Regarding… Vol 2 no 3 – The Moot Point

Dear Fellow Investors and Friends

I’m Piet Viljoen, and today is Thursday, the 25th of January, the 25th day of the year. A total of 341 days remain until the end of the year. Yes, it is a leap year – I have to keep reminding myself to do the sums properly.

If you’re new here, welcome! And welcome to everyone else, of course. I do appreciate you taking the time to read this.

Today, in 1947, Thomas Goldsmith patented the first arcade game, considered to be the ancestor of today’s video games. Last week, I showed this chart. Goldsmith died in 2009 when the industry was a third of the size it is today. From here, virtual and augmented reality might provide another growth vector. I only hope Goldsmith was able to profit from his patent.

In other games, this past weekend, Dricus du Plessis won the UFC world middleweight title. Dricus is from an area in Pretoria called “the Moot”. I’m also from Pretoria but from an area called Brooklyn. In Brooklyn, we were scared of the guys from the Moot.

UFC is a no-holds-barred, mixed martial arts fighting discipline. Like street fighting, almost anything goes. You need to be strong, skilful, and brave to have any hope of success.

Last year, after winning a fight by knockout, Dricus grabbed the mic and shouted, “Suid-Afrika, hulle weet nie wat ons weet nie”. You can see him saying it here.  It went viral and was adopted as a mantra by the Springboks during their successful defence of the Rugby World Cup – another sport that demands super-human levels of physicality, skill, and bravery.

But what does it mean?

In Dricus’ own words:

“I said it, and it blew up, and now the Springboks are saying it. It just came out of my heart because ‘hulle weet nie wat ons weet nie’. We’re always the underdogs. We are always expected to fail…

They don’t know what we as a country have been through and how proud we are to be here, no matter the adversity we face. We will never give up the fight; we will never stay down. And that’s what they don’t know.”

South Africans excel when the going gets tough, when the chips are down, and you have to stand up for yourself and make it count. We don’t take the easy way out – we put in the hard yards that ultimately lead to success. And that is why we punch above our weight in sports that demand extraordinary levels of bravery as well as physical and mental toughness – rugby, UFC, boxing (remember Gerrie Coetzee?) and even cricket.

Jon Arik, the American UFC commentator, said – and I quote verbatim – “A lot of his style is rooted in South African culture, just straight fucking desire and will”. Dean Elgar would agree.

We are a country of brave, skillful and tough people.

Our government is the exception that proves the rule. If there is a shortcut, they will find it; if there is an opportunity to benefit themselves at the expense of others, they will take it, and if there is work to be done, they will vacate the area immediately.

The exact opposite of the average South African.

As musician “The Kiffness” (@TheKiffness – follow him on X for some good content) posted: “South Africa is a winning nation, governed by a select handful of losers”.

On top of being a bunch of losers, our government has no concept of sustainability. That’s why the country’s infrastructure is crumbling, finances are in a mess, and the only thing growing is the unemployment rate. And the size of the potholes.

But the South African man-in-the-street is increasingly looking out for herself. She is strong and brave and doesn’t need handouts from corrupt politicians. That is why – despite the best efforts of our politicians – we have successful, growing businesses. Businesses are run by entrepreneurs who identify gaps in the system and pockets of inefficiency and make everyone’s life better by providing the goods and services that solve these problems. Their incentive? Profits. Exactly that which our communist government detests.

“Hulle weet nie wat ons weet nie” – also applies to our stock market, where there is a treasure trove of such well-run, cheap, ignored and misunderstood businesses – underdogs – that will reward brave investors richly over time because they are South African, not in spite of being South African.

For a large-cap company, this share price has completed one of the greatest round-trips ever, falling 77% in about 430 calendar days and staging a 344% rally to get back to even in just as much time. This week, it reached an all-time high. Like the other six of the magnificent seven, the momentum is strong here. So is the valuation.

My take: this cohort of stocks really scares me. They are sucking the oxygen out of most markets. The combined market cap of the magnificent seven, as they are now called, is bigger than every other major market in the world. Combined.

