Regarding… Vol 2 no 43 – Competitive Bolshevism

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 21, the 326th day of the year. There are 40 days left until the end of the year. The Springboks have now been world champions for 1,845 days.

Their game against Scotland two weeks ago illustrated how important it is to have good-quality competition. Not because of the quality of the rugby but because of the quality of the stream I was trying to watch it on. Specifically, DSTV Stream – the internet viewing service of MultiChoice – was shockingly poor.

Initially, I thought it was because my internet service provider had throttled my speed. But after the match, my wife and I watched a movie on Netflix, and the quality was good, as usual. Later, when I saw the outrage on X, I realised it was MultiChoice’s fault.

MultiChoice has little or no competition, so it seems to be indifferent to the situation. It has been building a DTC business for a few years now, and the product has worsened. It’s almost as if they want you to continue using their satellite system.

Theoretically, a body like the Competition Commission would ensure that MultiChoice faced at least some opposition to keep them on their toes. Unfortunately, government institutions in South Africa have only two states of being: utter collapse or intense overreach.

The Competition Commission (the Commission for ease of reference) falls into the second category.

But who is this Commission, and what are they trying to do?

The Commission is one of three independent statutory bodies established in terms of the Competition Act to regulate competition between firms in the market. The other bodies are the Competition Tribunal (Tribunal) and the Competition Appeal Court (CAC). The Commission is the investigating and prosecuting agency in the competition regime, while the Tribunal is the court. The CAC hears appeals against decisions of the Tribunal. Although each of the bodies functions independently of the other and the State, the Commission and Tribunal are administratively accountable to the Department of Trade, Industry and Competition (the DTIC). The CAC is part of the judiciary.

Before his retirement, the DTIC was headed by well-known communist minister Ebrahim Patel. He introduced the myriad of rules by which we were forced to live during the Covid panic. Remember not being allowed to buy sandals, roast chicken or underwear? The totalitarian fondness for rules was intensely expressed during that ridiculous time.

Unsurprisingly, the Commission has metastasised into a multi-tentacled parasite over time, injecting itself into business operations at multiple levels and paralysing the host.

The Commission’s long-term vision, “Vision 2030,” aims for a growing and inclusive economy that addresses poverty and unemployment in alignment with South Africa’s National Development Plan. The emphasis is on the Commission’s transformational role in fostering economic growth while balancing efficiency objectives with public interest considerations.

Let’s examine how they are progressing with this “Vision”:

• Over the past five years, the South African economy has grown by approximately 0.3% annually.
• As of 2024, approximately 55.5% of South Africa’s population (around 30.3 million people) lives below the national upper poverty line, up from 55% in 2014/15.
• South Africa’s official unemployment rate stands at 32.9%, with approximately 8.2 million unemployed, up from 5.1 million in the first quarter of 2014.

Whatever the Commission thinks it might be doing, it’s failing to achieve its long-term vision. In the 2024 Budget Review and Economic Outlook, the government said that the low economic growth rate “…highlights the persistent economic difficulties faced by the country, including high unemployment and structural constraints that hinder growth.”

I would argue that the Commission’s social engineering attempts are one of those “structural constraints.”

The problem lies in their all-encompassing mandate, which allows them to get involved in many areas they should not. Of course, the apparatchiks running statutory bodies such as the Commission like nothing more than broad, undefined mandates.

Russell Lamberti of Sakeliga accurately described the current situation well: “It’s not just that over-regulation stifles business formation, investment, and innovation. It’s that it emphasises compliance and bureaucracy as competitive advantages to the detriment of value and efficiency. This, in turn, breeds regulatory capture, where compliance experts encourage more regulation to cement competitive positions. Developing small businesses have almost no chance.”

Recently, the Commission’s over-reach broke new boundaries with their decisions on proposed acquisitions by Sun International and Vodacom. Yes, these were dominant players acquiring smaller players, but setting aside political doctrine, there are fundamental business reasons why these deals should have been allowed to progress.

The first ruling was against Sun International’s proposed acquisition of Peermont, which still needs to go before the Tribunal. The reasons given were mainly related to excessive concentration in the market, which is strange as casino licenses are awarded on a geographically exclusive basis. Casinos, by law, don’t compete with each other; they only compete with other forms of entertainment.

Peermont is highly indebted. Its current owners are more interested in extracting cash flow from the business than investing in it. As a result, the property is gradually declining, losing popularity with a concomitant reduction in the number of available jobs.

Sun’s acquisition would inject new capital, making Peermont more (not less) competitive and creating opportunities for growth – growth of the business and, therefore, growth in jobs, as well as the tax base of the country.

The second ruling was against Vodacom’s acquisition of Maziv, the parent company of two fibre infrastructure providers: Vumatel and Dark Fibre Africa (DFA).

