Regarding… Vol 2 no 17 – Common Ground

Dear Fellow Investors and Friends

Welcome!

I’m Piet Viljoen, and today is Thursday, the 9th of May, the 130th day of the year. There are 236 days left until the end of the year.

Yesterday, this letter reached the milestone of 1000 subscribers. Thank you very much for taking the time out of your day to read my musings on the market, stocks and life in general. I’m having a lot of fun writing these pieces, and it’s helping my thinking a lot. I hope it adds value to you, too.

Also, on this day in 1894, Benjamin Grossbaum was born in Lonhe don, England, to a homemaker and an importer of Austrian china. His family later changes its surname to Graham, and he becomes the founder of securities analysis and value investing.

(from: https://jasonzweig.com/this-day-in-financial-history/ )

Onwards.

In his book, “The Square and the Tower”, historian Niall Fergusson described turning points in history when power shifted from the centre, “The Tower”, to the distributed network, “The Square”, and vice versa. The Tower represents hierarchical, centralised power – the church, the state, and the big corporate; while the Square is the bustling marketplace, the decentralised network of human cooperation and exchange.

Most people’s lives are better in a decentralised – networked – world. There is more trade, growth, opportunity, and peace. In a centralised world, where power is in the hands of a few, there is more friction, more barriers, less trade and less growth. Growth takes energy, and the more energy you expend on staying in power, the less there is for growth.

Throughout history, the most brutal oppression of human beings has happened in societies which were structured with “strong men” at the top of the hierarchy. These “strong men” generally used a socialist philosophy to keep their subjects at bay. The pretence of a socialist utopia served to create a sense of contentment that everyone was equal – except the “strong men” and their clique at the top of the hierarchy, of course.

Whether it was the National Socialists of Nazi Germany, the Communist Socialists of Stalin’s’ Russia, the Peronists of Argentina, or the Nationalist Socialists of Verwoerd here in South Africa – intimidation, oppression, and aggression were the order of the day.

World Wars 1 and 2 resulted from hierarchical power structures trying to expand their influence and control. The absolute destruction and human misery created by these wars, coupled with the rise of the computer after World War 2, swung the balance of power back to the network.

Unsurprisingly, we have enjoyed a long period of sustained global growth post-1945.

But we are shifting to a more centralised future.

For crowds – the network – to function well, the nodes of the network need to be able to communicate effectively. Nodes must be open to new information signals, assimilate the signal efficiently, and then pass it on to the rest of the network.

The receipt and transfer of information should not have to pass through a filter. The signal needs to be unambiguous.  Equally, information needs to be open to debate and criticism. Accepting any old data – and even worse, filtered data – and unthinkingly passing it on or withholding it deducts from the richness of the system.

What passes for debate today is mostly caricature, virtue signalling, and preaching to the choir. Gaslighting is the currency of the realm. Today’s public square is a fractious place, where nodes increasingly take on positions calcified by hardened ideology, not open to debate. Debate and analysis are actively discouraged in many areas. We can’t hurt someone’s feelings by discussing sensitive matters now, can we?

Safe spaces are where communication goes to die.

Safe spaces allow crowds to form around central ideas, with no tolerance for questioning the validity of these ideas. In crowds, people stop thinking.

What to do?

Arthur Martine offered some timeless advice in his 1866 guide to the arts of etiquette, conversation, and being polite.

“In disputes upon moral or scientific points, let your aim be to come at truth, not to conquer your opponent. So you never shall be at a loss in losing the argument and gaining a new discovery.”

Anatol Rapoport developed a helpful set of rules for constructive criticism that conforms with Martine’s guidance (see here and here), best formulated by the philosopher Daniel Dennett (see here).

1. Attempt to re-express your target’s position so clearly, vividly, and fairly that your target says, “Thanks, I wish I’d thought of putting it that way.”
2. List any points of agreement.
3. Mention anything you have learned from your target.
4. Only then can you rebut or criticise.

Instead of straw-manning an argument, try to steel-man it. In other words, present the opposition’s case in the most robust possible way, making it as difficult as possible to argue against. And then build up a coherent argument against that strong position.

These techniques can lead to a more open and informative discussion and cumulative learning. Finding common ground can modify strong opinions and possibly even change them. In so doing, the nodes become efficient information gatherers and transmitters; the network becomes richer and more robust.

The stronger the network, the more decentralised power structures become and less power accrues to the hierarchy. The world becomes a much better place to live in.

