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Today is Thursday, the 12th of October 2023. It is the 285th day of the year, 80 days remain. At Starbucks, Pumpkin Spice lattes are on the menu again, so it must be Autumn in the Northern Hemisphere. They’re pretty good if you ever get the chance to try one.

Today, in 1810, the first Octoberfest was celebrated in Munich in the form of a horse race held in honour of the marriage of the crown prince of Bavaria (who later became King Louis 1) to Princess Therese von Sachsen-Hildburghausen. How and when it developed into an event where copious amounts of beer is consumed is not clear.

Quote of the day

“There are at least two kinds of games: finite and infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play”

James Carse

In the book, he distinguishes between finite games, which have rules, boundaries and an ending. When playing these games, the goal is to win. Examples would be board games, sports matches and political elections. Infinite games, on the other hand, have rules that change from time to time and boundaries that are fluid. There is no winner or loser; the goal is to continue playing for as long as possible.

Your relationship with your spouse or other loved ones is an example of an infinite game. Other examples could include the Cold War, Middle Eastern conflict, or evolution.

The winning strategy in finite games differs greatly from playing an infinite game.

In finite games, it pays to engage in risky activity, as the rewards of winning outweigh the downside of losing. And if you happen to lose, you can always play another game. Superior strength, mobility, and shrewd risk-taking are rewarded in finite games. Rassie Erasmus, the Springbok coach, understands this in spades. Rassie is known to take many calculated risks, to the extent that he has been called reckless. Yet, under him, the Springboks won the World Cup in 2019 and are currently ranked a close #2 worldwide.

In infinite games, losing means you drop out of the game altogether, and there is no repeat. It’s all over. The game, therefore, rewards very different strategies. The main strategy is not to lose or to survive, and the ability to adapt to any exogenous changes in rules or boundaries helps one in this regard. The famous mathematician John Kelly*  devised a betting strategy to minimise the risk of ruin and ensure long-term profitability as a gambler. Importantly, Kelly’s criterion does not try to maximise winnings, it tries to maximise your longevity at the table.

Here’s a YouTube video explaining the Kelly criterion:

Managing money, or the investment “game” is an infinite game.

In investing, the purpose should generally be to:

  1. Avoid ruin.
  2. Obtain a satisfactory periodic return.
  3. And do so over the longest possible time period, letting compounding work its magic.

What you are not doing is trying to win the “investment sweepstakes” over an arbitrary period of time by generating the highest return possible during that time. No true fiduciary would manage money in such a finite way. The risks are too high; the market throws too many curveballs at you.

Despite this, the investment management industry has successfully curated a finite mindsight amongst the players – i.e. the fund managers and their gatekeepers, thereby creating an illusion of winners and losers. “Winning” the game is a highly marketable asset, and as fund management firms have morphed into marketing-led organisations, this asset allows them to “sell more products” to their customers. They even dish out awards to funds that have “done the best” over some arbitrary period, usually three years.

One of the open-ended funds I manage, the Merchant West Value fund, has been the very fortunate recipient of a few of these awards over the years. Not through any brilliance on my part, but purely through a lucky confluence of a short-term investment burst, which happens occasionally, and the specific period over which the “game” was measured.

What are the tactics of a finite investment game player?

They would include positioning the portfolio strongly in line with a forecast and continuously repositioning it as the forecasts change. It would include buying “hot stocks” which are going up on hype mistaken for fundamental factors, and it would include being highly benchmark cognisant – as the bigger risk in a finite game is not that of losing money, but losing clients due to underperformance of the peer group.

Because winning competitive finite games requires effort, players tend to become focused on the game’s rules to the exclusion, potentially, of the more fundamental values the game should serve. These values would include the following:

  1. Not asking “What do I need to do?” but rather “What must I avoid?”
  2. Cause-effect relationships don’t always work out the way you think they will.
  3. Markets are subject to vicious randomness.
  4. Assume your assumptions can be wrong and plan with a margin of safety.
  5. Never place yourself in a position where you are forced by circumstance to do something you don’t want to do, even if that means ridicule in the short term.