I don’t own them. And it hurts. So, this is me currently:

Both the S&P500 and the Nikkei (Japanese stock market) hit new highs this week. The S&P500 is at an all-time high. America has been a great place to be invested over the past 15 years.

Meanwhile, Japan is only now starting to get its mojo back. It’s still almost 10% below the peak reached in 1989, but it now has momentum:

Both the US and Japan markets look bullish. There is a difference, though: the US market advance is incredibly narrow. From Gavekal: “Over the last 12 months, the MSCI US index has risen by 21.1%, outperforming the MSCI Japan, which is up 16.7% in US dollar terms. But a closer look shows that while the median constituent of the MSCI US has risen 8% over the last 12 months, the median constituent of MSCI Japan is up a thumping 35% in US dollar terms.”

My take: I trust the action of the Japanese market more. I have a high Japanese weight and a low US weight in the MWI SCI Worldwide Flexible fund (aka the cockroach).

This is a picture of Sasol’s new HQ, which opened a year ago:

This is a picture of Sasol’s share price:

And this is a picture of their return on equity:

My take: Sasol has been misallocating capital for a very, very long time. At least the chickens have a bright new office space to come home to roost in.

Warner Bros. Discovery, Inc. (WBD)  is a global media and entertainment company operating through three segments: Studios, Network, and DTC. DTC stands for direct-to-consumer and is also known as streaming. It is common knowledge that this part of the market is subject to a massive turf war between a bunch of big elephants: Netflix ($117bn market cap), Disney ($171bn), Amazon($1612bn), Apple ($3017bn) and also a host of smaller companies, including WBD ($25bn).

When the CEO of a company talks about a “generational disruption”, as David Zaslav of WBD did in their Q3 results last year, you know trouble is brewing.

Yesterday, Netflix announced that its subscriber base has grown by 13% over the past year. The stock jumped by 10%. By contrast, WBD stock is bouncing along the bottom.

My take: there is an African proverb that goes: “When elephants fight, the grass gets trampled”. When businesses have easy access to capital and use it to fight for market share – as in the DTC sector – returns to capital providers get trampled. I have no exposure to this part of the market, and until the fight is over and capital discipline returns, it will stay that way.

Adamas is a Lab-Grown Diamond manufacturer that produces near-flawless single-crystal diamonds for gemstone and industrial applications. Its ticker, misleadingly, is JEWL.O. There is currently much hype around lab-grown “diamonds” in the diamond industry, as they are at least partially to blame for low natural diamond prices at present.

This is the share price of Adamas One. It listed just over a year ago at $8 and is now trading at 59 cps.

My take: Costume jewellery has been with us for a long time and no doubt will not disappear. Conversely, gem-quality natural diamonds are fairly scarce and remain in demand. Having said that, I am not unbiased as our investment company, Astoria, owns a share in a diamond mining company. Even at current diamond prices, our company is profitable. Adamas is not. And, from the graph, right now, the market is saying lab-grown will not take over the world, while natural diamond prices seem to have bottomed.

47% of the world’s public mining companies are listed on The Toronto Stock Exchange and TSX-Venture exchanges. ChatGPT tells me the actual number is north of 1400. By comparison, there are 56 mining companies listed on the JSE. Yes, our regulatory environment is poor, logistics is an issue and raising capital is difficult.

But a story from Matt Levine’s Bloomberg column last week casts a different light on the reason for the discrepancy. Levine tells the story of a shell company which planned to acquire an exploration-stage mining property – which wasn’t actually producing anything yet – and then use it to apply for a Canadian provincial government program that provides up to $200,000 of taxpayer money to fund exploration projects. The kicker was the name under which the company was registered – Griftco.

According to Levine, Bay street (the financial hub of Toronto) lawyer Chris Irwin is one of the principals behind Griftco. In an interview, he said the name has a perfectly innocent explanation, has nothing to do with ripping people off, and was inspired by a funny acquaintance.

