Regarding… Vol 2 no 37 – Dodging the Curse

Dear Fellow Investors and Friends,

Welcome to this week’s edition of my investment musings, where I try to make sense of the world around me and share stuff that I find interesting.

Today is Thursday, October 10th, the 284th day of the year. There are 82 days left until the end of the year.

Here’s something I bet you didn’t know. On this day 734 years ago – in 1290 – the last of the Jews expelled by King Edward 1 left England. King Eddie, also known as the “Hammer of the Scots,” was clearly a less-than-nice person.

Edward used the Jews as a scapegoat to blame for his financial difficulties, brought on by extensive military campaigns in Wales and Scotland, not to speak of crusades to the Middle East. Edward resorted to heavy taxation to finance his wars, which was met with widespread resentment among his subjects. So he chose the easy way, first by imposing super taxes on the Jews and then by expelling them. Which eventually turned out to be counter-productive, of course.

So, antisemitism is nothing new. Whenever a scapegoat is needed, it rears its ugly head. And in today’s fractured world, scapegoats come in handy. Over time, I’ve learnt to be careful when easy answers to problems present themselves.

The problem I want to discuss today is the age-old one of how to protect the capital you have worked so hard to accumulate. As usual, there is no easy answer.

There are many ways to get rich. Most of them are not easy.

Some of the hard ways include:

• Starting a business to solve a problem for a set of customers and working day and night to make it gain traction. Then pushing even harder until it scales.
• Fighting your way up the corporate ladder to the C-Suite, where option schemes can have lottery-like payouts.
• Find, prove out, develop and extract resources from a mine. Okay, maybe not the extraction part. If you sell it before then, the payoff can be explosive.
• Doing the zoning, costing, planning and funding for a property development. Selling the properties. Doing it again and again.

None of these are easy. They require impatience with the status quo and a single-minded, aggressive determination and willingness to take huge risks. All to change things to the way you want them to be.

The second and third generations often lack the same grit and will to endure the hard stuff. Their inherited wealth provides them with options; they develop other interests.

Cornelius “Commodore” Vanderbilt built a steamship and railway empire using $100 that he borrowed from his mother in 1810. He was so successful that by his death in 1877, he had amassed a $100 million fortune, the equivalent of $4bn today.

It lasted less than 100 years.

Cornelius’ descendants kept themselves busy by competing to build bigger and fancier houses. They also focused on opulent parties, yachts, and thoroughbred horses.

By 1947, the family’s 10 great Fifth Avenue mansions had been torn down, and most other Vanderbilt houses had been sold or turned into museums in what has been referred to as the “Fall of the House of Vanderbilt”. You can read more about the fascinating Vanderbilt history in “Lessons in wealth management from a cursed family” by Dominique Olivier for Ghost Mail.

There are so many other stories of large fortunes squandered. All have the common element of conspicuous consumption, a lack of planning, and poor risk management. Also, highly successful people in one area of business naturally think their skills extend to other areas. With the confidence acquired in their primary business, they back themselves to be successful in other unrelated areas, usually with less-than-positive outcomes.

At some point, there comes a time when wealth needs to be preserved. When the entrepreneur decides to take their foot off the pedal. When the scion decides to apply some common sense. When the lottery winner comes to understand that good luck doesn’t come in twos and threes.

Staying wealthy (and avoiding the Vanderbilt curse) can be more difficult than getting rich in the first place. It requires a different mindset. The required attributes are conservatism, caution, patience, diversification, and common sense. These are not attributes commonly associated with driven entrepreneurs or lucky lottery winners.

Patience and caution didn’t get Elon Musk to where he is today. But if Cornelius Vanderbilt’s sons had those attributes, some of that $4bn might have been left today.

In Regarding…Vol 2 No 34 – Analysing Stories, I discussed the difference between successful businesspeople and investors. Similarly, building a successful business requires optimism about yourself, the economy, and the ability to take risks.

Staying wealthy is almost the exact opposite. You need to be a little bit pessimistic and paranoid. Yes, most of economic history is one long bull market, but it is interspersed with a constant chain of setbacks, surprises, recessions, bear markets, and crises. Staying wealthy is about absorbing the inevitable damage from these events with most of your capital intact, allowing it to participate in the inevitable subsequent recovery.

That’s why I love managing the “cockroach” – it solves one of the most challenging problems: how to stay rich.

There aren’t many hills I’m willing to die on, but criticising executive compensation is one of them. What’s happening – primarily in the listed market – is nothing short of scandalous.

I will give you one example, but I want to state upfront that this is not an attempt to single this company out; I am just using them as a proxy for many – most? – other listed businesses.

The example I am going to use is Truworths. For background, 18 months ago, almost 50% of their investors voted against their remuneration policy. I was one of them. They sent me long emails ostensibly justifying their policy, clearly written by compensation consultants, apparently being paid by the word.

