Dear Fellow Investors and Friends
Today is Thursday, the 5th of October. It is the 278th day of the year; 87 days remain until the end of the year. On this day in 1989, Travis Kelce was born. Which brings me to…
Quote of the day
“See that run rate number on slide 3? Yeah, that’s GMV. Not net revenue.”
From Chris Brown (@almostcmb on X):
Most of the genes my father passed on to me, I am happy about. But if there were a chance for a do-over, I would ask not to have been given the collector’s gene. I don’t think they identified this one during the human genome project, but I am 100% sure it exists. My father enthusiastically collected stamps when that was a thing and was well on his way with an embryonic art collection when he died at age 46. He would have amassed a sizeable collection given a longer time at bat.
In turn, I started collecting art over 20 years ago but, with huge willpower, have managed to pull back my activities over the past few years. But, like a true addict, I just replaced it with another collection, this time wine. Unlike my art collection, if the wine collection turns out to be poor, I can at least drink it.
Geek note: I have a spreadsheet that calculates how many years of drinking are left in the collection. Turns out I should also hope I didn’t get the gene that did my dad in early.
In any case, I used to have this theory about South African wine – that the quality of our top wines is on par with the best in the world, but their prices didn’t reflect it. Therefore, local wine prices would tend towards their international counterparts over time.
Recently, I spent some time cycling through Burgundy, and I have come to change my mind on that theory. Our wines don’t have the same provenance as the Cru’s of Burgundy.
This is what Wikipedia says about Domaine Romanée-Conti, the most exclusive Grand Cru from Burgundy:
“In 1232, the Abbey of Saint Vivant in Vosne acquired 1.8 hectares of vineyard. In 1631, it was bought by the de Croonembourg family, who renamed it Romanée for reasons unknown. At the same time, they acquired the adjacent vineyard of La Tâche.
In 1760, André de Croonembourg decided to sell the domain and it became the subject of a bidding war between Madame de Pompadour, mistress of Louis XV of France and her bitter enemy Louis François, Prince of Conti. The prince won, paying the massive sum of 8000 livres, and the vineyard became known as Romanée-Conti. But come the Revolution, the prince’s land was seized and auctioned off.”
So, this vineyard has been producing top wines for over 800 years. Kanonkop, sit down.
The point here is not that the prices of the wines in my collection will not trend towards the prices of French wines – I realise now that they won’t – but the amazing pricing power of luxury goods. This pricing power stems not just from quality but also from provenance. What really sets luxury goods apart from anything else is their craftsmanship, scarcity, brand story, time invested and the emotions they evoke. The top wines of France have that in spades, while the top wines in South Africa are just pretenders for now.
Some things are more permanent than others, and the pricing power of luxury is one of them. A business that feeds one of the seven deadly sins is legal and completely unregulated, with almost zero prospect of future regulation, is a powerful business. Luxury feeds 4 of the 7: pride, envy, greed and lust. It is not surprising that luxury goods are that special breed of item that is classified as a Veblen good – where the demand rises as their price increases. This gives the purveyors of luxury brands massive pricing power.
It is also not surprising that Bernard Arnault, the founder of LVMH was, until recently, the richest man in the world. And Johann Rupert, the scion of the Rupert family who founded Richemont, is the richest person in South Africa.
These companies have operating margins of over 25%, with returns on equity in the high teens. Growth rates for Kering (owner of Gucci) and Richemont have been acceptable, while LVMH has been a fast grower. Unfortunately, the ratings of these stocks over the past few years have discounted even higher returns in future than they have been able to produce in the past. As a result, I have chosen to stay on the sidelines despite the undoubtedly high quality of the businesses.
Fortunately, for the last few weeks at least, the S&P Global Luxury Index, which tracks 80 of the largest publicly traded companies engaged in producing or distributing luxury goods in the world, has sharply underperformed the main global market indexes. It is quite possible that we might be getting a chance to buy these stocks at reasonable prices in future.
They are on my watchlist.