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):

The power of provenance

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.

Did you know?

1. A Scotsman once invented a fake country and fooled investors into buying its bonds.

British financial history often involves expensive wars wreaking havoc on markets. For instance, the Napoleonic Wars sent Britain’s debt-to-GDP ratio to 226% in 1815, a record high.  The government pegged bond yields to just 3% to reduce their rapidly rising interest payments. Unsurprisingly, high-yield bonds from countries like Peru and Chile – paying 25% – became all the rage.

Gregor MacGregor, a Scottish adventurer, had been fighting for Venezuela in their war of independence. Post-war, his travels around Latin America took him to an uninhabited island near Honduras. Here, MacGregor came up with a scheme to defraud investors. He invented a fake country called Poyais and issued bonds, yielding 6% The British public eagerly bought this higher-yielding debt. MacGregor successfully floated £32 Million of Poyais bonds in today’s money.

Before long, MacGregor opened Real Estate offices in London and Edinburgh, selling plots of land in Poyais for 4 shillings an acre. He also convinced 240 Scottish retirees to exchange their savings for “Poyais Dollars” and move to Poyais.

What awaited them was not the promised paradise but the harsh reality of malaria, natural disasters and unforgiving wilderness. Only 60 survived.

When MacGregor’s scheme was revealed, he fled to France, where he was imprisoned. Dubbed ‘The King of Conmen” by The Economist, MacGregor ultimately moved back to Venezuela and died in 1845.

(Source: Jamie Catherwood,

History doesn’t repeat, but it rhymes. Abnormally low interest rates invariably beget a misallocation of capital. Nvidia anyone?

2. Steinhoff, EOH and Ascendis are all down by more than 95% from their highs

You probably knew that. But did you know that all three were once fairly widely held stocks?

Many investors held at least two, if not all three, at one stage.

Of course, there were red flags all over the show. Serial acquirers, financed with large amounts of debt and regular stock issuance, all three also overpaid significantly for their acquisitions. In all three cases, cash flows lagged accounting earnings.

How did they become so popular? One word: greed.

The less-than-honest people who ran these businesses knew one thing – that they could pull the wool over otherwise very smart investors by pandering to their inherent greed.

Frauds and pyramid schemes have always been part of the investment environment. However, the learnings from this trifecta of disasters will stand the student of markets in good stead.

That, and the knowledge that greedy investors inevitably get slaughtered.

3. Nuclear stocks have outperformed the energy sector as a whole since the Fukushima nuclear accident in early 2011

At the time, it was thought that the disaster would signal the industry’s death knell. But now this is happening, from the FT:

“Rishi Sunak on Wednesday ignited a business backlash and a Conservative civil war on the environment as he announced a series of U-turns on critical targets to tackle climate change. The UK prime minister pushed back a ban on the sale of new petrol and diesel cars from 2030 to 2035 in a delay that is strongly opposed by some carmakers…Sunak also relaxed the 2035 phaseout target for the installation of new gas boilers by introducing an exemption for the most hard-pressed households so they will ‘never have to switch at all.’

Sunak goes on to helpfully explain that “governments of all stripes have not been honest about the cost and trade-offs,” that the drive for Net Zero would impose “unacceptable costs on hard-pressed British families,” and that “we’re not going to save the planet by bankrupting the British people.”

The UK’s walk back from the cliff was followed swiftly by a similar retrenchment on the part of Sweden’s ruling party and comes on the heels of Canada’s reacceptance of nuclear power, the rightward tilt of the German electorate, and angst among the climate alarmists over the upcoming United Nations COP-28 annual gathering.

It looks like an emergent pattern.

It was inevitable that the relentless assault against fossil fuels would manifest in economic hardship for the lower and middle classes. And that governments would pull back as a result of their voters’ suffering.

“New highs are bullish”

1. Japanese banks

Japanese Banks

At first glance, the above chart shows that Japanese banks are barely off their lows. Upon closer examination, they are now at 15-year highs. What’s happening?

Let me preface that anything I say about Japan is that it is a foreign country. Very foreign. I have been fortunate enough to visit it a few times, and it is personally my favourite country in the world to visit. But I can’t read or speak Japanese, I don’t know how the economy works or anything about the finer nuances of the banking system.

My take – when bank stocks make new highs in any country, my ears prick up. Especially when they trade at well below book value when making 15-year highs.

