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 the 320th day of the year; 45 days remain until the end of the year. Only six weekends are left before Christmas, so make the most of them.

On this day in 1867, Edward Callahan unveiled the first stock ticker, devised for the Gold and Stock Telegraph Company in New York. The advent of the ticker ultimately revolutionised the stock market by making up-to-the-minute prices available to investors around the country. Now, share traders could track how much money they were losing in real-time. It still didn’t stop them from trying.

And 166 years later, they are still trying.

The winners? As always, the croupiers, or, as they are known in financial circles, stock exchanges.

Quotes of the day

“And those who were seen dancing were thought insane by those who could not hear the music.”

Friedrich Nietzsche

All investors want one thing – to grow their capital satisfactorily over time. How they go about doing so can follow different paths, though. Some investors only buy what they regard as high-quality assets and hold them for the long term; others buy distressed assets and sell them when they improve, otherwise known as turnround investing; and others buy what is going up and sell what is going down, otherwise known as momentum investing.

These are not the only ways; there are many others – some less rational than others. But none of them are wrong, per se.

However, there are two rules to follow. You have to

  1. Choose a philosophy that resonates with your personality
  2. Stick to your chosen philosophy consistently. And you won’t if you didn’t follow rule #1.

My investment philosophy is that of value. Ben Graham – the father of value investing – defined it as follows:

“Value investing is an investment operation that promises the safety of principal and a satisfactory return. All other operations are regarded as speculation.”

That resonates with me, and I have been applying it to my investment operations for many years now. Sometimes successfully, other times less so. However, I have always been consistent in applying the value approach.

The perception is that Value as an investment strategy has been underperforming for a long time. And it has indeed struggled since the global financial crisis of 2008 – 15 years ago!

Despite this, I have been on record as saying – since 2021 – that the trend is changing, and value is coming back into fashion.

And I have been wrong when you look at the US market:

Deep, deep value

This has been driven by “The Magnificent 7” or Amazon, Meta, Alphabet, Netflix, Tesla, Microsoft and Nvidia:


So, what’s going on?

One theory is that interest rates are important to the performance of large-cap growth stocks. After all, or so the theory goes, their big cash flows lie far in the future due to their high growth profile. The lower interest rates are, the more valuable the present value of those cash flows. Hence, when the market expects interest rates to decline, growth stocks should outperform value stocks, which is exactly what has happened this year in America.

However, I think Cliff Asness’ (from quant shop AQR) argument bears thinking about, which he made in the paper “Is value just an interest rate bet?”

His conclusion: not even close.

His argument is that growth stocks’ duration – i.e. the average time to receipt of all cash flows – is not much higher than value stocks (duration is a measure of sensitivity to interest rates – the higher your duration, the more sensitive you are to the movement of interest rates).

How is this possible, as AQR’s quantitative work shows that growth stocks have a 4% p.a. growth advantage over value stocks over five years? It’s because most of that excess growth happens in the first two years, so it doesn’t impact the duration calculation much. In the paper, Asness calculates that growth stocks have only a 0,4 years duration advantage over value stocks.

Asness says, “It is not the level of earnings that affects duration; it is the time shape, and the only way to affect the time shape enough to move duration seriously is to make assumptions of large and extremely long-lasting (way more than 5+ years out) growth differentials that historically do not exist” (emphasis added).

Growth vs value is correlated with the interest rate cycle because investors think most growth stocks are unicorns i.e. super high growers for a very long time. Such stocks would indeed have a high duration.

The problem, as I pointed out in Vol 1 No. 11 last week, is that really big winners like Amazon and Google are very few and far between. Unicorns don’t even exist in stock markets, as much as we wish them to. A bubble is defined as asset prices discounting an unrealistic growth profile, which neatly describes significant parts of the US stock market. In other words, bubble valuations cause interest rate correlations. But this is only temporary; the work of Jeremy Grantham of GMO fame has shown that all bubbles end.

Some corroboration for this view can be gleaned from other markets where value is doing well:

Value outside US

The one geography that is missing in the above chart is South Africa. Fortunately, I have the data on the only true South African value fund, the SCI Merchant West Investments Value Fund. If you are aware of any other – i.e. that invests only in South Africa and is not constrained by size, let me know!