Maziv is expanding its fibre network to underserved areas, connecting millions of homes and businesses. The company has ambitious plans for further expansion and investment, estimating that it will require around R30 billion to achieve its goals. This includes efforts to connect approximately 12 million unconnected or underserved homes nationwide.

Maziv’s business plan is capital-intensive and requires a capital injection to execute it – capital that its parent company, Remgro, lacks. Enter Vodacom. In terms of the proposed acquisition, Vodacom plans to invest over R14 billion in Maziv and expects to create up to 10,000 new jobs.

But there is an even bigger problem: the time it takes to make the ruling. The Vodacom deal was first announced in 2021! It’s taken three years to get it turned down. Three years in business is an eternity.

It’s also worth pointing out the elephant in the room – apparently, the state is allowed to have gigantic monopolies. Shouldn’t the Commission also advocate for breaking up and privatising many state entities, encouraging competition and better service delivery?

• If the SABC were well-funded and privately run, would MultiChoice still get away with such a shoddy product?
• If power generation was competitive, would we still have had blackouts?
• If rail transport was competitive, would there have been capacity to export more goods?

Here’s my idea: the Commission should abandon its “Vision 2030” and pull back its tentacles, diverting its attention to the economy’s actual problem areas. Before you could say “free market,” South Africa would be much better off. There would be more growth, more jobs, and a bigger tax base.

But there would be fewer jobs for the Bolsheviks.

Then again, Turkeys have never voted for Thanksgiving. Milton Friedman had the right idea. And so does Javier Milei of Argentina.

To get our economy back on track, we need people like those to take over our current slow-motion train wreck of a government.

Yesterday, the annual South African Inflation Rate was announced. It came in at 2.8%.

Today, you can buy South African government bonds that mature in 20 years at a yield to maturity of 11.3%. In doing so, you earn a real return (i.e. a return above inflation) of 8,5%. This is higher than you would expect from high-risk equity investments, not low-risk bonds!

I know that sounds too good to be true. But in this case, it is true.

Most of us switch off when considering bonds as an investment – they’re too complex and boring. But it’s pretty simple: you earn an extremely high return over inflation by lending money to the South African government, the highest credit quality available in the local market.

This tells me two things:

1. South African interest rates are far too high. Any businessperson will confirm this.
2. As a result, South Africa’s assets are significantly undervalued.

The second point is worth expanding on. Any asset is worth the present value of all the future cash flows it will generate – businesses, properties, collectables, anything. Asset values and interest rates are inversely correlated – a high interest rate (discount rate) produces low asset values, and vice versa. This is just math.

Our high interest rates are a key reason SA assets are undervalued.

My take: If (when?) our interest rates normalise, asset values will increase. Possibly dramatically. Also, SA government bonds are one of the best risk/return propositions in global markets today.

From one of the best investment propositions to one of the worst. Sasol has been featured in these letters many times, always in a negative light. Here’s why:

Apart from the COVID panic era, the Sasol share price has gone nowhere for 20 years. The latest sell-off was prompted by their chairperson’s statement that they intend to become “a leader in renewable energy.”

Talk about not being able to read the room! President-elect Trump has already started taking steps to make fossil fuels great again. Instead of kowtowing to the anti-capitalist, anti-human net zero crowd, Sasol could have been on the front foot, explaining why their fossil-fueled processes are essential in producing the chemicals, plastics and fuels our economy can’t function without.

My take: The stock is cheap, and the MWI Value fund owns some of it, but with a lightly held conviction. Let’s see if management follows through with their latest hare-brained scheme to shoot their shareholders in the foot.

If you have any doubt about who is winning the streaming wars (clue: it’s not DStv), this chart should tell you:

First, they introduced the ad tier and then cracked down on password sharing. This helped re-ignite subscriber growth after the Covid panic surge:

Now, Netflix is getting into sports broadcasting, disintermediating the pay-per-view business model. Last Saturday, they showed the Tyson/Paul fight. Despite the scammy fight and glitches during the broadcast, it turned out to be a huge win for Netflix, with 60 million people watching.

They will now also start broadcasting football – of the American variety – and WWE.

My take: I have always said there will only be a few left standing once the streaming wars are over; I just didn’t know which. Well, now we have one answer: Netflix. Unfortunately, given its sky-high valuation multiples, it’s not investable, at least not for me. Ten times sales is just too rich for my simple taste.

Here are the arguments against investing in Tesla:

1. It is overvalued, trading on a market valuation of more than the combined value of the next 16 biggest car manufacturers.
2. Simultaneously, BYD – and other Chinese EV manufacturers – are bringing (much) cheaper EVs to the market and outselling Tesla.
3. President-elect Trump will abolish the government subsidy given to buyers of EVs in the USA.
4. Cathie Wood is bullish on it.

Here is the share price, up by 50% since the US election:

This thread by Drew Dickson on X (@Albertbird) paints a bearish picture (it was written in April when the share price was lower).

