay and Bolivia.

Even more interestingly, there is something brewing in the emerging markets of Latin America.

Here are two more holdings of the Global Value Fund, starting with Itau Unibanco, one of the biggest banks in Brazil, at a new post-Covid high:

Itau Unibanco

And Fomento Económico Mexicano, a Coke bottler and retailer in Mexico (and a top 10 holding in the fund), at a new all-time high:

Fomento Economico

2. Technology stocks

The bull is alive and kicking, so who am I to argue? While tech stocks make new highs, the path of least resistance for the market as a whole is up. I might think that these stocks are expensive, and are speculations, not investments, but the market does not care what I think. It’s going up. And in the case of these stocks, it’s going up without me. This is a chart of an index of US technology stocks:

Select sector SPDR

The top holdings are – you guessed it – Microsoft (24% of the index), Apple (23% of the index), Nvidia (4,5%), Broadcom (also 4,5%) and so on. The good news is that the Merchant West Global Value fund does own Broadcom – but not any of the others. Not sure how that slipped in, though! I’ll have to speak to the portfolio manager. I’ll schedule an appointment for a tough talk in the mirror.

“New lows are bearish”

1. African Rainbow Capital Investments

There is only one bearish stock worth talking about this week. And that is local investment holding company African Rainbow Capital Investments.  Here is a chart of the share price, since it listed in 2017:

African Rainbow Capital

A couple of notes:

  • It has never once traded above its listing price of R8,50 per share.
  • It trades at R4,70 per share, against a disclosed NAV per share of R11,40 – a 60% discount.
  • The All Share Index is not far off an all time high. ARI is at a new two-year low.

Why such poor performance, and such a big discount? I can only speculate, but I think a triangulation of the following facts would lead to the answer:

  • One of the founding directors was a director of Steinhoff at the time of its demise. Steinhoff was highly acquisitive, and generally overpaid for acquisitions. It failed because of significant corporate governance missteps.
  • In 2020 management held a rights issue, diluting shareholders to, inter alia, pay themselves a fee which they seem to have forgotten to provide for. The rights issue was at a price of R2,75 per share, while management reported a NAV per share at R9,57. The offer was non-renouncable and no excess offers were allowed, effectively allowing the controlling shareholder, ARC, to increase their holding at the expense of any minority who could not participate.
  • Yesterday, they announced a similar rights issue, this time priced at R5,00 per share, after management disclosed a NAV of R11,44 per share. Again, minorities cannot trade their rights, nor can they apply for excess shares. The controlling shareholder, who has fully underwritten the transaction, once again wins at the expense of minorities who can’t follow.
  • When ARI listed, it originally charged usurious fees of 1.75% p.a. plus a performance fee. These have subsequently been reduced, but the incentive still seems to be for size rather than returns.

Everything this company has done has been legal. But many of their actions have varying levels of moral ambiguity. Any serious investor should steer well clear of this vehicle, which seems to exist solely for the benefit of management.

The only reason to invest in ARI, as the Finance Ghost pointed out on X this week, is if you hate money.

Did you know?

1. There is always a reason to sell

I’ll just leave this here:

Always a reason to sell

My take: deferred gratification is hard. But it’s the only way to stay the course and earn the returns that markets provide.

2. Despite the ongoing bull market, the median stock in the USA has not gone up for 25 years!

Again, I’ll just leave this here:

Value Line Geometric

My take: if it weren’t for technology stocks in general, and the Magnificent 7 specifically, we would be feeling very differently about the US stock market.

3. Watch prices are declining

According to RMB/Morgan Stanley, prices for used Rolex and Patek Philippe watches fell to fresh two-year lows on the secondary market last month, as demand for pricey timepieces continued to decline amid rising supply. The Bloomberg Subdial Watch Index dropped 1.8% in October, sinking to its lowest level since 2021. The index, which tracks prices for the 50 most traded watches by value on the secondary market, is now down 42% since the high in April 2022.


My take: collectables are generally not investables. When someone tries to sell you a collectable as an investable, run for the hills.

What I’m reading

Ben Hunt is the chief investment officer and co-founder of Second Foundation Partners, an independent financial research firm and registered investment adviser, and the author of Epsilon Theory. Epsilon Theory is a newsletter and website that examines markets through the lenses of game theory and history.

He wrote an article yesterday about the recent election of Milei as president of Argentina. The money quote from this piece was:

“Milei will be framed in Narrative-world like everything else is framed, through left/right narrative archetypes. Why? Because that’s what is most useful to Big Politics, Big Tech and Big Media, the three-headed hydra of our Fiat World, where reality is declared rather than lived. You will be told that it’s a left/right thing, and you will believe it. And that’s why Milei will fail. Not because a shock treatment of currency dollar-pegging and public sector-slashing can’t work, but because everyone knows that everyone knows that it can’t work.”

It’s a quick read, and you can find it here. Note that you need to be a subscriber (I am), but I think they allow one free article per month. Make this it.

What I’m watching

  1. One of my financial heroes is Jim Grant, editor of Grants Interest Rate Observer, of which I have been a subscriber for a number of years now. It is celebrating its 40th anniversary this year. I read his bi-weekly letter not only for its financial insights, but also for his writing style, which is self-deprecating, acerbically witty and laced with more than a passing grasp of the broad arc of financial history. Here he is interviewed by Consuela Mack, and you will see that he is as funny as he is observant. He also makes a good case for holding gold in your portfolio.
  2. During the most recent rugby world cup, Zombie by the Cranberries, for some strange reason which us non-Irish will probably never understand, became the Irish standard. Here is a pretty in-depth analysis of the song. Warning: it can get a bit cheesy from time to time.

What I’m listening to

Live at Budokan was peak Bob Dylan. He has just released an expanded version of the album, titled The Complete Budokan 1978, featuring all of the songs on the original release in newly remixed and remastered form, and featuring 36 previously unreleased tracks.

It comprises the Budokan concerts from 28 February and 1 March 1978 in their entirety. I only became a Dylan fan later on in life, so this release is a joy for me. I hope it is for you, too.

Listen to it on Apple or Spotify.

“‘Twas in another lifetime, one of toil and blood
When blackness was a virtue, the road was full of mud
I came in from the wilderness, a creature void of form
‘Come in,’ she said, ‘I’ll give you shelter from the storm'”

And until we find that shelter, lets be careful out there!

Piet Viljoen