Of course, I have the data because I co-manage this fund with my colleague Brian Pyle. And over the past three years, it has also outperformed the average general equity fund and the All Share Index:

SCI Merchant West

So, the USA is the only market where value is not doing well. And it happens to be the only market where AI dominates corporate communication. Or the only market driven by magical AI bubble thinking, whichever is your preferred nomenclature for some very interesting valuations, specifically of the magnificent 7.

So, despite the perception of value being dead and buried, it seems alive and kicking.

This begs the question: can you hear the music yet?

“New highs are bullish”

1. Nintendo

With an impressive $185 billion in revenue in 2022, the gaming industry has surpassed the combined earnings of the music and film industries. Entertainment has always been a critical element in our lives, providing solace, thrill, and respite from the monotony of everyday existence. In the analogue world, music and movies dominated. In the online world, that is no longer the case.

Recently, Microsoft launched a protracted buy-out offer for Activision Blizzard, ultimately paying $69bn – a multiple of around eight times revenue. For reference, Netease is a predominantly Chinese gaming company with a market cap of $72bn. It trades at five times sales. Electronic Arts has a market cap of $36bn and is on a 4,5 multiple of sales.

This week, Nintendo, the Japanese gaming company formed in 1889 (!) hit a new high. It’s the unsung hero of the gaming world. Like most things Japanese, it is a high-quality business, doesn’t rush new games, and invests heavily behind its existing game franchises (Legend of Zelda, Donkey Kong, Animal Crossing and Super Mario bros).


Nintendo is on a price to sales of around three if you strip out their cash and shareholding in The Pokemon Company. It is also one of the bigger holdings in the Merchant West Investments Global Value fund.

My take: Japanese stocks are massively underrepresented in most global portfolios. Quality businesses like Nintendo should benefit from any eventual reallocation away from an eye-wateringly expensive US market (and currency!) And even if this doesn’t happen, it’s such a great business that owning it for the long term should work out fine.

“New lows are bearish”

1. Estee Lauder

Estee Lauder

This high-quality, ostensibly stable consumer growth stock has declined by over 60% from its post-Covid highs.

In 2021, at a share price of around EUR 300, the headlines were:

“The Estee Lauder companies report outstanding fiscal results.”

“ELC named to RippleMatch’s list of top 100 companies to work for”

“The Estee Lauder companies vow to bring innovation, novelty to China.”

Now, in 2023, at a share price of EUR 120, the headlines are:

“Estee Lauder sinks after dour 2023 outlook due to slow growth in Asia”

“Leonard Lauder to leave The Estee Lauder companies.”

“Estée Lauder stock fell sharply after the cosmetics company cut its fiscal-year outlook as headwinds in China are expected to persist.”

My take: Never buy the headlines, especially when the company you are thinking about is on a P/E of over 100. And don’t buy a 60% decline when all it does is leave a stock on a multiple of 50 times.

Estee Lauder PE

2. Dish Networks

Dish Networks is an American company that provides satellite and cable pay TV services. Unsurprisingly, it has been doing poorly as competition in the home/personal entertainment sector has intensified dramatically over the past few years. After all, companies like Dish sell entertainment and compete for eyeball time – of which there are only around 16 to 18 hours a day, depending on one’s sleep habits. It is the same eyeball time that all the OTT streaming services (which are all throwing massive capital around – never a good sign for investors) and the TikTok, Instagram, Facebook, Activisions etc. etc. are competing for.

This high level of competition is starting to show up financially. Dish surprised investors with a third-quarter loss, as their pay TV and wireless subscribers declined. Its net pay TV subscribers fell by 64,000, while retail wireless subscribers fell by 225,000 – which the share price is reflecting, down by almost 90%.

My take: When business volumes start declining, and competition limits pricing power, trouble is ahead.


3. MultiChoice

Dish reminds me of MultiChoice, whose stock has halved so far this year.


You can’t accuse Multichoice of not trying to build new revenue streams to replace the attrition happening in their legacy business. They bought an online betting shop to bulk up their atrophying pay-tv business.

But not just any betting shop: a Nigerian-based one called Betking.

Now, if you’re going to operate a business in Nigeria, my preference would be to control your business to get your hands on any cash flow, especially given the experience minority investors have had in that country. Not Multichoice, though – they seem to feel a 49% stake is fine. For which they paid R6bn.

