Regarding… Vol 2 no 41 – 10 Stocks, Forever

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, November 7, the 312th day of the year. There are 54 days left until the end of the year. That doesn’t leave you with many shopping days until Christmas.

On Tuesday, the USA elected a new president. This process has taken up a lot of bandwidth, and I am happy it’s over. The good news is that the outcome of the election will make absolutely no difference to how your investments will do over the next 10 or 20 years. This is mainly because we will never know what the alternative future could have looked like.

Over the past few weeks, I have been sharing my thoughts on a new framework for managing the equity portion of the MWI Worldwide Flexible fund (aka “the cockroach”).

In Vol 2 No 38, I identified the two most important inputs into the framework:

• what has been proven to work in managing money and
• those things you, as the manager, can control

The good news is there are fewer items in these inputs than one might imagine!

In Vol 2 No 39, I expanded on the first controllable: patience, or developing a true long-term mindset. In Vol 2 No 40, I wrote about the second controllable: endurance, or developing the ability to invest over a really long period.

I’m sharing the actual framework based on these principles in today’s letter. I started implementing it last quarter, but it is still a work in progress.

What caused me to think about a new framework for managing equities is that Investing is presently going through another one of its regular phase transitions.

Today, fundamentals don’t matter as much as they used to.

Previously, you did the research, initiated a position, and waited for the market to catch on. Utilising the wisdom of crowds, markets eventually price assets efficiently. James Surowiecki wrote a book with that name (“The Wisdom of Crowds” – well worth reading), showing how large groups can predict better than a few elites.

An efficient market needs the following conditions:

1. A diversity of opinion.
2. Individual members are unable to influence each other.
3. An unbiased aggregation mechanism.

Social media has made the world increasingly homogenised. Members of the crowd no longer think independently. In the online world, people’s views are reinforced and integrated by algorithms, influencers, and the dopamine of clickbait – and yes, even censorship. It’s hard for differential opinions to surface.

This has voided the first two conditions of market efficiency, leading to a diversity breakdown. In the past, these diversity breakdowns often happened during bubbles, but only for a short time. Now, market inefficiency is lasting longer, as social media’s algorithm keeps people engaged.

Speculation is rampant. It’s reflected in the rise of shitcoins, meme stocks, zero day-to-expiry options, battleship ETFs and so on. It’s people YOLO’ing into 16-way parlays. It’s being able to gamble on almost anything, anytime, anywhere. Ben Hunt (@EpsilonTheory on X) calls it the speculation layer, and it makes up an increasing part of the social fabric.

This is even true for professional investing, where long-term investing has many advocates but few adherents: the Refinitiv Lipper database gives the median turnover of a US mutual fund as 39%, implying a holding period of just 2.5 years. Yet most funds are underperforming their benchmarks. The analogy that comes to mind is that of impatient drivers who continually change lanes in traffic and make no progress.

How does one deal with this brave new speculative world?

In his recent obituary of Daniel Kahneman, Jason Zweig wrote: “Once Danny taught me how unreliable the human mind is, I came to believe that everything in investing that can be done with rules, policies and procedures should be.”

Here is my idea: build a portfolio of stocks you will hold forever, regardless of the market’s gyrations. This forever portfolio is the exact opposite of market activity right now. Buffett said: ” If you want to win, pick a game no one is playing.”

Set compounding free to do its work.

The rules I have implemented in building this “forever” portfolio are as follows. Each company included in the portfolio must have:

1. An identifiably strong culture. Culture can only really be inculcated over long periods, possibly under the control of an individual or family dynasty.
2. A long history. As Taleb defines it, the Lindy effect states that the longer something has existed, the longer it is likely to exist in the future.
3. A globally diversified business. Such a business has shown that it sells goods or services that everyone wants or needs, so it has a big market. And if one region goes through a challenging period, other areas can compensate. Globally diversified businesses have more staying power over the long term than purely domestic ones, no matter which country they call home.
4. A large market capitalisation. A big company has shown that its business is scalable, essential for longevity. Small, good businesses often get taken over, possibly by a company you don’t want to own. Even worse, you could get paid in cash. And then you have to make another investment decision, increasing the risk of getting things wrong.
5. Low debt levels. High leverage leads to companies losing control of their destiny. The second law of thermodynamics states that entropy increases over time. This also applies to markets – when high debt levels meet a volatile environment, the environment wins. Debt facilitates entropy; a strong balance sheet holds things together.

I am also limiting my choices – I think 10 stocks is a good number. Limiting choices is a forcing function for a deeper contemplation of the constituents. Also, each holding will be equally weighted. These are all high-quality businesses; there is no basis for discriminating between them.

The current problem is that the type of high-quality stocks that comprise such a portfolio tend to be well-known and highly rated by the market. However, simple maths shows that if you intend to own an investment for a very long time, your ultimate return depends much more on the growth of the investment than the price you paid for it (refer to Vol 2 No 39, Aggressively Passive).

