Regarding… Vol 2 no 19 – Scoundrels and Heroes

Dear Fellow Investors and Friends

Welcome! I do appreciate you taking the time to read this.

I’m Piet Viljoen, and today is Thursday, the 23rd of May, the 144th day of the year. There are 222 days left until the end of the year. That’s right… Double Nelson. IYKYK.

Amanda and I were married almost three years ago. We had a small wedding, with around 50 guests. The older you get, the smaller your real friendship circle becomes, and the guest list consisted only of family and our small circle of friends.

The wedding was a weekend affair, with all of us staying together at the lodge where the ceremony was held. Seeing it was a Jew marrying an atheist, my business partner Jan conducted the ceremony. Now you have to understand that Jan is a big guy – a Maties first-team prop kind of big guy. But he is also a smart guy – one of the youngest ever actuaries at Sanlam kind of smart guy, which is why we trusted him to handle the ceremony.

In any case, at the reception, he was standing around, looking big, as he does, when Willem, one of my oldest friends from Pretoria, came over and asked who he was, as he had never met him before. Jan answered, “I’m the head of security”.

Willem promptly went over to the people at his table and said there must be some really important people here because of the security detail, of which he had just met the head. Of course, Willem was suitably embarrassed when the truth came out.

But he had made a mistake we all make all too often – we judge others based on first impressions or a second-hand anecdote. Most people’s personalities are like onions with multiple layers. We have to take the trouble to peel the different layers to get at the depth there is to all of us.

Not wanting to go to all that trouble, we judge people based only on what we see in public: first impressions and all that. What we see in public is often something said or done under pressure or is the interpretation by someone else of something said or done under pressure.

Some very famous people – people who have changed the course of history – had many more layers to them than one would think, given the public discourse around them.

Churchill achieved what few people believed was possible when he took office in 1940: the unconditional defeat of Nazi Germany. But did you know he also won a Nobel Prize for literature? His parliamentary career was far from plain sailing, and he made several spectacular blunders, so much so that he was often accused of having genius without judgment. Churchill loved gambling and lost what was, for him, a small fortune in the great crash of the American stock market in October 1929.

Richard Nixon was re-elected as US president in 1972 when he defeated the Democratic candidate in one of the largest landslide victories in American history. The indelible marks Richard Nixon left on American history through Watergate and his resignation as president before he could be impeached are well-known. Those events caused him to be perceived as an evil man, scheming to subvert the Constitution. But what often gets forgotten is his establishment of direct relations with China after a 21-year estrangement, ultimately leading to China rejoining the global economy, and being its growth engine for the next 30 years – a massive market for US businesses, which benefitted tremendously.

Steve Jobs changed our lives in the most profound way possible. Can you imagine going anywhere without your phone? As a result, Jobs is hero worshipped. But he was also obnoxious, impatient and irritable with the people around him. This from someone who worked with him: “I’ve worked with many billionaires in my career, and Jobs was the biggest asshole I ever met. He would destroy people just for the fun of it. He would make it personal”. Steve Wozniak, his business partner, said when you think about Steve, you need to ask the questions:  “Did he have to be so mean? So rough and cruel? So, drama-addicted?”

Elon Musk has created billions in shareholder value across three companies that have revolutionised how we think and go about our daily lives. Electric Vehicles, Space Travel and Satellite Communication are all more real and accessible and less science-fictiony due to Mr. Musk. But he has had more than his fair share of run-ins with regulators and courts. His private life is also not quite a paragon of virtue, with 11 children from three mothers and public drug use. His brother Kimbal says Elon is “a drama magnet. That’s his compulsion, his life.”

As it goes with people, so it goes with stocks; companies are living, dynamic things with many different aspects. Just like any living, breathing thing, companies also continuously adapt to the environment around them. You can’t sum up the investment case for a business in one word or even a sentence, just like you can’t sum up a person in one word or even a sentence.

So be careful when judging people or stocks based on a ten-word post on X.  What looks odd in a person or a business might be a feature, not a bug. It takes thoughtful analysis, not excitable reaction, to differentiate.

Well, it wasn’t exactly a new low, but it sure does look like a stock that is going nowhere slowly:

Last week, our dear, dysfunctional president signed the NHI (National Health Insurance Bill) into law. I can only guess it was done as a last, desperate election ploy. “Free healthcare for all” has a nice populist ring to it. Of course, the government has a solid track record of not delivering any service to its constituents ever. So I’m pretty sure the only thing the NHI bill means is that eventually, no one will get any healthcare unless they are rich enough to pay for private delivery, much like education, safety and security, electricity, transport, water and, increasingly, sanitation.

