Regarding… Vol 2 no 40 – Long Life

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.

I do appreciate you taking the time to read this.

Today is Thursday, October 31st, the 305th day of the year. There are 61 days left until the end of the year.

Harry Houdini was a magician and escape artist who relied on death-defying acts to pull in the crowds.

On October 22, 1926, Houdini was performing in Montreal when a student challenged him to withstand punches to his abdomen. Houdini accepted the challenge but was struck before he could brace himself, thereby sustaining a severe abdominal injury.

Despite pain and a subsequent high fever related to the injury, he continued to perform, believing the discomfort was merely due to the punches he had received.

Houdini’s last words are reported to have been, “I’m tired of fighting,” reflecting his struggle against both his illness and the challenges he faced throughout his life as a performer. He died on this day in 1926 at the age of 52, having led an eventful but short life.

Last week, I wrote about one of the few actual investment “edges”: patience. Maximising time in the market is a much more significant contributor to compounding than trying to maximise returns. In fact, the harder you try to perform in the short term, the worse you tend to do.

Earning an average return for an above-average period of time leads to way above-average investment outcomes. This aligns with another aphorism: “Time in the market is more important than timing the market.”

In the Jewish faith, when someone dies, it is customary to wish their relatives “long life.”  Wishing someone “long life” is elegant shorthand for “Hang in there. You will get through this immense pain and live to discover comfort and joy again.”

That strikes me as an appropriate metaphor for a sensible approach to investing.

It follows that the most significant part of our investment strategy effort should not be on the investments themselves, but on ensuring we maximise our chances of living a long life. Unlike Houdini. The longer we live, the more time our investments have to compound.

Warren Buffett is one of the wealthiest people on earth. He earned 99% of his wealth after his 60th birthday. His secret? He compounded for another 33 years (and counting) after turning 60.

There are many books on investment strategy written by someone who got lucky. The gist of all these books is something like “flipping 20 heads in a row” or “just pick the winning lottery number.”

Do yourself a favour and don’t waste time reading those books.

Instead, invest your time reading something like Peter Attia’s book “Outlive”. (I reviewed it in Regarding…Vol 2 No 1 – Review of 2023)

Very few of us are lucky enough to have Charlie Munger’s genes, which allowed him to drink Cherry Coke, eat See’s candy, do absolutely no exercise – and live to the ripe old age of 99. Buffett seems to have gotten as lucky. But the rest of us need to listen to Clint Eastwood when he asks:

“You gotta ask yourself one question. Do I feel lucky? Well, do you, punk?”

In the absence of that gene, Attia says there are two main vectors along which one should strive for improvement, increasing the odds of living a long, healthy life. The first is cardiovascular fitness, and the other is strength.

Fitness is measured by V02 max – the maximum amount of oxygen your body can use during exercise. The fitter you are, the more energy you will have for whatever you do. According to Attia, V02 max is the most potent longevity marker.

Muscle mass may be almost as powerfully correlated with living longer as fitness. One study has even suggested that strength trumps cardiovascular fitness. Importantly, it’s not the muscle mass itself that matters but the strength of those muscles.

Importantly, no interventions, drugs or otherwise, can rival the magnitude of the benefits of being fit and strong. Exercise is the most powerful tool for fighting our inevitable decline in cognitive, emotional, and physical health.

The good news is that it is never too late to start getting fit and strong. Even people in their eighties who have never exercised can reap the benefits.

If you combine the investment superpower of patience with a really long-term time horizon, your probability of investment success compounds magnificently. Both things are largely under your control.

And you don’t need to waste time reading all those “How I Made a Billion Dollars in Two Weeks” books.

If you were in any doubt about the message being conveyed by the new highs in Bitcoin, Gold, and the Nasdaq, have a look at this chart:

We are currently in the best market for US stocks (and many other assets – including South African stocks) in 25 years. This is despite tensions in the Middle East, a war in Ukraine, sabre-rattling over trade policy with China, and a klown kar krash of an American presidential election.

My take: This is not a market to be short of.

Since Donald Trump came out in support of Bitcoin, its price action has been seen as the quintessential “Trump trade.” So, with Bitcoin very close to making new highs, up 37% since the first week of September and 71% for the year to date, it seems to be sending a clear message as to the outcome of next week’s US elections.