As a result, I am prepared to be less price-sensitive than usual when building this portfolio. However, given the generally elevated level of markets, I will gradually build this portfolio of stocks into the equity portion of the MWI Worldwide Flexible Fund (aka the Cockroach) over the next three years. As I do this, I will share with you the how and why of my decisions.

Here is my list of 10 stocks forever:

1. Berkshire Hathaway (of course!)
2. Microsoft/Apple (still thinking about my final choice here)
3. Johnson & Johnson/Roche (I still need to finalise my choice here)
4. Walt Disney (I have started nibbling at this one)
5. Nestle (I have started nibbling at this one, too)
6. Coca-Cola
7. LVMH
8. Nintendo/Tencent (Is China eligible for this selection? Right now, I don’t know)
9. Investor
10. Mastercard

Eventually, the cockroach’s equity allocation will consist almost entirely of these 10 equally weighted stocks. However, I will add some global equity index exposure when market conditions warrant it. Equities comprise one-quarter of the cockroach’s asset allocation, the other quarters comprising of cash, bonds, and hard assets.

I would welcome hearing from you if you have any comments, criticisms, or suggestions of stocks I should consider.

At the very least, I look forward to some interesting debates.

Significant shifts in energy consumption take a long time, even when the new energy form is easy to adopt and cheaper. For instance, whale blubber was used to light and heat homes in the 18th century. Then, kerosene came along, which was up to five times cheaper and stank a lot less. Replacing whale blubber with kerosene in the existing physical infrastructure was also easy.

Yet kerosene took 30 years to become the leading light source in the USA and over five decades before it was no longer used. Other energy transitions took even longer.

So, it should come as no surprise that, despite the best efforts of the green anti-human crowd, the use of coal is still growing:

This is being driven by use in emerging markets, where the destructive energy policies of the West have fortunately yet to take hold to a great extent. This affirms an important (and largely hidden) message from the @IEA’s 2024 WEO report, which states that coal demand will be higher than expected in 2020-2030 as electricity demand rises faster than renewables output (not to be confused with the capacity of renewable output).

Javier Blas wrote a column on this topic in Bloomberg.

It should, therefore, come as no surprise that Peabody Energy Corporation (ticker: BTU, of course!) is not far off a 5-year high:

Doomberg wrote a great article, providing a guide on nullifying the “green new math”.

My take: This energy transition will take much longer than most people think. Invest accordingly.

Recently, most legacy car makers have reported poor results. But Volkswagen is one of the worst. From their results presentation:

“Volkswagen AG cast its least-profitable quarter in years as cause for the first factory closures in Germany in its 87-year history, setting the stage for contentious negotiations with labour leaders. Volkswagen said Wednesday that its operating profit plunged 42% to €2.86 billion ($3.1 billion) in the third quarter, with revenue also slipping from a year ago. Its operating margin dwindled to just 3.6%, the lowest over four years. The results buttress Volkswagen management’s case for taking drastic measures in Germany, where union representatives resist closing at least three factories and eliminating thousands of jobs. The company is also looking to reduce wages for around 140,000 workers by 10%, which would add to the woes of Europe’s largest economy.”

I saw this post on X by @CantillonCH:

“And, if you still haven’t grasped that NetZero is a return to socialistic immiseration and rationing – here’s the proud example of the German Energiewende to help you focus:”

The effects of the German “Energiewende” are becoming clear for all. Here is what the market thinks of it via the Volkswagen share price (in US$):

The share price has yet to do anything for over a decade now. Contrast that performance with that of GM, which has more than doubled:

From bitter experience in South Africa, we know that countries that bungle their energy policies can’t have nice things. The UK recently celebrated the closure of its last coal plant and will soon wonder why all the steel factories left. Germany, the global capital of green energy virtue-strutting, is about to feign shock when its energy-hungry domestic automotive sector withers into irrelevance.

My take: The solutions to Germany’s dilemma are simple: stop its insane energy policies and reform its rigid labour laws. Until then, Germany remains a difficult place to invest in, and the UK is working hard to replicate that situation for investors – despite Brexit!

I remember sitting in an investment team meeting at the old Investec Asset Management (precursor to today’s listed mega-manager Ninety-One) in mid-2000. At the time, markets had weathered Y2K (remember that story?) and were busy digesting the fallout from the busting tech bubble.

Unlike almost every other asset price, the oil price was screaming upwards. It had bottomed out at $10 per barrel in 1999, and by the end of 2000, it had more than tripled(!) to $33 per barrel.

The market was busy finding out that all that fibre laid to carry the internet traffic that was expected to (and eventually did) change our lives, needed energy to light it up.

It turned out that energy was the tech bubbles’ dirty little secret.