The siren call of “winning” the finite game – from the sales team, the management of the business, and yes, even the gatekeepers, is very hard to resist. It is a game I tried to play for a long time. Playing this type of game ultimately led to a poor long-term track record, albeit interspersed with the odd gong for a podium place.

I opted out of this “game” just over three years ago.  The mindset I now employ in the open-ended fund I manage for Merchant West is that of an infinite investment game player. This means a fully diversified portfolio, with no “swing for the fences ” type exposures, minimal trading – i.e. a long-term mindset, and a complete disregard for short-term investment outcomes, especially those relative to an index. Not because I don’t care, but because these outcomes are arbitrary and capricious.

Even the nickname of the fund – the cockroach – is not designed to be an attractive marketing proposition, although it does imply a certain robustness to different possible future outcomes, many of which could be adverse.

* As an aside, Kelly was a chain smoker who died at 41. As always, if someone is an expert in one domain, it does not automatically follow that they are an expert in another.

“New highs are bullish”

1. Calgro


Source: koyfin

Calgro is a property developer, focusing on the entry-level part of the market – that part of the market which you would think struggles most when interest rates and unemployment are at multi-year highs.

However, year to date, Calgro’s share price is up by over 40%, helped by a combination of strong core results and a major share buyback programme. Share buybacks are a powerful tool when a company is trading at a low valuation. Calgro has bought back over 18% of its shares over the past year at an average price of R2,63 per share. Yesterday, the share price was R4,70.

Importantly, cash generated from operations is in line with profit after tax. Profit after tax at the last set of results was R1,53 per share, placing the shares on a P/E of 3. They released a trading statement recently, indicating at least 20% growth over the past 6 months.

Here, you have a management team that has gone through deep waters, come out the other side, and is implementing sensible strategies in a business which provides an affordable product its clients need and want. I own the shares in the Merchant West Value fund, as well as in RAC.

2. Fortress B

Fortress B

Source: koyfin

Regular readers will know of my dislike of property as an investment. This is compounded by the weaknesses of the REIT structures in which they are housed and the general management abuse of shareholders, which is rife in these entities.

So here’s one for the books – Fortress B shares – which were de-REITed a year ago due to their inability to pay a distribution (which had to do with the greed of the A-shareholders, but that’s a story for another day) hit a new 5-year high this week, trading at above pre-Covid levels. Almost all other REITs are trading well below their pre-Covid prices!

If that’s not a message to all the other poorly performing REITs out there, I don’t know what is.

“New lows are bearish”

1. Renergen


Source: koyfin

Renergen has been the topic of some sharp – and well-researched – commentary on X lately.

Their response? A lesson on how not to win friends and influence people:

“While opportunistic attacks on illiquid stocks remains a common issue within the South African financial services community, the Company will assess the comments and consider appropriate next steps to protect the interests of all of its shareholders.”

Look, if an analyst addresses seemingly valid criticism towards your company, as management, you have two choices:

  1. You hold your tongue and let your results do the talking.
  2. You address the criticisms publicly. Truth is the best disinfectant.

What you don’t do is threaten the analyst. After they made this announcement, the share price declined even further. Who will management blame now?

2. Carmax

Carmax was the poster child for the used car industry post-Covid. At one point, it traded on a P/E of 28, which was on high earnings. A high multiple on high earnings is always a strong headwind to future returns.

Carmax pandemic

Source: koyfin

Needless to say, the cycle has run its course, and last week Carmax reported a revenue decline and an earnings miss.

Executives cited many of the same issues its peers have used to justify missing Wall Street’s targets. Rising used car prices, higher interest rates, tighter lending standards, and lower consumer confidence about the economy are all weighing on sales.

As a result, the Carmax share price is roughly where it was 10 years ago.

Carmax 10 years

Source: koyfin

As always, the cycle is alive and well. although sometimes, we forget about it in our excitement. This segues very neatly into the next new low:

3. Palladium price

The commodity plays a significant role in new vehicle production, being used to make catalytic converters that transform toxic gasses into less harmful substances.