John Authers – in his Bloomberg column yesterday – said that crypto’s surge came after Donald Trump announced he would ask Musk to head a Department of Government Efficiency (or DOGE — no, you couldn’t make this up) to cut government spending.

Bitcoin is currently close to new all-time highs:

Here is a report on the Crypto environment by VC firm a16Z. Take it from where it comes, as a16Z is heavily invested in the space, but I thought the main takeaways were, at the very least, interesting reading.

• Crypto activity is at all-time highs, showing increasing acceptance.
• Stable coins have found product-market fit.
• Infrastructure improvements have increased capacity and drastically reduced transaction costs.
• DeFi remains popular – and it’s growing.
• Crypto could solve some of AI’s most pressing challenges.
• More scalable infrastructure has unlocked new on-chain applications.

My take: I think the investment case for Bitcoin has very little to do with the outcome of the US elections. That’s just a sideshow. The real value lies in its ability to act as a reward for validating information on a blockchain. And that won’t change regardless of the election’s outcome. In the meantime, it is becoming increasingly mainstream.

Newmont is the world’s largest gold mining company and the only one included in the S&P500 index. This company also exemplifies why I tend to avoid investing in the shares of such companies.

There are many reasons, but two stand out: cost and capex.

• Mining companies are famously poor at controlling their cost base. Despite the gold price being at all-time highs, Newmont’s operating margin has declined to all-time lows, now at a measly 5%.
• Mining companies are famously capital-intensive, compounding this problem by making acquisitions at the wrong time and price. These acquisitions are often funded by diluting shareholders via the issue of shares (come to think of it, property companies do precisely the same thing!) As a result, Newmont’s return on equity has averaged a lowly 3,1% over the past 20 years and return on invested capital is currently functionally zero despite a record price for its output.

Here’s a picture of the result of these dynamics:

The gold price (purple line) has risen 55% over the past three years, while Newmont’s share price is down.

My take: Speaking very broadly, I regard the shares of most mining companies as uninvestable. They are tradeable, yes, but not investable.

What would one of my letters be without a mention of the cockroach? To be sure, this is the fund I manage to which I have the biggest personal exposure. Today, its latest quarterly report was published, which you can read here.

Remember, the fund’s goal is to survive under all conditions and thrive when conditions allow it, just like a cockroach. It aims to generate returns that exceed the US inflation rate. We all need real returns in hard currency terms. Additionally, it needs to be invested in liquid assets so that your money is available when needed, not when it suits the fund. The fund’s returns should also be reasonably stable with low downside risk. It is a stay-rich fund, not a get-rich fund.

I changed the fund’s investment process in August 2020 after a long period of poor performance. So, it has been managed according to the new process for four years.

Here are some highlights from the quarterly:

• Over the past 4 years, the US$ return was 9% p.a., well above the US inflation rate of 4.9% p.a.
• Over the same period, the ZAR return was 9.9% p.a., well above the South African inflation rate of 5,4% p.a.
• The cockroach has performed better than the average Worldwide Flexible fund over that period.
• It has done so with the second-lowest volatility out of 90 funds in the sector.
• It had a maximum drawdown of only 5.1% during the four years.

This week, the fund’s unit price hit a new all-time high. Here is a chart of its price action:

My take: Four years in, the change in process is working. The cockroach is thriving.

About a year ago, the libertarian candidate in Argentina’s presidential election won the popular vote. Javier Milei secured approximately 55.7% of the votes, marking the highest percentage received by a presidential candidate in Argentina since the return to democracy in 1983. This is a man who called Argentinian-born Pope Francis an “imbecile” and mocked Diego Maradona but still won the election amid an economy in crisis and rising poverty. He carries around a chainsaw as a metaphor for cutting back government:

Milei runs a real DOGE in Argentina.

His central policies are to replace the Peso with the US dollar, dramatically reduce government spending, cut taxes, deregulate the economy, and privatise state-owned enterprises.

That sounds lovely, especially to us here on the southern end of the African continent, who struggle under our increasingly interventionist socialist government.

However, these policies are challenging to implement, as the pain is immediate, and the gains only accrue over the long term. That is why most politicians cannot do this. But I guess the people of a country that has defaulted three times over the past forty-odd years and suffers from inflation rates of over 240% (!) will try anything.

So far, Argentina has had some tangible rewards – the spread of their interest rates over US treasuries has come in significantly. If your cost of capital declines by 10%, it can only lead to better things:

For instance, Cresud, an Argentinian agribusiness and land-owning company, is up from $7 per share at the time of the election to almost $10. This uplift is almost entirely due to the lower cost of capital, as earnings have been flat over the period.

