Dear Fellow Investors and Friends

Welcome to all the new subscribers! And to everyone else, of course. I really do appreciate you taking the time to read this.

Quotes of the day

“Success does not lie in sticking to things. It lies in picking the right things to stick to and quitting the rest.”

Annie Duke

Today is Thursday, the 9th of November, 2023. It is the 313th day of the year; 52 days remain. On this day in 1989, the Berlin Wall was opened, allowing people from East and West Berlin to move freely across the border which had been blocked since 1961.

Of course, most traffic moved in one direction – no prizes for guessing which!

More importantly, the Berlin Wall had been the symbol of the Cold War between communist Russia, its vassals and the free West.

The fall of the Berlin Wall was a tangible sign of regime change, driven by Glasnost (openness) and Perestroika (restructuring) in Russia. But change wasn’t limited to Russia – in the 80’s and 90’s, world trade and capital flows were being liberalised.

For example:

  • The UK abolished capital controls in 1979 under Margaret Thatcher
  • Glasnost in the mid-80’s
  • The ASEAN free trade agreement was signed in 1992
  • The NAFTA was signed in 1994
  • South Africa abolished exchange controls in 1994
  • The European Economic Area was established in 1994.
  • China joined the WTO in 2001

All these developments led to more trade, higher global growth, lower inflation and a boom in stock markets.

It’s also interesting to note that long bond yields in the USA peaked in 1989, and the stock market started going up after having done nothing for 20 years post the collapse of the nifty fifty craze in the early 70’s. So, markets anticipated the regime change, which was happening slowly.

Another regime change happened around 20 years ago – the shift from desktop to mobile. Apple, under Steve Jobs, caught the wave; Microsoft missed it. In an interview at the time, Gates and Jobs were asked:

“The core functions of the device formerly known as the cellphone, whatever we want to call it now — the pocket device — what would you say the core functions are five years out?”

Gates’ answer was like that of so many experts trying to predict the future: he had some ideas and some inside knowledge of new technology but no real vision of what might come next.

Jobs’ answer was profound:

“I don’t know. I don’t know because I wouldn’t have thought there would have been maps on it five years ago. But something comes along, gets really popular, people love it, get used to it, you want it on there. People are inventing things constantly, and I think the art of it is balancing what’s on there and what’s not — it’s the editing function.”

That right there is the recipe for genuine innovation:

  • Embrace uncertainty and the fact one doesn’t know the future.
  • Understand that people are constantly inventing things – not just technologies but also use cases.
  • The art comes in editing after the invention, not before.

To be like Gates and Microsoft is to do the opposite: to think that you know the future, to assume you know what technologies and applications are coming and to prescribe what people will do or not do ahead of time. It is a mindset that does not accelerate innovation, but rather attenuates it.

I found this interview so interesting because the same applies to investing. So many of us try to forecast the future – a la Bill Gates – and then build a portfolio around this forecast. And most people default to predicting macro events because it’s so easy to talk about. Whenever I speak to financial advisors, most often, the discussion devolves down to what the outlook is for the currency, interest rates, GDP growth etc.

The fact is, I don’t know. And neither does anyone else.  The future will always surprise us.

As a thought experiment, consider how regime change would play out in SA politics. Yes, it’s what we are all rooting for, but what happens after? Who has power, and how much? Can they wield that power? How far would the unseated groupings go to regain power?

It’s very hard to predict what will happen after a political regime change in South Africa. It’s even harder to predict what happens after global socio-economic regime change.

The good news is – as far as investing goes – it doesn’t matter.

Rather than try to optimise a portfolio for the best return under a given forecast, I try to optimise a portfolio for a reasonable return under any future possible outcome. In my book, portfolio management is not to generate the best return possible, regardless of risk, but to take the least amount of risk possible and still generate a satisfactory return.

This is especially true in the current investment environment, as we are undergoing another regime change. These significant changes happen every 25 to 35 years. The Covid mania could be the Berlin Wall of this era.

We will only know for certain in the future, but the following could be regarded as pointers to barriers being erected to stem trade and capital flows:

  • Supply chains, i.e. “re-shoring.”
  • The war in Ukraine.
  • Tension between China and the USA.
  • The rise of the “Global South” in terms of the BRICS+ grouping.
  • Resource nationalism, specifically with respect to the “clean energy transition”

If true, what would be the effects on markets? Again, I don’t know. But, as discussed in my note, Vol 1 No. 9, what worked over the past 30 years is unlikely to work over the next 30 years. Any investment strategy that aims to preserve wealth and grow it in real terms should be prepared for inflation, deflation, high nominal growth and a higher cost of capital, not necessarily in that order.

