Dear Fellow Investors and Friends

Today is Thursday, the 21st of September. It is the 264th day of the year; 101 days remain until the end of the year. On this day in 1931, the Bank of England dropped the gold standard, and the pound sterling promptly lost 28% of its value, undermining the solvency of countries in Eastern Europe and South America. History never repeats, but it tends to rhyme

Quote of the day

“There is nothing easy about the path of least resistance when you consider the opportunity cost.”
Richie Norton

A few weeks ago, I spoke about how pockets of excellence keep bubbling to the top in our lopsided economy – despite the best efforts of our incompetent government and our weak currency.

But how weak is our currency really?

My colleague Daniel King at Merchant West Investments put together the following chart:

The graph shows the return of rands earning interest in a local bank account (the orange line) against an equivalent amount of rands – translated into US$ on 1 January 2000, earning interest in a US bank account, and then translated back into rands today (the black line).

In short, by keeping your rands in South Africa, and earning local interest rates, you are much better off than buying US dollars. 17% better off.

How is this possible? Hasn’t the rand collapsed from 6 to 19 to the US$ over the past 20-odd years?

That is most people’s first reaction. Extrapolating the rand’s decline over the past 20 years, they reason be worse off if they don’t take ALL their money offshore NOW. And there is no shortage of heavily incentivised “helpers” who will encourage this. After all, the best gig possible is getting paid to deliver a service the client is begging for.

However, first reactions are not always the best reactions. A more thoughtful second take would be to consider the opportunity cost, which is a better decision-making process. In this instance, opportunity costs are clear – interest rates. And in South Africa, our interest rates have been high enough to compensate investors for a weak currency. After all, that’s the job of interest rates – to put a price on time and risk.

The green line in the chart above ends above the orange line because the difference in interest rates in South Africa and the USA has been more than the depreciation. But how is that possible? A collapse from R6 to R19 per dollar is so disastrous that interest rate differentials could never make that up. Or so the helpers shout, day in, day out.

The truth is that going from R6 to R19 over a period of 22 years works out to a depreciation rate of less than 6% per year. And our interest rates have been between 6% and 10% over that time, while US interest rates ranged between 0% and 4%. Yes, SA is riskier than the USA as an investment destination. However, relative interest rates tend to reflect that relative risk.

And what seems obvious at first glance, is sometimes a lot more complicated. Should you leave all your money in SA to take advantage of our juicy rates? In short, no. Countries get into trouble and try to devalue their way out of trouble like the UK tried to do in 1931, or the USA in the early 70’s. Poorly governed countries such as SA are even more vulnerable.

So, by all means, diversify your risk. But don’t ignore the opportunity costs.

“New highs are bullish”

1. Markel

Insurance stocks are doing well. I highlighted Berkshire a few weeks ago, and Markel hit a new high this week. Fairfax has gone parabolic. These are all top holdings in the Global Value fund, which I manage for Merchant West Investments.

What’s going on?

Source: Koyfin

Markel is a specialty insurer focused on niche markets with hard-to-place risks like excess & surplus, or E&S, lines. The other two companies also have insurance as their primary business line. However, there are multiple common denominators. Some of them are:

  • A long-term mindset
  • A strict underwriting discipline
  • An outstanding capital allocator at the helm (in the case of Markel, it’s Tom Gaynor)

These are all outstanding traits to have in an insurance business. But it also helps to have a “hard’ insurance market – i.e. when they have the power to increase premiums to levels which reflect the risk they are insuring more than adequately. Currently, insurance rates are hardening, as you might have seen if you recently negotiated a renewal on your insurance policy.

That’s good, but this is better: today, the equity of all three businesses is reasonably valued by the market, close to book value. This allows outside passive minority shareholders the opportunity to share equitably in the growth of the business, as opposed to many “growth” stocks today where the high multiples discount so unrealistically rosy a future the shareholder returns from these prices are likely to disappoint.

2. Okamoto

Okamoto is an exciting stock I bet you’ve never heard of. Here’s a price chart of that stock:

Source: Koyfin

After languishing for a few years post-COVID, it has exploded higher over the last few weeks. No, it does not do AI and is definitely not “leading the fourth industrial revolution”.

It makes raincoats and condoms. Go figure.

The #3 condom maker in the world has growth potential in China, where usage rates are low compared to Hong Kong or Japan. Okamoto is typical of neglected Japanese businesses: a good business with a strong balance sheet and improving capital management. In short, Okamoto is a case study of neglected business trading at attractive multiples in a non-US jurisdiction.

It’s the sort of thing I love to invest in. And new highs make me happy.

3. Coal usage

Here’s a new high which I am ambivalent about: coal usage.

You might question my ambivalence; after all, isn’t coal a much dirtier word than sh1t these days?