I couldn’t make any sense of it.

When so many of your shareholders vote against your remuneration policies, it forces a company to engage with them. So, after the emails, all the dissenting voters were offered a face-to-face meeting with management. I was the only shareholder present when I joined the Teams meeting. The others just didn’t care enough. Or maybe the timing clashed with an all-hands-on-deck emergency ESG meeting. Who knows? But the lack of interest from the other shareholders was shocking.

It is exactly this lack of interest that creates an environment in which the remuneration committee of the board can allow the following to happen:

The table shows that the things management had control over, i.e., revenue, NAV per share (navps), dividend per share (dps), and headline earnings per share (heps), all grew by low single digits. It’s been a tough few years in the South African economy, so that’s probably excusable. Also, the growth in the share price over that time appropriately reflected these fundamentals.

What does not reflect these fundamentals is the CEO’s remuneration growth, which compounded at 18.3% p.a. His pay increased from 0.1% of revenue to 0.27%, so it tripled relative to his (and his teams’) contribution to the business’s growth.

Here’s another fun fact: the remuneration committee’s report occupied 8 pages of the 2014 annual report, or 7.3% of it. In 2024, after allowing the CEO’s pay to skyrocket relative to the business’s fundamental performance, this report was 16 pages long, taking up a full 16% of the annual report.

To paraphrase Queen Gertrude in Shakespeare’s Hamlet – in response to the Player Queen’s exaggerated declarations of fidelity – methinks the committee protests too much.

My take: It is a scandal that shareholders and management experience such widely divergent outcomes. The Truworths remuneration committee should hang their heads in shame. The worst part is that this happens in many listed companies, where board members have no skin in the game because they have been “King Coded” out of any responsibility.

This company arguably has some of the best fundamentals of any company in the world. It is also a significant holding of the MWI Worldwide Flexible Fund (aka the cockroach), so the fact that it hit a new all-time high this week is quite gratifying.

What is even more gratifying is that it is that extremely rare thing – a hundred bagger over the past 15 years:

The weird thing is that the share price has gone from $8 in 2010 to $980 this week, yet nobody has ever heard of the business.

TPL owns large tracts of land (3,600 square km) in West Texas, which happens to be where one of the richest oil and gas fields in the world – the Permian Basin – is situated. TPL got this land from its erstwhile parent company, the Texas Pacific Railroad, which was granted the land in the 1800s to build a railroad. The land was subsequently unbundled out of the company and put into a trust – today, the Texas Pacific Land Corporation.

TPL’s primary business is collecting royalties from the oil companies that drill for oil on its land. It has no capital costs and very little operational costs; it merely collects the royalty.

But that’s not all. Drilling for oil (or fracking) produces two other products – natural gas and water. The reason the natural gas price in the USA is so low is the massive amounts of natural gas produced as a by-product of oil fracking in places like the Permian basin, with too few pipelines to transport this gas elsewhere. Also, fracking produces 4 barrels of (dirty) water for every barrel of oil produced.

So, TPL has built a complementary business over the past few years that offers brackish water sourcing, disposal, recycling, and other hydrocarbon extraction-related water services.

Here are some numbers to compare TPL with, say, Nvidia:

Both companies are highly rated. Nvidia has grown faster – albeit only over the past three years – and has a higher rating than TPL. But what of the future?

Nvidia’s main clients are the profitable giants of the US tech scene – Microsoft, Amazon, and Meta. To think they are not devising plans to use their strong cash flow and financial position to reduce their reliance on one company would be naïve. I don’t like making forecasts, but I am pretty sure Nvidia will face some competitive pressures in the future, which the market has been ignoring.

On the other hand, TPL is in a monopoly position.

Over time, TPL has increased the value of the business by developing complementary products and using the land more effectively. But this process still has a long way to go.

AI (and data centers generally) use large – and increasing – amounts of power. Last week, I wrote about Microsoft recommissioning the Three Mile Island nuclear facility to supply power to its data centers. It doesn’t take a huge leap of imagination to imagine that data centers could be built on TPL’s land to use all the cheap, stranded gas produced there.

One could also take this line of thinking a step forward – nuclear plants use lots of water for cooling purposes. That’s why they are all built next to the ocean or on rivers. But no one wants a new nuclear plant in their backyard. So why not build them in the desert in West Texas, where fracking produces large amounts of water?

Owned and controlled by TPL.

But wait, there’s more! If you build all these data centers and nuclear facilities in the desert, you will need towns for the people who work there to live in. These towns will have to be built on TPL land.

My take: It is not hard to imagine a wonderful future for this seemingly highly-rated company – a future that will easily justify its current rating and more. No capex and no competition. What an excellent position to be in. It’s harder to imagine a future for Nvidia that is fantastic enough to justify its current valuation.