This must be the deal of the century – for the seller, that is.

This week, Multichoice released its latest set of results, which included this sentence: “The group has introduced an adjusted core headline earnings metric to incorporate the impact of losses incurred on cash remittances in markets such as Nigeria (post an adjustment for minorities and tax), as these costs can no longer be viewed as temporary in nature.”


My take: The only aspect of this whole deal that I find remotely interesting is the identity of the investment banker who sold this lemon to MultiChoice. He or she can name their price to come work for me.

Did you know?

1. That interest rates have been declining for 800 years?

Well, it is a bit gimmicky, but this chart from Byrne Hobart at the Diff  ( – always an interesting read) does show a very long-term declining trend:

Interest rates

What’s going on? Broadly, two things:

  1. Measuring the rate of return on government debt in the 15th century and the 21st is like measuring two completely unrelated markets. In the 15th century, debt was unsecured or secured only by uncertain spoils of war, as governments were small and regional and had limited taxing power. Risk premiums embedded in interest rates tended to reflect this inherent riskiness.
  2. Changes in the economy’s complexity, the age structure of the world’s population, and the nature of reserve currencies all created a larger global demand for savings. Large, liquid markets in government securities developed, significantly reducing the frictional cost of issuing and investing in government debt instruments. This significantly reduced risk premiums in interest rate structures.

My take: This is more of a “fun fact” than an investment truism. But, if markets fracture, liquidity reduces, and regulatory overreach takes place – which can happen in a world where heavily indebted Western governments implement financial repression, this trend can change, albeit only for 20 or 30 years.

2. LNG export capacity from North America is likely to more than double through 2027

LNG North America

Markets for natural gas are hyper-regional – massive price differentials routinely arise between areas that look close on a map but might as well be a world away logistically. Natural gas is difficult to handle, and the presence of sophisticated infrastructure can mean the difference between supply gluts and extreme shortages.

The USA produces huge amounts of LNG as a by-product of oil production through fracking. This surplus is stranded due to a lack of export capacity. In the USA, the price of LNG is around $3/MMbtu (Million British Thermal Units). In Europe, which has very little LNG productive capacity, the price is around $14/MMbtu. Last summer, it got as high as $80/MMbtu in the lead-up to winter. In Japan, the LNG price is $12/MMbtu.

There are massive arbitrage profits to be made here, creating a huge incentive for the USA to invest in export capacity, which it is trying to do, despite obstructions being placed in its way by the Biden administration.

My take: The world will benefit from cheaper energy once the USA can get its exports going. The environmental left, situated predominantly in rich countries in the West, is doing its best to preserve the historical advantage cheap energy bestowed upon them by denying the developing world those same benefits. I hope it fails, and think it will.

What I’m reading

Having visited Japan multiple times over the past ten years, I cannot emphasise enough what a wonderful country it is. Everything is high quality – the food, the people, the infrastructure. And now, after a bear market lasting over 30 years, its stock market is showing signs of coming to life. The Nikkei is still below its all-time high reached in 1989, but the trend now is up.

In this regard, James Montier of GMO wrote a very good piece addressing the deleveraging of Japan Inc and its subsequent strong cash-flow generation – which is not (yet) being recognised by investors.

In this companion piece from Reuters Breakingviews, Ed Chancellor (author of “The Devil Takes the Hindmost” and “The Price of Time”) writes about the reforms happening in the Japanese market, substantiating Montier’s views.

What I’m watching

The fund management firm Horizon Kinetics released their 3Q2023 review here. Warning: it’s two hours long. But two hours well spent, especially if you are interested in the potential of blockchain technology and crypto currencies.

You can also read it here.

What I’m not watching is the Proteas batting collapse against Australia. It’s the hope that always gets you, even when the rain helps a bit. Time will tell today.

What I’m listening to

Rick Rubin is a music producer and founder of Def Jam Records. Def Jam put hip-hop on the map after signing acts like the Beastie Boys, Public Enemy and Run-DMC. He also produced records for Metallica, The Cult, Red Hot Chilli Peppers, Strokes, etc. In short, Rubin is rock gentry.

He also has a podcast called Tetragrammaton (Google it). This week, he interviews one of my musical heroes, Nick Cave. Well worth listening to on Apple or on Spotify.


But remember to be extra careful out there.

Piet Viljoen