One of the most highly recognised brands in the world missed earnings badly last week. The reasons given were: ” “Unexpected pressure on locational customers, choppiness in China, challenges in the Middle East”. Interestingly, according to data from the World Coffee Portal, China passed the United States as the country with the most branded coffee shops globally. China is Starbucks’s second largest market. So, the big takeaway is that Starbucks is losing market share in a big market. The share price reflects this poor performance, as it’s given up most of the growth achieved over the past 5 years:

The U.S.A. is, to all intents and purposes, a coffee desert. Finding a good cup of Java there is hard, and it’s no wonder Starbucks has done well with its sweet, colourful offerings. However, they struggle everywhere, including China, which is a big part of their future strategy.

My take: I don’t own this stock, and I see no reason to, despite the decline in the share price. Give me a Seattle double short latte over a cup of Starbucks diluted dishwater every day of the week.

This was a “hot stock”, unbundled from Afrox in 2010. It rapidly increased from R5,00 per share to R20 per share. At that stage, it was on a P/E of 25(!)

Effectively, hospitals are highly specialised properties with minimal pricing power and no flexibility in choosing their mix of customers. Hospital groups are capex-intensive businesses that struggle to generate appealing returns on capital. Don’t get me wrong, hospitals are good, but they are not good businesses.

The market is slowly but surely coming around to this view:

We can agree that property generally doesn’t make a good investment. So, we should be able to find a lot of common ground around the notion that properties with limited pricing power are disastrous investments.

My take: At its current price, Life Healthcare is on a 10% earnings yield and probably more fairly priced. But it’s not exciting. Move along here; nothing to see.

The stock market everyone used to love but now hates seems to be making a comeback. The CSI 300 China A shares ETF – a broad index of the biggest and most “blue-chip” Chinese stocks- has recently picked up its head. It’s not exactly a new high, but it’s showing promising signs:

Fundamentally, Chinese stocks look cheap. Tencent is on a P/E of 15, BYD on 20, Alibaba on 15 and Baidu on 18. These are all high-growth stocks; their US counterparts trade on multiples 2 to 3 times higher. However, China has been a high-growth market for a very long time. I showed this chart in my letter (Sanctions don’t work) last week:

Whatever your stance is on the attractiveness of Chinese stocks, there is a reason for the above chart. An increasingly large number of market commentators believe the terminal value of foreign investments in China is zero.

My take: Despite this short-term uplift, China is not a place to invest; the risk is too high. There is no need for bravery here; many countries are not run by communists where you can find good companies at attractive valuations. Let’s see how the whole structural change that is taking place in geopolitics plays out before we get too excited. In Afrikaans, we have a saying, “eerder bang Jan as dooie Jan” I firmly subscribe to that view.

This index of mainly defence-related stocks is on a tear despite having Boeing as its second biggest constituent at 14%:

My take: this chart tells us all we need to know about the state of the world. In short, the market knows we are struggling to find common ground.

Cameco Corporation is a leading Canadian uranium producer. There has been almost no investment in new uranium production for a long time. As a result, Uranium prices have been trending higher as the market has moved from a fundamental surplus toward a potential deficit.

Kazakhstan, the leading uranium-producing country, is close to Russia, which has maintained its influence over production activities. China’s close relations with Namibia have led to Chinese control of most Namibian uranium reserves. That leaves Canada and Australia as the only Western-aligned major uranium producers.

As a result, Cameco has been hitting new highs:

My take: Uranium is an illiquid market and makes up a tiny portion of the total cost of nuclear energy. If the future of energy is green, then nuclear has to be a significant component. Germany admitted as much last year when it reclassified nuclear as green energy.

If this becomes widely accepted, Uranium prices could go much, much higher.

The MWI Global Value Fund owns Cameco. In the commodity portion of the MWI Worldwide Flexible fund, there is a significant allocation to Yellow Cake plc, an investment trust with a single asset: Uranium.

I wrote about Yellow Cake in “Prophets and Profits” in January.

My take: Nintendo owns 32% of Pokémon and all of Mario Bros and is an underappreciated global media powerhouse. While not as cheap as it used to be, Nintendo is an attractive stock. The MWI Global Value fund owns it. If you want to learn more about this exceptional 130-year-old business, here’s a proper deep dive: https://www.acquired.fm/episodes/nintendo-the-console-wars.

Have I mentioned this before? Yes, just last week, in – surprise! – Sanctions don’t work.