And many, many other unexpected – and unforecastable – outcomes.

In my book, the only way to deal with this is to run a diversified portfolio that includes assets that might not have been in favour historically but could protect your capital – and even benefit from – a regime change. Edit the assets that did well in the previous regime and add ones that can function well in the current regime. At certain times, this might look stupid relative to what everyone else is doing, but over time, it can lead to sleeping well and eating well.

And that is the best outcome possible, regardless of the macro-environment.

“New highs are bullish”

1. Fairfax International Holdings

I mentioned this Canadian Insurance and investment company in Vol 1 No. 4 when I discussed Markel, both large holdings in the MWI Global Value fund. Well, this week, it was the turn of Fairfax to report excellent results.

Over the last five years, Fairfax has shown the highest growth in per-share book value of the major P&C insurers. I got this table from a post on X:

PC insurance companies

Even better, Fairfax has – and continues to – trade at the lowest multiple of book of all the major insurers. This seems to be due to the market’s negative view of Prem Watsa’s (the founder and CEO) investing acumen. However, recent results seem to be proving that view to be incorrect. A 16% CAGR in book value is head and shoulders above the competition due to a combination of good underwriting and capital allocation.

Unlike nearly every other insurance company, Fairfax remained disciplined and did not reach for yield in the bond bubble.

This was a chart from a year ago, which indicated what could potentially happen:

Fairfax discount

And here’s the share price:

Fairfax share price

My take: when the market reaches an inflection point around previously strongly held opinions, it can lay the groundwork for outsized investment returns. Fairfax is at such a juncture.

2. Solana

The blockchain bites back! In a delicious bit of irony, SOL, the token most closely associated with SBF (other than FTX, obviously), broke to new cycle highs this week.


Of course, that’s not the whole story; if we zoom out, it’s clear that Solana – and other cryptocurrencies are not quite out of the woods yet:

Solana pandemic

My take: a 400% rally after a 97% selloff does not take you back to all-time highs. But don’t count out cryptocurrencies – the longer they stick around, the more likely they will stick around.

“New lows are bearish”

1. Fintech

Fintech – short for financial technology- was all the rage for a while. Yesterday, the financial sector was ripe for disruption. Block, Affirm, Robinhood, Worldline and Paypal would take over the world. Today, all are at or close to all-time lows, down over 80% from their euphoric highs.

What has caused this massive sell-off? Simple: supply-side economics, aka the capital cycle. When the frenzy was at its peak, it was easy for any business with “Fintech” somewhere in its description to raise inordinate amounts of capital.

So they did.

What they didn’t do was develop a business model that was anything different from what already existed in the plumbing of the financial world. it was just a different way to skin the same cat. And, as everyone was skinning the same cat, there wasn’t much cat to go around, the results of which we can see in their share prices today.

Here’s Paypal, for instance:


And here’s Worldline, the European “Fintech” that thought it could consolidate its way to glory:


My take: Visa and Mastercard are doing just fine, thank you. Moat intact. Real fintech would need to overcome the favourable network economics these businesses have built up over many years.

2. Online dating

Dating services company Match Group fell 15% after its fourth-quarter revenue guidance fell below analyst estimates. Management pointed to the weaker macroeconomic environment as the reason for the company’s lacklustre results.

Of course, it’s the economy’s fault! Management only takes the credit when results are good, or so most corporate communication seems to imply.

In other news, Forbes reports that online dating app Bumble’s CEO resigned, following an extended slide for Bumble stock since the company’s February 2021 initial public offering. Bumble’s $13.67 share price at Friday’s market close was 83% below its all-time high of $78.89 achieved in its first week of trading.

That’s probably also the economy. Or an overtraded market resulting from too much capital at too low a price for a long time?

My take: if you can insert yourself between two entities and collect a toll for connecting them, that makes for a good business. And if you can collect a toll from connecting human beings, that’s an even better business. This is a sector I would keep my eye on.

3. SEA Ltd

To complete our trifecta of internet-native disasters, let’s look at SEA Ltd. Remember this one? The smart kids had it on their bingo cards in 2020/21. The Amazon/Tencent/TikTok/Google what-what of Southeast Asia.

Here’s the share price:


What happened? Same as in numbers 1 and 2: free cash flow under pressure due to competition and incremental e-commerce expansion (i.e. capex) spend.

My take: in the tech world, big winners like Amazon, Google, Tencent, etc are the exception, not the rule. Beware when someone says, “This is the next Amazon/Google/Tencent etc etc”. It probably isn’t.