Here’s another (kind of an) equation for you:

Less government = lower cost of capital = higher share prices = more investment, which means everyone (even the government) is better off.

My take: Sensible government policies can significantly improve business conditions. This is happening in Argentina, and so far, we are seeing a little bit of the same with our GNU.

As the years have passed, my awareness of the extremely short duration of our time on earth has increased exponentially. This has made me interested in how to extend not only the quantity but, more importantly, the quality of my life.

I know I should have started thirty years ago when I was a fat slob smoking a pack a day – but it’s never too late to start.

So, I’ve curated some research on the subject, which I would like to share with you in the interest of helping us all compound our returns over a much more extended period.

• Longevity 101: a foundational guide to Peter Attia’s frameworks for longevity. The money quote: “I would say three-quarters of the benefits you can get towards a longer life come solely from pursuing better health.”
• Ed Thorpe on ageing. Legendary gambler and hedge fund manager Edward Thorp, 91, shares what he’s learned about exercise, diet and managing risk in all areas of life.
• This guy lived to 110.  He attributed his longevity to regular walking; he and his wife, who lived to 103, often completed three miles a day into their 90s, holding hands, they joked, “to keep themselves up.”
• Training into old age. In short, resistance training at an old age has lasting strength benefits. The money quote: “What we once thought of as “inevitable” declines in health and fitness are increasingly being recognised as mere side effects of an age-related decline in physical activity.”

And here’s a scientifically unverified fun “fact”: companies whose CEOs lift heavy weights outperform the index. There are likely many other factors at play, but it’s easy to see why this could work (improved health, sleep, cognition, decision-making). But maybe this is just Zuck @ work:

(Chart via Weekly S&P500 ChartStorm – 25 August 2024)

How do you know someone has done the ABSA Cape Epic? They tell you.

I’ve done three.

I’ve done them all with a good friend, Oscar Foulkes. Without Oscar, I would have done exactly zero ABSA Cape Epics.

In early 2016, I received a message from a fellow friend and Arsenal supporter in London. He said I was the only reasonably fit guy he knew, and he thought I should do the Epic with his friend, Oscar.

Oscar, it turned out, was just recovering from cancer of the larynx, and wanted to ride the Epic as a “f*ck cancer” type of thing, despite still being very weak from medical procedures. I was totally on board. So we went for a ride, and given Oscar’s condition, I immediately realised I would be the hammer in the hammer/nail situation of team mountain bike racing. Realising this, of course, I said, yes, Oscar, let’s do it!

We started riding together and ultimately became good friends. I’ll spare you the details of our experiences of staying in tents, campervans, and dodgy guesthouses for all the various races and all the ups and downs) of spending so many hours on the trails, but we did form a strong bond.

And we eventually – as I’ve already pointed out – managed to complete three Epics together. Here we are finishing our third one:

It might not look like it, but we did shower once or twice between our first Epic in 2017 and our last in 2019.

Oscar is also an excellent writer and, if I’m honest, the person who inspired me to start writing. Recently, he suffered a health setback and documented his journey in his blog. Of course, being a cyclist, he self-medicated using his bike. Unsurprisingly, It seems to have turned out okay.

You can read about his journey here.

My take: Exercise is the best remedy for many, many ailments. With the added bonus of extending both the length and, importantly, the quality of your lifespan.

Last week, one of the performing seals running for US president had a rally at Madison Square Garden. Apparently, things were said that upset some people.

I don’t know… I’m not following that circus.

But John Authers pointed out that Led Zeppelin also performed at Madison Square Garden 51 years ago. Here’s a clip of them playing “Whole Lotta Love” live at MSG.

The music is loud, in your face, testosterone-driven, and highly suggestive – just the thing that would appeal to young men. And I loved it! I remember being huddled around a portable tape recorder with my friends in the middle of the rugby field during a break at my primary school, blown away by the pyrotechnics of this song.

I still like it, but maybe not as much as my teenage self.

But here’s a cover that really appeals to me. Tori Amos approaches the song with a much more playful, feminine touch without losing the music’s inherent edginess. My 62-year-old self much prefers this version.

That’s it for this week.

It’s Halloween tonight, so be extra careful out there.

Piet Viljoen
RECM