I prefer to live in the world of “realpolitik” –the world as it is, not as we wish it to be. Life is a trade-off, and the energy sector cannot escape this. You can have clean energy, or you can have cheap energy, but not both. And large parts of the world want the same cheap energy the developed world had for a long time.

Greta Thunberg can admonish us Boomers all she wants, but if you are cold and hungry in a shack in the Global South, her words will fall like water off a duck’s back.

This segues very nicely into the next section: new lows are bearish.

“New lows are bearish”

1. Clean Energy

From GMO, the famed Boston-based fund management firm headed up by Jeremy Grantham (who did some outstanding research on stock market bubbles):

“Clean energy over the last few years looks suspiciously like one of Jeremy Grantham’s bubbles. After outperforming MSCI World by 200%+ over 2020 and early 2021, the Clean Energy Index lost all that alpha through the end of last month, as it dropped over 70% from its February 2021 peak.”

As Doomberg (one of my favourite Substack writers) says, “In the battle between physics and platitudes, physics is undefeated.” He then explains that low energy density is a fundamental challenge plaguing wind technology due to its inherent intermittence. This makes wind an increasingly expensive alternative form of energy.

Whether Doomberg is right or wrong can be debated, but what can’t be debated is that “clean” energy is not always clean and is often not dependable. So, any stock market price related to this sector, which implies certainty, will likely play out poorly for investors.

As it has done over the past few years.

Did you know?

  • Bob van Dijk, who suddenly “retired” as CEO of Naspers was estimated to have earned over R1,5bn during his ten-year tenure at the company. Over this period, the share price of Naspers underperformed its principal investment, Chinese internet giant Tencent, by 3% p.a. Another way of putting this is that shareholders had around a third less money after ten years of manic deal-making by Van Dijk and his team than they would have had if Van Dijk had sat on his hands and done absolutely nothing. My take: consultants play the game much better than owners. Be careful of them.
  • Last week, British chip designer Arm Holdings completed the most significant U.S. initial public offering (IPO) since 2021. It opened about 10% above its $51 initial price and closed over $60 on its first trading day. Last night, ARM is already trading well below its initial trading level. Earlier this week, Instacart IPO’d (is that even a word?). It priced at the top end of its range of $28 to $30 per share, valuing it at $10bn. But Instacart had a rough session after listing. While it initially jumped 40% to an opening price of $42, its price faded throughout the day to close at $33.80. Last night it closed back at its offering price of $30. The chart below from NYU’s Aswath Damodaran outlines how much money the company raised and at what valuation. Some early investors made money, but most did not and will have to wait to see if public market prices rise enough to get them back to even. In other IPO news, Deliveroo’s shares have slumped about 70% since the IPO, giving it a market value of about £2.1bn. Also, Chewy, an online pet food seller, was up nearly 250% from its IPO price at the 2021 peak. This week, its share price was down 85% from that peak, at a new all-time low. My take: avoid Food Delivery businesses, Online Fulfilment services or Dog Food sellers. And anything else that does an IPO.

What I’m reading:

The Price of Time, by Edward Chancellor

I met Edward in 1999 at a conference where we were both presenting. As you might recall, 1999 was the apogee of the “TMT” bubble. The conference was to launch a fund called The Wired Fund, loosely based on the stocks picked by the journalists at Wired magazine – a magazine dedicated to the new “Wireless” economy. I know – the fund couldn’t miss, could it? Could it?

It did. It faded into obscurity less than three years after chomping through a lot of client capital.

Needless to say, I think the primary purpose of Edward and I speaking at this conference was to provide some light entertainment, as neither of us bought into the concept of the fund, or even the thinking “du jour” that gave rise to the concept.

Edward has gone on to write several books. He wrote The Devil Take the Hindmost – a History of Financial Speculation, which I highly recommend. He also wrote two investment books: Capital Account (a collector’s item now) and a follow-up called Capital Returns.

His new book, The Price of Time, tells the story of the history of interest rates, and, for any student of the market, is compulsory reading.

What I’m watching:

This clip of Bill Gurley has been shared widely online, so you might have already seen it. I only saw it this week, and his presentation blew me away. Regulatory capture is real in SA and worldwide, including the “free market” USA. What he says is proper food for thought.

What I’m listening to:

PJ Harvey has come a long way from the days of “White Chalk” and “Rub it till it Bleeds.” Her music today is softer, gentler, and less immediate – but still exhilarating.

On her new album “I Inside the Old Year Dying” (no, not a typo), she has crafted songs adapted from her book-length poem Orlam. The poem was written in the nearly forgotten dialect of Dorset, the English county where she was raised. As such, it is hard to decipher the lyrics, and the music reinforces this state of suspended belief.

This is how PJ Harvey’s albums work now: you feel them without being able to explain them. Where her early records hit you in the gut, now she toys with your mind.


That’s all for this week. Take extra care out there.

Piet Viljoen



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