But yesterday, I saw this chart on X, posted by @robin_j_brooks:

Of course, it just reinforced my view that sanctions have almost no effect on their targets. They merely allow politicians to make vote-catching performative announcements.  And enrich unscrupulous middlemen.

My take: Just think how lucky all those Kyrgyzstan gangsters are now that they have another line of business. The Kyrgyz Republic is ranked 31st out of 136 countries in crime rate. Better than South Africa, but not good.

Rest assured, they are working hard to move up the rankings with the help of German sanctions.

1. A blog  called “YWR: your weekend reading”: https://www.ywr.world/p/ywr-one-mans-garbage

   This week, it had the first positive piece on South Africa I’ve read in a long time: It starts with a riff on the mooted Anglo/BHP deal, then heads into the SA rabbit hole. And comes out the other side wearing rose-tinted glasses. If you look at the numbers, you can’t help but agree.

   My take: the numbers in the article speak for themselves. In the MWI Worldwide Flexible fund (aka the cockroach), I have a 20% allocation to SA as a proxy for a bullish outlook on commodities and emerging markets. Remember, this fund’s mandate allows it to be invested anywhere in any asset class worldwide. So, I guess the 20% allocation tells you how I feel about the investment opportunities here.

2. An interview with Niall Fergusson on winning the Cold War:  https://weltwoche.ch/daily/the-new-cold-war/

   In this interview, he talks about defeating the “Axis of Ill Will” – essentially the People’s Republic of China and its no-limits partnership with Russia. It boils down to a power struggle between hierarchical adversaries.

   My take: It isn’t comforting, but I would not dismiss anything Fergusson says. After all, students of history are often best prepared for the future.

1. Podcasts of the Berkshire Hathaway AGM, Courtesy of  @ChrisBloomstran

   First session:  https://podcasts.apple.com/us/podcast/berkshire-hathaway-annual-shareholder-meetings-s\ince/id1445276006?i=1000654586963

   Second session:   https://podcasts.apple.com/us/podcast/berkshire-hathaway-annual-shareholder-meetings-since/id1445276006?i=1000654586962

   What’s even better is this heartfelt summary of the proceedings by Chris Bloomstran (from Semper Augustus fame), who is the absolute axe on all things Berkshire:

   https://twitter.com/ChrisBloomstran/status/1787661194951618794

2. If you want to learn more about Chris Bloomstran and Semper Augustus, here’s an excellent interview with him:

   https://podcasts.apple.com/gb/podcast/interview-with-chris-bloomstran/id1709504113?i=1000637406940

My take: finding a good role model is more than half the battle. I was lucky enough to stumble across Buffet, Munger and Berkshire Hathaway relatively early. Internalising the Berkshire Hathaway culture was one of the best things that ever happened to me professionally. Over time, some people have taken advantage of me because of it, but many more people have added to the richness of my life because of it.

1. How to value Berkshire:  https://www.youtube.com/watch?v=Xd2rtzBVmx8

   Seeing it was the annual Berkshire Hathaway AGM last weekend, we might as well continue the theme. And who better to show us how to value BH than Chris Bloomstran? For all you BH groupies out there, enjoy! And if you’re not a BH groupie, here’s your chance to become one.

2. The fourth Turning: https://t.co/hSuCpTjRNk

   The Strauss-Howe generation theory describes a recurrent cycle of same-aged groups with specific behaviour patterns that change every 20 years.  This is a visual representation of the USA’s 80-year cycle. It’s from the book “The Fourth Turning” by Neil Howe. For me, these things are always a bit indeterminate. I don’t think you can delineate human experience so clinically. But – true or not – it is at least a graphic illustration of how we think about our times. And how we need to act against the emergent authoritarianism during these times.

3. Climate Change, The Movie: https://vimeo.com/924719370

   Before you label me a climate change denialist or some such, remember what I said about common ground. If you want to steel-man your argument for climate change, you NEED to watch this movie. I don’t know enough about the “science” to argue for or against the premise. But I do know that science is not what someone in a position of authority tells you it is. Science is merely a theory, open to be disproven. But let Vaclav Smil tell you all about it: https://www.nytimes.com/interactive/2022/04/25/magazine/vaclav-smil-interview.html

At this point, it’s probably best to say goodbye. I hope you all have a great weekend.

But remember to be careful out there while you work on disproving scientific theorems.

Piet Viljoen
RECM