This piece by YWR paints a bullish picture by valuing all sorts of non-car manufacturing possibilities.

Take your pick. I’ll stay on the sidelines here; it’s most definitely in the too-hard pile.

My take: The single most compelling argument for buying Tesla is that you should never bet against Musk. He is willing to do anything to win, and now that he is a political insider, his boundaries for doing those things have expanded significantly.

My co-manager on the MWI Value fund, Rudi van Niekerk, also manages a Delaware-incorporated investment vehicle called Desert Lion. Desert Lion can only be accessed by offshore investors and is not allowed to be marketed here in South Africa. However, it invests exclusively in South African assets, and Rudi is doing a great job with it. That job is starting to reflect in the MWI Value fund as well.

I’m sharing his monthly comment for Desert Lion here because it succinctly and convincingly argues for investing in more South African assets than you currently have exposure to. The fact that Desert Lion is shooting the lights out in US$ substantiates his argument.

My take: South African investors have a problem – they are underexposed to South Africa. The MWI Value fund is a solution to that problem.

On that note, regular readers of this letter will know that a smart BizNews community member put up R1,000,000 three years ago – in the depths of our collective depression about South Africa and its prospects – to see which would outperform, South African assets or Offshore assets. This was a real-money bet; he allocated R500 000 to me and R500 000 to a financial advisor urging South Africans to take their money offshore.

Of course, I put the money in the MWI Value fund and kept it there. The advisor picked a range of offshore funds.

The result (so far) is that the Value fund has increased by almost 30%, while the selection of offshore investments is flat.

You can see Alec Hoggs’ interview, where we discussed the progress of the wager, here.

My take: The experiment still has two years to run. Fortunately, we are in the early innings of what could be a lollapalooza event for South African assets. In the interview, I discuss why I think so.

David Senra’s podcast series, Founders, aims to distil lessons from the world’s greatest entrepreneurs.

In this podcast, he is interviewed by “The Glue Guys”, and he connects the dots between sporting GOATs and business legends.

His takeaway? You have to be slightly crazy about your craft and never take the easy way out. The hard way is the right way. According to Senra, excellence is the capacity to take pain.

The money quote: ”Munger was asked why he settled for playing second fiddle to Buffett, as he was a genius in his own right. Munger’s answer? Buffett is a once-in-a-1000-year phenomenon, why would I let my ego get in the way of partnering with such a person?”

My take: Nothing good comes easily; if it does, it will likely go easily, too.

Adam Singer says these apps are refined sugars and seed oils for the mind, causing a similar type of mental sickness to those they cause on the body.

You can read his argument here.

The money quote: “If the challenge of contemporary existence is learning how to wield attention meaningfully, then TikTok and Instagram are weapons-grade distractions, optimised by some of the smartest people given incredible monetary incentives (generational wealth in many cases) to control the human mind.”

My take: Do yourself a favour. Escape the algorithm. Delete the apps. You can thank me later.

What? Not Vasco da Gama. No, Vasco is a non-club for mountain biking, which I and 170 other Capetonians belong to. A group of Hamilton’s rugby players started it almost ten years ago (I, of course, only joined much later when playing rugby wasn’t a prerequisite anymore).

Membership of this non-club gets you nothing. Nothing except the opportunity to turn yourself inside-out on the time trials every month.

Nothing except that and contributing to building and maintaining the fantastic trails around Table Mountain.

Nothing except that, and some great new kit every year, designed by non-club captain Colin Dix-Peek. King Colin, as he likes to be called. And there’s nothing a cyclist likes more than new kit day. Except for newly shaved legs.

A bonus of being a Vasco member is the regular newsletters, in which Colin’s DEI policies allow him to insult everyone around him equally. It’s almost like he has a checklist. But it ends up being one of the funniest things you’ll read.

Every year, he says he’s not doing it again. And every year, we say yes, King Colin. And every year, the non-club gets bigger. This is also in no small part due to the major sponsors, Devils Peak Lager and Enjoy cycling clothing. After his second Devils Peak, Colin gets keen to design new kit for the next season.

This last weekend, we had our “year-end” ride on the Paarl trails. “How hard can 30 km be?” I asked naively on Friday night after my third glass of wine. “Very!” I said on Saturday after 2 hours of brutal climbing and white-knuckle descents.

As an aside, the ride started at La Borie wine farm, which is in fine shape. It is a testament to how HCI looks after its assets. Even if you’re not a cyclist, La Borie is worth a visit.

Here are some pics from the ride:

My take: Helping fund the trails on Table Mountain and the surrounding area is enough justification to join Vasco. It’s enough, even if you live in Pretoria and don’t mountain bike. At least you can walk around the house and show off your fancy kit and shaved legs. If you want to join the non-club next year, drop me a line, and I’ll put you in touch with Colin.

That’s all for this week!

Be careful out there, but make sure you have some fun, too!

Piet Viljoen
RECM