Moderna, the COVID darling, invented the first vaccine to fight the pandemic that caused such panic. As a result, its share price rocketed in 2020/21. It was a share every self-respecting portfolio had to own. But then two things happened: the panic subsided and other pharma companies developed competing vaccines.

Moderna’s share price has reacted correspondingly, hitting new lows which have taken it back to 2020 levels:

When businesses become too profitable, it incentivises competition. The pharmaceutical industry has historically been protected from competition by the patents it registers on its medicines. However, this shield is being whittled away by the biotech industry, which is continuously finding new ways to do things that are under patent.

The latest smash pharma hits are obesity products like Wegoway and Ozempic, which have driven the share prices of companies like Eli Lilly and Novartis to stratospheric heights – much like Moderna in 2020/21.

However, this week, the biotech firm Rivus published positive results for the phase 2 trial of its lead asset, a once-daily oral drug called HU6 that’s intended to help patients with obesity. While current leading anti-obesity drugs essentially promote weight loss by sending signals to patients’ brains that affect their appetite, thus reducing caloric intake, HU6 is designed to boost the breakdown of fat in the body by preventing it from accumulating in the first place. The latest trial results, crucially, showed the drug helped patients lose weight while preserving muscle mass – an especially critical asset for patients suffering from obesity-related heart failure.

My take: Competitive destruction is the way of the market, and consumers ultimately benefit from the system. Make sure your portfolio doesn’t suffer the consequences.

I’ve mentioned Prof Aswath Damodaran in these letters before. He is a Professor of Finance at the Stern School of Business at New York University and writes interestingly on company valuations and related matters. This is his homepage.

Just over a month ago, he posted this video on YouTube entitled: “Bet your bot; building your moat against AI.” In the video, he tries to find the middle ground between where AI makes us all redundant and where we dismiss it as a fad. He also gives some valuable tips on how we can react to – and use – AI to our advantage.

His main points:

• We need to be more generalist, like the Renaissance men and women.
• We need to get both sides of our brains working – the stories and the numbers sides.
• We need to exercise our reasoning muscles a lot more. Less Google, more first principles reasoning.
• We need to create space to allow our minds to wander – hopefully to interesting places. As my friend Simmy says: “Be in the moment, not the phonement”

Robert Cialdini is a prominent psychologist and author renowned for his expertise in the science of influence and persuasion. He holds the title of Regents’ Professor Emeritus of Psychology and Marketing at Arizona State University. Cialdini is best known for his groundbreaking book Influence: The Psychology of Persuasion, which was one of Charlie Mungers’ recommendations.

Which makes it must-read.

Here is a podcast in which Cialdini discusses his principles of persuasion and how you can apply them – and make them work for you – in this age of AI. He doesn’t cover any new ground, but his principles are always worth revisiting. I have personally found them tremendously helpful.

The main takeaways?

• Find something someone has said or done that is in line with your offer to them, and then highlight the alignment in your negotiation.
• Lead with something you know people support. Once they say yes, make your offer to them.
• Make your goals public, especially to audiences you care about.
• Build human connection into your communication practice.
• Reciprocation never fails to produce results.
• Having an ethical reputation is table stakes.

I know this is a vexing issue for most of us. War is never a good thing. But sometimes, it is unavoidable, and now seems to be one of those times.  My wife, Amanda, is Jewish and going through a hard time. Apart from the plight of the more than one hundred remaining hostages and the incessant bombing of Israel – the way the globalist media is so one-sidedly portraying events is just painful. Even to me, a Goyim.

This interview helped me properly consider what is happening in the Middle East. Its level of honest analysis is breathtaking, a masterpiece in the art of intellectual argument and debate.

My take: As I pointed out in the intro of this letter, antisemitism is nothing new. Minorities, and especially Jews, have been discriminated against for centuries. Don’t perpetuate it.

Growing up, I never liked country music in general and Kristofferson’s music specifically. I always found it twee, sentimental and vacuous.

But over the past few years, I have grown to appreciate this style of music. Good country music is rooted in the soil and comes from the soul. If you have any doubts about this, listen to Zach Bryan.

Kris Kristofferson died last week, and I took the opportunity to listen to chunks of his catalogue. I was pleasantly surprised. It didn’t take long, as he only made decent music for a few years in the early seventies before becoming more of an actor. He was not a good singer, but he was a great lyricist. And his songs tell interesting stories in interesting ways.

Anyway, I put together a playlist on Spotify of what I consider to be his 10 best songs. The sharp-eyed amongst you will notice there are 11 songs on the list. The 11th is a version of his big hit “Me and Bobby McGee” sung by Janis Joplin, which showcases what a real singer could do with his material.

Enjoy!

That’s it for this week.

Except to say my son Nic rode his first Suikerbossie (IYKYK) this week, and the cycling bug may have bit. If it has, I look forward to many more rides with him.

What a joy.

But remember – and as I told Nic before our ride –  be careful out there!

Piet Viljoen
RECM