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 20th of June, the 172nd day of the year. There are 194 days left until the end of the year.

Down here in the south, today is the shortest day of the year. Bring on summer!

Quote of the day

“Whenever you find yourself getting angry about a difference of opinion, be on your guard; you will probably find, on examination, that your belief is going beyond what the evidence warrants.”
– Bertrand Russel

On this day in 1887, artist Kurt Schwitters, one of the leading Dada artists, was born. The Dada movement was nihilistic and critical of society in the post-World War 1 period. It rejected all formal artistic conventions, and its preoccupation with the bizarre and the irrational eventually gave rise to the Surrealist movement.

Irrationality is everywhere; sometimes, it takes movements like Dada to bring society’s attention to it. One form of irrationality is cognitive dissonance, a psychological phenomenon that occurs when a person holds two contradictory beliefs simultaneously.

This post is about irrationality in financial markets and was inspired by a piece written by Cliff Asness of AQR called “Cognitive Dissonance”. You can find it here.

I’ll lead off with two of his that are particularly close to my heart:

  1. We understand the victory for the U.S. stock market over ex-U.S. markets over the last 30-ish years has come mostly from re-valuation (the market going from paying less for U.S. cash-flows to paying considerably more)…

…but we still expect, and are, in fact, counting on, it to happen again over the next 30 years.

  1. We know that performance chasing, especially over three to five-year horizons, is a bad investment plan (it’s what we often call “mildly backwards”)…

…but it’s still a very useful way to evaluate managers, and we hire and fire based on it, either explicitly or implicitly, rarely looking back to see if that helped or hurt us.

And here are some of mine, copying Cliff’s format.  I add to this list regularly, as the market is always fraught with these type of inconsistencies:

  1. We understand that the fees we pay on funds reduce returns, and know that a 1% annual fee is too high…

…but happily pay 2,5% on each and every credit card transaction we do. And up to 3% on simply withdrawing cash from an ATM.

  1. We understand that insiders are happy to sell their stock to us, the public, in an IPO because they are getting a high price for their business…

…but we are gratified to have been afforded the opportunity to buy a part of such an exciting company.

  1. We understand that high interest rates  – and, therefore, the high RoEs in business – in South Africa have historically more than compensated us for the risk of being invested here…

…but we cheer on each and every CEO who makes a “transformational” acquisition of a ‘hard currency’ business in the US/UK/AUS to diversify earnings and propel growth despite a long history of failures.

  1. We understand that insider selling is one of the most powerful sell signals for stocks…

…but we are happy with the explanation that it is purely for diversification purposes and that they are actually still a “net buyer” because of the generous share option scheme.

  1. We understand that banks are “useless” when it comes to helping you move your money through the payment system…

…but we are upset with “useless” regulators when we get defrauded while using the payments system.

  1. We understand that small caps are volatile, risky and fragile, and would never think of allocating any of our institutional risk budget to them…

…but we think that the private equity guys are geniuses in how they can lever up a portfolio of small caps and produce a low volatility portfolio by not taking their marks properly. They deserve a large allocation of our risk budget.

  1. We understand that those stocks we were happy to own before a market correction are a claim on a very long-term stream of cash flows far out into the future, and are even better value after the sharp decline in price…

…but that 30 year stream of cash flows might just be permanently impaired by the latest negative headline the newspaper used today to sell more copy. So maybe it’s better to sell it.

  1. We understand that no one has ever been able to make consistently accurate short-term forecasts about financial markets. Especially about macroeconomic variables…

…but we hang on the lips of any economist with a one-year view on the Rand, interest rates or GDP growth and adjust our portfolio accordingly.

“New lows are bearish”

1. Paramount / Warner Bros Discovery

The streaming wars are not going well for the also-rans. Despite Paramount being the subject of a take-out offer (which subsequently failed), its share price continues to plumb new lows:

Warner Bros Discovery

It’s not that the whole industry is suffering, as Netflix is close to hitting new highs:


Rather, it’s apparent that Netflix is eating the lunch of the also-rans. Apple, Disney and Amazon all have highly profitable businesses outside of streaming, so can afford to carry them. The big losers are the Johnny-come-lately competitors with outdated business models.

My take: first mover advantage in a platform, networked business is a real thing. And once your name becomes a verb, you’re on a good wicket. I discussed “anthimeria” in “Leaving for London” and the streaming wars in “The Moot Point”.

In summary, scale counts, both in content and eyeballs, in a mutually reinforcing manner.

As an aside, if the Canal+ offer for Multichoice is accepted by shareholders, the combined business will have 30 million subscribers across Africa, as opposed to Netflix’s 2 million. Plus more local content than you can wave a stick at.

“New highs are bullish”

1. Nvidia

This week, Nvidia became the most valuable company in the world, overtaking Apple and Microsoft. It’s almost like it’s a meme stock:

NVIDIA normal

Although to be fair, one should look at it on a log scale, which makes it look more reasonable – but no less bullish:


This is the last time for a long time I will say anything about Nvidia. Mainly because I don’t own it. And it’s starting to really hurt now. Especially when I see all the Nvidia shareholders like this.

My take: Not buying stocks on EV:Sales multiples of over 40 or P/E’s of 80 has stood me in good stead – so far – in my investing life. Maybe it’s different this time, but I’m not about to change how I do things now because of a little bit of (strike that – a lot of) FOMO.