AI has a similar secret. All those data centers housing all those chips need a lot of energy, and AI has an almost limitless hunger for chips. History never repeats, but it sure does rhyme.

So, instead of jumping on the Nvidia! Cloudflare! Coreweave! Palantir! Crowdstrike! bandwagons, take some time to read this quarter’s commentary from Horizon Kinetics, which you can find here.

It takes a much more discerning and sober view of the investment opportunities that might arise from the AI boom. I wrote about one of them, Texas Pacific Land Corporation, in Vol 2 No 37. At the time, it was priced at $980 per share. Today, it is at $1,330. Year-to-date, it is up by 154%. It’s still behind Nvidia, though.

Here is an interesting podcast, courtesy of Liberty’s Highlights Substack, describing the energy crisis facing Big Tech and AI.

My take: Despite its stellar long-term performance, no one talks about TPL. The best investment opportunities are not always obvious.

As you know, I’ve been trying to ignore the US election, but now that it’s over, I have two comments.

1. Neither candidate mentioned the US’s highly indebted situation, which will become one of the most significant factors driving markets over the next four years. Just like German equities, US bonds are uninvestable. What was once an anti-fragile asset has become an exceedingly fragile one.
2. This election is a severe wake-up call for legacy media. All the narratives they pushed turned out to be wrong. Over time, in trying to stay relevant, they have effectively Dorito-fied themselves, as Trung Phan points out in this wonderful piece. Ted Gioia provides a neat timeline describing the implosion of legacy media over the past few months in this telling article. Finally, Jeff Bezos wrote a column in his newspaper, the Washington Post, about how the media has lost the public’s trust.

My take: Avoiding US bonds and legacy media will dramatically improve the quality of your life. Also, short afternoon naps. And for those of you who are exasperated by how someone like Trump could win the US election, here’s a thread on X that explains it very well.

Capital will flow away from where it is not welcomed and towards where it is appreciated. Good governance is the equivalent of a welcome mat for capital. Also, a market-based economy does what customers want and need. Socialists only do things for themselves. The one attracts capital; the other pushes it away. Although the Western Cape government can sometimes be criticised for its quasi-socialist leanings, unlike most other provinces, it generally lets the market do its work.

I live in Cape Town by historical accident. Although I grew up in Pretoria, I accepted a job here in 1991. I appreciate that Cape Town and the Western Cape generally have good governance and outstanding governance compared to the rest of the country.

Nowhere is the difference more evident than in property prices, which provide tangible evidence of the difference in how our provinces and cities are governed (as posted by @stats_fact)

Another benefit of living in Cape Town is the food scene. I don’t know if this article offers an entirely unbiased opinion, and I’m unsure what method was used to judge the outcome. But Conde Nast has a good reputation, and I can confirm that eating out in Cape Town is a treat. It’s also interesting that Italy – Milan – is second, and no French city is in the top ten. Based on my (minimal) experience, I concur with this finding. I’m surprised Tokyo is only in fourth place, though.

Some might know that I started a musical journey a few years ago. The goal was to document the best music of each year of my life, beginning in 1962, the year of my birth. Last week I finished 1986.

So far this year, I have compiled best-of lists for 1983, which you can find in Vol 2 No 11; 1984 in Vol 2 No 16; and 1985, which is documented in Vol 2 No 25.

1986 was the year I started a real job. At 24, I was still trying to avoid the call-up to the army, but it was getting harder. I needed to find an employer who would pay me when I was eventually forced into conscription and who would employ me, knowing that the military police would eventually catch up with me.

Fortunately, the SARB didn’t seem to mind these things and employed me as a junior research analyst in the Economics department. It was a year of hard work and many late nights socialising – because all my friends were still students (having gone to the army straight after school).

I’m not sure I impressed anyone senior at the SARB much during that time, but my main aim was not to be a good worker but to avoid conscription. I was temporarily successful in that. I also took some pride in being able to buy my first proper car, partly funded by trading in the old VW Beetle my parents had given me.

Overall, it was a bit of a “meh” year for me, just killing time. It was also a bit of a “meh” year musically, the highlight being Paul Simon’s take on African music on his album “Graceland.” Iggy Pop’s album wasn’t far behind.

I like to listen to full albums, so:

• Here are the best albums of the year on Apple Music.
• Here are the best albums of the year on Spotify.

If you would instead get a broad sweep of 1986’s music, here is a long list of the year’s best songs on Apple Music.

And if you prefer the concentrated version of what I thought stood out in the year:

• Here are the top 20 songs of the year on Apple Music.  
• And here are the top 20 on Spotify.

Bearing in mind the usual caveat that one’s musical tastes change over time, my 24-year-old self would not necessarily agree with my 62-year-old self. But I hope you can find something here that will give you some joy!

And remember to be careful out there!

Piet Viljoen
RECM