The CEO of Discovery’s mealy-mouthed defence of the NHI bill can only mean he wants to position his company as a service provider in the new system. To say that his clients shouldn’t cancel their health insurance, as “it will take at least 10 years for the bill to kick in”, is like telling the passengers on the Titanic not to cancel their reservations, as the boat will only sink in 4 days.

My take: It’s not surprising that the stock is going nowhere. It’s a death knell when, instead of fighting for your client’s rights, you start collaborating with our incompetent government.

Where to begin? There are so many! I’ll highlight a couple:

This is a core holding of the MWI Worldwide Flexible Fund (aka the cockroach) and forms an important part of the hard asset portion of the fund. Wheaton is what is known as a “streaming” business. This means it acquires “streams” of revenues from mines, principally gold mines. This is one of the ways new mines raise development finance. They sell a portion of future revenues – sometimes in perpetuity – in return for capital from companies like Wheaton.

Wheaton is effectively a gold mining company without continuous capital or even labour costs. Wheaton’s gross margin is almost 80% and its operating margin is over 50%. This is a true asset-light business, even more so than most of the Magnificent 7. It is also – deservedly so – as highly rated as the Magnificent 7.

With the gold price reaching new highs, it’s no surprise that Wheaton is also doing well:

My take: With companies like Wheaton, there is little standing between you and the cash flow from mining the relevant commodity. It’s almost as good as owning the commodity itself.

Westaim is a Toronto-listed investment holding company. It has three assets:

1. An investment in Skyward Specialty Insurance company, which listed last year. Since the listing, Westaim has been taking advantage of the hard insurance market and has been selling down its stake at increasingly higher prices.
2. An investment in Arena Investments (AI), a US-based investment manager that manages money for 3rd parties. It focuses on fundamental-based, credit-focused investments.
3. Its capital, which Arena manages.

Arena Investments is managed by Dan Zwirn, who has an interesting back story. Suffice it to say that he is a leading manager in the private credit industry and has previous experience building a big business book.

In short, Westaim Corp is a holding company run by value investors who focus on allocating capital effectively. It has been growing its NAV per share at over 10% per annum in US$ terms over the past 5 years and is trading at a 30% discount to NAV. And it has bright prospects for further growth. The share price is looking favourably upon the business:

My take: Like many small caps worldwide, this stock is under-followed, under-owned and underpriced. I initiated a small position in the equity portion of the MWI Worldwide Flexible Fund (aka the cockroach) a few years ago and look forward to owning it for a long time. Superb capital allocators manage it, there is a long runway of growth and it has a differentiated asset base.

This is an interesting chart from John Authers’ Bloomberg column yesterday:

It shows that earnings growth not only comes from just Nvidia, or the Magnificent 7 – it’s broadening out nicely. And we are seeing new highs in major stocks in multiple sectors internationally. Here is a short list of recent new highs:

• Financial: Goldman Sachs, Citigroup, Bank of America, Barclays, BNP Paribas, KKR (private equity) and previously mentioned Markel (in Path of Least Interest here).
• Technology: Broadcom, Qualcomm and Dell.
• Staples: Costco, Walmart, Tesco, Procter & Gamble.
• Health Care:  Eli Lilly, Moderna, Novo Nordisk, Thermo Fisher.
• Mining: Freeport McMoran, Wheaton, Teck, Antofagasta, Cameco.
• Oil/Energy: Exxon, Shell, Total.
• Industrial: GE, Transdigm, General Dynamics, Cummins.

My take: Equity markets are only getting started here. Whatever your neutral setting is for equity exposure, it’s probably best not to be under that.

That isn’t some obscure algebraic notation. No, it indicates the number of days it takes to settle transactions on stock exchanges in the USA. Up to now, it has taken 2 days – T+2. On 28 May, settlement will be moved to 1 day – T+1.

From Grant’s Interest Rate Observer:

“Only 9% of sell-side firms polled by consultancy Coalition Greenwich this spring anticipate a smooth transition to T+1. Some 38% express concern over inadequate buy side preparation, while 28% flag potential problems with trading venues and nearly 20% fret over the prospect of broad-based “severe issues.”