“I had a friend, who had a phone message that when you called, said, ‘Thank you for reaching Griftco, all our agents are busy,’ ” he said. “We sort of had a running joke about that, and then I said, ‘I’m going to steal the name,’ so I incorporated the company and now I have the name. …It’s probably my reputation that people know it’s ironic,” he said through spurts of laughter.

The local newspaper Globe and Mail who first reported on Griftco, also noted that another recipient of Ontario Junior Exploration Program funding is a company called “Money Money Money,” but they weren’t able to talk to whoever chose that name.

So now you know…In South Africa you can’t get a mining license, let alone a mining grant due to corruption and incompetence. But in Canada even outright frauds actually advertising the fact that they are frauds can.

My take: I don’t know which jurisdiction is worse for investors.

The following graphic shows just how transitory news is:

source : @exec_sum

Thinking about how all-encompassing the “story of the day” feels, it’s surprising to see how quickly most news stories fall off the radar – as people move on to “new” news. Thus, the news cycle has to be relentless, as its main purpose is not to inform but to sell advertising.

And we all know what sells: bad news.  But as interest in yesterday’s bad news wanes, so new bad news needs to be dished up.

If you invest based on the news flow, you would be paralysed by fear into absolute catatonia. So the best advice here would be to listen to Charlie Mungers’ advice: invert. That means you need to stop reading, watching or listening to the news. Completely.

My take: I “stopped the news” a few years ago, and my general sense of well-being has greatly improved.

My take: this used to be a hot market and a sign of strong speculative forces. Prices are still high, above the levels of 3 years ago, but things are cooling rapidly. There are proper “hard assets” that can protect you against unanticipated inflation. I continue to stay away from fancy watches.

If you are a regular reader of these letters, you will know that I enjoy listening to music. As much as I love listening to old favourites, I also love discovering new music. Last year I connected some of you with my friend Mark Rosin’s WhatsApp group: “The Friday Song”, where he introduces us to an interesting song every Friday. I can’t wait for his WhatsApp every Friday morning. (for new subscribers: drop me line of you want to join in the fun).

So I enjoyed this article on how to find new music amidst all the confusing abundance the streaming – and its algorithm – has brought us.

It also happened to coincide with Pitchfork being bought out by GQ this week. For those of you who don’t know, Pitchfork is a publication dedicated to music reviews. The fear is that they have sold out now, and the quality of their reviews will decline and be limited to covering work by Taylor Swift, Drake and the 5 or 6 other stars. The long tail will become even more obscure.

In this regard, Bob Lefsetz commented in his weekly letter (to which I subscribe) on the Pitchfork situation: “This is not a harbinger of what’s to come; this is the last gasp of a dead paradigm.” and “Music criticism is dead. If it comes back, it will look different.”

You can find Bob’s archive here. You can also subscribe to his letter there.

Last week Mark Rosin shared two related articles with me: here is a very good piece in the Guardian about the “Pitchfork Problem”. And here is an even better companion piece which expands the Pitchfork saga into a general critique.

There is a new crisis brewing in the music industry. It looks like we will end up with five or ten big current acts, and lots of thin verticals. Very thin. And also a lot of people will just listen to what algorithm serves them up – thirty-year-old hoary chestnuts.

I don’t know what the solution to this problem is, or even if anyone thinks it is a problem. But I do think its worth talking about. If anyone has other views on this I would love to hear from you

“The Magnificent Seven,” by one of my favourite bands ever, The Clash. of course.  From the triple album Sandinista. A triple album, you say? Yes – the indulgences of 70’s/80s rock bands. Just like the indulgences of the 20s investment fads.

He says, with more than a little bit of Schadenfreude:

“Ring! Ring! It’s 7:00 A.M.!
Move y’self to go again
Cold water in the face
Brings you back to this awful place
Knuckle merchants and you bankers, too
Must get up an’ learn those rules”

Watch it here

That’s it for this week. The music’s playing, the party is rocking, so dance. But dance close to the door.

And be very careful out there.

Piet Viljoen
RECM