Palladium has been under pressure because of several factors. The first is the new car market’s slow recovery from its pandemic supply chain issues. Additionally, automakers switching to platinum as a cheaper alternative has reduced demand. And lastly, the electric vehicle industry is eating into the market for light vehicles, where palladium plays its most significant role.

Prices recently attempted to stabilise but were unsuccessful and are now trading at five-year lows. It’s unclear what it will take for this trend to reverse, mainly because it’s a thin market dominated by commercial users and speculators who primarily employ trend-following strategies.

This does not bode well for local PGM miners. And especially not those who bought into Palladium at its high a few years ago. Although, to be fair, at R27 per share, SSW is trading 75% below its high of 2021, so it is discounting a lot of bad news. I would still wait to buy, though. With cyclicals, bottom fishing is not a process that generally leads to good outcomes.


Source: koyfin

Did you know?

1. Steinhoff’s listing was suspended this week

This ends its sorry saga as a listed company. I didn’t include it under “new lows are bearish” because you can’t go lower than 0, which Steinhoff shareholders get.

My take: I don’t think anyone is sorry to see it go.

2. Most corporate transactions destroy value

Yes, of course, you know this, but they still get done. That is why investment bankers earn the big bucks: they can convince company management to do transactions despite the overwhelming evidence that most, especially cross-border ones, destroy shareholder value.

This week, we received news that Life Healthcare sold its UK business, Alliance Medical Group. In the SENS announcement, they proudly mentioned cash proceeds for the sale of GBP593mn. What they didn’t say was that they paid GBP 553mn for it in 2016. That’s a return of – wait for it – exactly 1% p.a.

Let’s do some simple math. If they had instead taken the GBP 553mn and exchanged it into rand at the prevailing rate of around 21,50 at the time, put it in the bank here in SA at an interest rate of, say, 7% on average, and taken the proceeds last week and exchanged it back into sterling at the current rate of 23,25, then Life would have had GBP820mn in the bank. Plus a lot fewer headaches.

My take: when highly incentivised investment bankers meet company management with no skin in the game, shareholders lose out. Big time, every time.

3. Your favourite ugly sandals are coming to market

Birkenstock was listed via an IPO yesterday at $46 per share. This valued the business at over $10bn. At that price, its owners, L Catterton, the private-equity arm part-owned by LVMH, will more than double its money over two years.

Prof Aswath Damodaran did a nice valuation of the business if you’re interested:

Musings on Markets: Invisible, yet Invaluable: Valuing Intangibles in the Birkenstock IPO! (

My take: in line with my note on IPOs in letter #3,, I hope you didn’t buy any. It closed 15% down on the day at $39.

3. Gold has kept its value in beer terms

Gold beer

Beer prices increased at the Octoberfest this year by 8% to EUR 14.90 for a Maß. Compared to 2019 (in 2020 and 2021, the Oktoberfest fell victim to Covid-19), the Maß was 26% more expensive this year.  But gold has kept pace, allowing the beer-drinking gold owner to maintain their drinking habit.

My take: since 1950, gold has maintained its beer purchasing power, unlike the rand, the US dollar or even the Swiss franc. However, right now, it looks a touch expensive. In beer terms, that is.

What I’m reading

I guess one must mention the shocking atrocities in Israel earlier this week. My wife is Jewish, and I have many Jewish friends. And I’m absolutely shocked by some of the garbage that’s come out of people’s mouths in the aftermath of these inhuman attacks on ordinary citizens.

The best take on the situation I’ve seen was in this post on X.

What I’m listening to

The Tim Ferris show is often the #1 business show on Apple Podcast.

In this episode, he speaks to Shane Parrish, an entrepreneur and wisdom seeker behind Farnam Street and the host of The Knowledge Project Podcast.

Farnam Street is the street in which Warren Buffet lives in Omaha. So that will give you a clue what Parrish is about.

Have a good weekend. May the Boks win on Sunday night. And be careful out there.

Piet Viljoen