Did you know?

1. Capitalism outperforms Socialism

Capitalist-run countries’ markets outperform those run by socialists. I guess you did know this, but it’s nice to put some numbers to something we take for granted. Verdad Capital wrote a good piece on this subject and included the following chart:

Capitalist vs. socialist

In the article, Verdad Capital points out that a small number of outsized winners often drive equity returns. That type of inequity is toxic to socialists, who favour equality of outcomes. Moreover, stock market returns are rarely a top priority for dictatorships of the proletariat. The socialist president of Mexico, Andrés Manuel López Obrador, perhaps best captured the sentiment when he said, “The stock market is a great den of thieves, and I don’t like it.” Of course, he was silent on any description of politicians, especially of the socialist ilk.

Furthermore, autocratic leaders are reluctant to promulgate regulation shielding investors, and the resultant risk of expropriation depresses the returns realised by outsiders.

My take: Now we know why the stock market in South Africa is doing so poorly.

2. How the market for IPOs is doing

Many companies considering going public are rethinking the proposition, informed by a string of soft, high-profile debuts on U.S. exchanges. Shares of chipmaker Arm, software firm Klavio, e-commerce player Instacart and casual footwear manufacturer Birkenstock, each of which went public in recent weeks, languish below their offering prices.

Grants Interest Rate Observer reports that conventional IPO volume stands at $19 billion in the year-to-date per data from Dealogic, a fraction of the $59 billion average output over the same stretch during the past decade and down 85% from the first ten months of the bumper-crop 2021.

The news is that fast-fashion retailer Shein is looking to test the IPO market with a massive valuation. The Singapore-based fast fashion platform is targeting a $90 billion valuation in its potential U.S. initial public offering (IPO). That would be up from the $64 billion valuation it received in a funding round earlier this year.

My take: Don’t buy IPO’s. If you do, don’t say I didn’t warn you.

3. Turkey is issuing dollar-denominated bonds

Turkey returned to the dollar bond market on Tuesday, selling $2.5 billion of five-year sukuk (i.e. compliant with Islamic law) at an 8.5% yield. Investors placed some $7 billion worth of orders for the securities, the Financial Times reports, pricing comfortably below initial indications of 9%. Turkey’s dollar-pay bonds maturing in 2028 have rallied to an 8.1% yield from more than 10% in May. This narrows the spread over five-year Treasuries to 3.6% from nearly 7%.

The widespread acceptance of the bond issue is surprising, as Turkey has long been stuck in a vicious cycle of strong inflation and a weak currency. Their inflation rate was measured at 61.4% in October, and the lira is at 28.5 per dollar, compared to around 10 two years prior.

By contrast, South Africa’s inflation rate hovers around 5-6%, and our currency has depreciated by 10% p.a. over the same period. According to Daniel King, my fixed income colleague at MWI, 5-year SA dollar bonds trade at 7.3%, a spread of 276 basis points over US Treasuries. Not far off the spread Turkey has to endure. South Africa has a BB- investment rating, and Turkey a “highly speculative” rating of B.

My take: one of these spreads is wrong.

What I’m reading

Rudi van Niekerk, a good friend, manages a fund called Desert Lion Capital. It is a Delaware-incorporated fund that only invests in South African assets. (Full disclosure: RECM has an interest in his business.)

As I understand it, only internationals (i.e. non-RSA citizens) can invest in the fund.

But last month, he wrote a very good piece to his clients on the investment prospects for South Africa, Normally only his clients can read his letters, but he kindly took this one out from behind the paywall. Enjoy!

What I’m listening to

Many of you have subscribed to my friend Mark Rosin’s “Friday Song”. It might surprise you that I also build playlists, although I’m not in his league. I’m more of a collector, while Mark is a connoisseur.

Around six years ago, I set myself the task of collating the best music (in my opinion) of every year since 1962, the year I was born. Last week, I finished 1982 – only 40 more years to go!

Here are my top 20 songs from 1982, counting down from number 20 to number 1. You can access it on Apple or Spotify.

What amazes me is how some music just hasn’t stood the test of time (Michael Jackson, the goth stuff), and some of it I enjoy a lot more than I remember doing back then (Bruce Springsteen, Peter Gabriel).

But “Should I Stay or Should I Go” was the song of the summer of 1982 for me. And now, in 2023, it’s just as good.

I hope you find something in this playlist that brings back some good memories.

Enjoy the music, but remember to be very careful out there.

Piet Viljoen