2. FirstRand

FirstRand is South Africa’s biggest bank by far. As such, it is a bellwether. And it liked our recent election outcome, with the resulting Government of National Unity (GNU):


Government Bond yields have also declined by more than 1%, indicating a significant reduction in the risk premium the market is ascribing to South African assets in the wake of the election results. Banks are particularly sensitive to this – but most South African stocks are trading on very high earnings yields (i.e. low P/E’s), so they will benefit tremendously if this risk premium continues to decline.

A stock’s value is the present value of all the future cash flows it will generate. The share price is the market’s best guess at a specific point in time as to what that present value is. The present value is determined by two things: the size of the future cash flows and the interest rate with which they are discounted.

What has happened post-election is a decline in the risk premium (interest rate) attached to South African assets. This has caused a significant uplift in asset prices. What has not happened (yet) is an increase in the size of those cashflows. Political confidence, declining interest rates, and the two-pot retirement system are all things that can cause those cashflows to increase in size.

My take: I think the election outcome is potentially something a lot more significant than just a swing in the right direction. In how many African countries has the liberation movement willingly given up power in the wake of a free and fair election?

Go on, I’ll wait…

All those 3 and 4 P/E local small caps on the JSE could get a major bid over the next few years. The sort of bid that their liquidity won’t be able to handle.

These are the kinds of stocks the MWI Value fund owns a lot of.

Did you know?

Returns on SA assets don’t stack up as badly as the purveyors of expensive offshore structures and funds want you to think.

SA vs. offshore

The “lost decade’ of 2014-2024 has caused our real returns to lag a bit, but we’re still in the game and well ahead of some other significant developed markets. And in the short term, we are very much in the game.

Witness my competition with a famous wealth manager. A client gave us each R500,000 of real money to invest. The wealth manager (one of the best in SA) picked some offshore funds, and I picked the MWI Value fund, which is an SA-only fund. Halfway into this 5-year competition, I am still ahead in common currency terms.

Market movements post-election will have reinforced my position.

Investment returns happen through the windscreen, not the rear-view mirror.

My take: Markets tend to compensate you for known risks. It’s the unexpected ones (both positive and negative) that create gains and losses. And which risk is more well known than the one that “SA is going down the toilet”?

I’m not saying you should be all in on South Africa. That would be naive and reckless.

All I’m saying is one should be prudent in how you diversify your assets. The MWI Worldwide Flexible fund (AKA the cockroach) has a 25% allocation to SA assets, mainly in the form of government bonds. In my view, that is a significant allocation – but warranted, given the valuations available.

What I’m reading

I just finished the biography of Elon Musk by Walter Isaacson. Amongst other things, Isaacson is the ex-editor of Time Magazine. So he can write. But does he have to write such unadulterated, fawning drivel?

There is no doubt Musk is a genius, but there is also no doubt he is a flawed genius. A much more interesting book would have explored these flaws and how they correlate with his genius.

Of course, he probably would not have authorised such a biography.

I read the book to learn more about the man who has created more unicorns (billion-dollar companies) than anyone else. Surely, in doing so, he would have discovered deep truths about the human psyche and what drives consumer preference. Surely, I would come away with valuable insights on how to scale businesses on these truths and preferences?

But no, nothing of the sort was available. Just platitudes and thinly disguised hero-worship. But well-written and quite readable platitudes.

By the way, to illustrate Musk’s idiosyncrasies, here is a chart showing all the lawsuits Musk is involved in:

Musk lawsuits

My take: The least you can say about Musk is that he is an interesting character. 11 kids (the last two of which are named  X Æ A-12 and Exa Dark Sideræl, understandably nicknamed X and Y) with three women is just the start.

Here is Jordan Peterson being interviewed on Musk:

If the book had gone down some of these rabbit holes, it would have been much better. In my view, the book didn’t do the real Musk any justice at all. If you’re a fanboy, you’ll love it. If not, move on.

What I’m watching

1. Tour de France Unchained, Season 2.

It’s almost July. That means it’s almost Tour de France time; the single most-watched sporting event in the world every year. If you watch this series, you will understand why. This show lays bare the depths of despair and the peaks of the triumph of this most physical of sports.

And that’s just in the supporters. The cyclists in the race are a level or five up from there.

It’s brutal and beautiful at the same time.

The brutality lies both in the physical demands of the sport and the consequences of the risks the riders need to take to win.

The beauty lies both in the amount of suffering the riders need to – and are able to – endure, as well as the exquisite routes they ride. France is a beautiful country.

Watch it on Netflix. You’ll be glad you did. You might even become a cycling fan, God forbid. The Cape Town Cycle Tour is in March next year; you have 9 months to train.

2. Stairway to Heaven

Not the JSE after the GNU was announced. No, this is the real thing. This is Jimmy Page telling us how the song was made. For the Gen Zs and Millennials (I doubt any Alphas read this letter), Stairway to Heaven is apparently the most requested and most played song on FM radio stations in the United States, despite never having been released as a single. It was originally released in 1971 and contains one of the most unique and recognisable guitar solos in history. Plus all the triplets and ghost notes for which Bonham was famous.

Also, a lot of big hair.

Here is Led Zeppelin playing it live at Earls Court in 1975. The solo kicks in around the 6-minute mark.

In any case, it is an iconic song for all of us Boomers and maybe even for the Xers – although Pearl Jam might have hit a bit harder for them.

And here is the guy who played the guitar solo – Jimmy Page – explaining how the song was made.

My take: He looks very different now. We all do. But the song remains the same.

In other news, my stepson Zac is visiting from London. It’s a pleasure having him around; it’s an even bigger pleasure to see how happy his mother is.

That’s it for this week.

And remember – be very, very careful out there!

Piet Viljoen