On May 31, index provider MSCI will conduct its quarterly rebalancing, setting the stage for what should be one of the busiest sessions of the year a mere three days after introducing a one-day settlement. As data from Northern Trust shows, global equity turnover jumped 120% from its long-term daily average during the prior such event. “This is the rubber hitting the road immediately after T+1 goes live,” Gerard Walsh, head of the global capital markets solutions group at Northern Trust, tells Reuters, noting that the index rejiggering impacts “thousands of funds, ETFs, portfolio structures. . . it’s a big deal.”

My take: If you plan on trading in the USA over the end of the month, you should do it now or take a few days off and wait for the systems and processes to settle. There is a non-negligible likelihood that things get messy. You don’t want your check getting lost in the mail.

This is a hard-hitting but thoughtful piece, which contains a lot of nuggets that serious investors will do well to internalise. The upshot of this piece is that the top outliers account for most of the returns from almost any asset class. Very, very few can capture those returns consistently.

My take: Lower your expectations of the returns you expect from your investment activity.

My ex-colleague and current manager of the Rozendal family of funds posted this article on X earlier this week.

The article’s tone was slightly snotty, but I thought the argument was strong if you can get over that. At the very least, if you are a gold bug, it’s worth thinking about.

My take: From current levels, the prospects for real returns from gold are probably not encouraging. Still, in a high inflation environment – one possible future outcome – I would venture that nominal returns from gold would still be entirely satisfactory and better than many other asset classes. You can follow Wilhelm on X for infrequent, but interesting points of view.

HK is a New York-based investment management firm that thinks about the world differently from all the cookie-cutter firms. Their quarterly documents are a treasure trove of outside-of-the-box thinking.

In this one, they talk about investing in technology, blockchain/crypto and how real long-term investing works.

My take: Horizon Kinetics’ principals, Murray Stahl and Steven Bregman, are original investment thinkers. Their quarterly (well-researched) musings are a regular highlight of my reading

In this episode, Jim Grant of Grant’s Interest Rate Observer fame (required reading for long-term investors, well worth the subscription price) interviews Dan Zwirn of Arena Investments (see above).

My take: Dan Zwirn is a veteran of the private credit market. He’s seen it all, so his views are worth listening to. And Jim Grant is a great interviewer.

Shellac is one of the bands formed by Steve Albini, who died last week. Albini was more famous as a producer than a musician. I had never heard of Shellac before, nor had I heard of any of his other bands – Just Ducky, Big Black, or Rapeman. But he produced albums for Nirvana, the Pixies, the Breeders, PJ Harvey, Jimmy Page and Robert Plant, the Dirty Three, Bush and Veruca Salt.

Albini was a musician’s musician. For him, it was all about getting the production fidelity as close to the sound of the live performance as he could. He considered himself a tradesman, who famously said to Nirvana, “he wanted to be paid like a plumber”, not requiring points or a percentage of the gross. The blog Cultish Creative had a great piece on this.

Here’s the album on Spotify, which was released 11 days after his death at the age of 61. My age. Turn up the volume and enjoy a master craftsman at work.

I’ve become seriously disillusioned with mass media. It seems to have devolved to providing the lowest common denominator with clickbait material. On top of that, they seem to be trying to tell us what to think instead of simply telling us about the news and letting us draw our own conclusions.

In this clip, the comedian Bill Maher takes on the media… and wins big.

This is not the journalists’ fault; they are merely responding to the incentives in the system. Most journalists I know are good, honest people with honourable intentions. But since the news became a big business, journalists haven’t been paid for the news but for the narrative. Whose bread I eat, whose song I sing. I know how this works – I was a fund manager at an institution. Incentives drive behaviour.

My take: I’ve unsubscribed from virtually every “big media” outlet. I think the real news can be found in the niches and corners where few are looking. I read as many of those as possible and then try to make up my mind.

We all complain about the deterioration of infrastructure and services for which the state is responsible here in South Africa and the increased complexity of legislation and regulation with which individuals and businesses must comply.

Here are three things you can do about it:

1. Get out and vote next Wednesday. It’s simple: if you don’t vote, you can’t complain.
2. Join – or contribute to – an organisation or community that replaces what the government neglects to do.
3. MAN up. In other words, practice Maximum Allowable Non-Compliance with all the arbitrary regulations our government is so good at rolling out.

Recently, I was honoured to be invited to join the board of Sake-Liga, and we had our first meeting this week. Under the capable leadership of Piet le Roux, Sake-Liga is an independent non-profit business group that aims to tackle the problem of state failure at scale. Their goal is to help facilitate a favourable business environment in South Africa through strategic litigation and alternative structures.

You can find out more about them here.

And remember – you can never be careful enough.

Piet Viljoen
RECM