2. Consol Energy

Consol Energy

Source: koyfin

Consol Energy is a coal miner. Consol energy is making new highs. Alternative energy stocks are collapsing. Governments are changing their minds on this whole energy thing (see above).

My take – prices lead, and narratives follow.

“New lows are bearish”

1. Brait

THE poster child of the over-leveraged, overvalued private equity class of ZIRP, c.2010 to 2022. This company has only ever existed to suck management fees from its unsuspecting owners. First, the ex-Goldman Sachs wunderkind shuffled off the scene with a bag full of money, leaving the owners (i.e. shareholders) to bail out his Frankenstein of overleveraged UK fashion retailers and under-capitalised South African gyms.

This was followed quickly by a private equity firm that couldn’t raise funds in the market, so they sweet-talked their way into a listed firm. For the fees, not the returns, mind you.

In any case – if you think I’m off on a tangent here – look at the share price of Brait, then go and work out what the different management teams sucked out of it. I’m too tired to do it; in any case, I know the answer.

My take: value destruction writ large. Owners take note.


2. Pick n Pay

Raymond Ackerman, the founder of PnP, was the doyen of South African retailing. He revolutionised the industry to benefit not only his companies’ owners, the shareholders of PnP, but also the South African public, who benefitted from a greater variety of goods to choose from, conveniently located, at lower cost. A true win-win for capitalism.

Raymond passed away two weeks ago, a sad loss to the South African business world.

This week, barely ten days after Raymond’s passing, CEO Pieter Boone became the fall guy for years of underperformance, getting fired after less than three years on the job. His successor? Previous CEO Sean Summers, who left in 2006 after ceding the high ground in the retail wars to Shoprite by postponing the decision to build distribution centers (or DCs as they are commonly called in the industry).

Today, Shoprite, due to its early lead on scale and efficiency, can outperform PnP on price while still running at an operating margin of over twice that of Pick n Pay. it’s virtually impossible for PnP to claw back lost ground.

The wonderful thing about food retailing businesses is that they generally run negative working capital cycles – their customers pay them immediately, while they only pay their suppliers over 60 to 90 days, roughly. Growth requires very little shareholder funding. However, if revenues start going backwards, this positive self-reinforcing cycle goes negative, posing an existential risk.

Over the past six months, PnP’s revenue grew by less than 1%. And they expect to report a loss, even before the abnormal costs of load-shedding.

From Biznews:

Shoprite vs Pick n Pay

Turnarounds are difficult beasts; the statistics show that most fail to turn around. If you really want to invest in a turnaround, my rule of thumb is only to invest once the following conditions have been met:

  1. The financials have been kitchen-sinked.
  2. A complete, in-depth overhaul of management has been implemented.
  3. The market actively shuns the stock.

My take: As Summers points out, retail is hand-to-hand combat. He is 70 years old. The controlling family is understandably emotional. I am not sure this will work out well for minority shareholders.

3. Telkom

The dead hand of the government once more comes to the fore. Earlier this year, I thought that Telkom owned assets that were worth far more in other hands than they were in their own. Properties, Cell Towers, Spectrum – all valuable assets that were not being recognised by the market, or so I thought.

I was wrong.

The government, which effectively controls Telkom, has interesting ideas on running businesses, as we see daily with our SOEs that are supposed to supply us taxpayers with electricity, water, railways and other services.

Why I ever thought Telkom would be different escapes me right now. I can only say thank you to Brian Pyle, the co-manager of the Merchant West Value fund, for convincing me to sell Telkom.

This week, we learned that Nonkululeko Dlamini would be appointed as the group Chief Financial Officer and executive director. Dlamini is currently the group CFO at Transnet, previously the CFO at the Industrial Development Corp.

My take – if you own this stock, run. Run as fast as you can. Our government will not stop until the cadres have eaten everything.

What I’m reading

“Finding Endurance – Shackleton, my father and a world without end by Darrel Bristow-Bovey

If social media has gotten you out of the habit of reading actual books, this book is the one to get you back into it. DBB takes history and mixes in a good measure of pathos, bathos and anecdote to create a fascinating world in which to get lost for a few hours.

Also, he does a mean rugby post on X – follow him @dbbovey

Finally, he has a great blog:

What I’m watching

Jim Chanos (my second favourite Greek investor).

“We’ve been negative on China now for 13 years”

That’s all for this week. Be super careful out there!

Piet Viljoen