Regarding… Vol 2 no 45 – Art for art’s sake

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, December 5th, the 340th day of the year. There are 26 days left until the end of the year. And only 19 shopping days to Christmas.

This is the second part of my discussion about art as an investment. In last week’s letter, I highlighted some problems with the structure of the art market. Today, I will discuss the returns you can expect from owning art and come to an unsurprising conclusion.

Here is another piece by the art collective Avant Car Guard:

Guess what I paid for it?

At least the pricing was transparent, if somewhat contrived.

What can I sell it for, assuming I want to? Who knows? There is almost no way of establishing a reference point. I’ll only know what it’s worth – if anything – if and when I try to sell it.

Last week, I said the art market was a rigged ecosystem. Now, let’s dig even deeper and examine the “he who must not be named” of art market practices – practices that would be illegal in regulated financial markets.

1. Front running. Dealers regularly bid on artists’ work at auctions they represent in the primary market, thereby putting a public – inflated – value on their stock, which they can then sell to the public.
2. Insider trading. Dealers and galleries have early insights into when major shows or retrospectives of their artists will take place. These shows generally have the effect of inflating the value of the artist’s work. Inventory will be accumulated and released after the big show, ensuring good profits.
3. False, inflated pricing. Auction houses include the buyer’s premium – of up to 25% – in their announcement of “what work sold for”. The sale price of an artwork in a gallery includes the gallery’s commission.
4. Price fixing. Controlling the market supply keeps the intermediaries in business. You probably can’t buy exceptional works in the primary market, even if you walked into a gallery with a wad of cash. These works are reserved for insiders.
5. Forgeries are prevalent and hard to detect. Until you want to sell the work, of course.

Art, like property, is a non-fungible, high-maintenance asset. Apart from all the issues of an inefficient market, which I’ve mentioned, there are significant headwinds from the mundane. Stocks and bonds don’t need to be insured against damage, don’t need to be transported by trained handlers, and don’t need to be kept in a climate-controlled environment – all of which cost money.

These costs will deduct 3-5% of the value of your investment annually. Just as the words “property” and “investment” generally don’t belong in the same sentence, the words “art” and “investment” are also mutually exclusive. Property is slightly better because if you dial up the risk by taking on significant leverage, you might eke out an acceptable return. No bank will lend against your art portfolio. And if you find one who does, I’d like their number, please.

Looking at a real-life example, the Whitney Museum of American Art sold Picasso’s Garçon à la pipe for $104m in 2004 after acquiring it for $30,000 in 1950. This made huge headlines, as, on the face of it, it seems to be a staggering gain. But let’s do the maths. It works out to an annual growth rate of 16% – before any costs. This is for a top work by one of the greatest artists in history.

It has been calculated that the whole Whitney collection has shown gains of less than 7% a year over the past 50 years, which doesn’t leave much after costs. This collection was put together by some of the best minds in the world, with a more than generous acquisition budget.

Here’s another piece of art: Jeff Koons’ Rabbit is the most expensive artwork by a living artist:

I wrote about my concept of a “forever portfolio” of equities in Vol 2 No 41. The basic idea is to identify a limited number of stocks that would make up the equity portion of the MWI Worldwide Flexible fund (aka “the cockroach”), bearing in mind that equities are only one asset class the fund holds. The others are cash, bonds, and hard assets – with each asset class making up 25% of the overall fund.

Although my time horizon (forever) allows me to be less price-sensitive than usual, I plan on slowly building up this section of the portfolio, as most of the candidates here are pretty expensive.

So far, I’ve done the following:

• Added a 1% holding in Disney, trading at the same price as 10 years ago.
• Added 0,5% of Nestle, also trading at multi-year lows.
• Excluded pharmaceutical businesses entirely from consideration. Once one adds back expensed R&D to capital, returns on equity are low. Additionally, successful drugs are a hit-and-miss situation. Furthermore, these companies face serious litigation risks from time to time. For example, ask Bayer how it manages its litigation surrounding the Monsanto acquisition and its herbicide Roundup. For those interested, this podcast on the show “Business Breakdowns” provides a good background on the pharmaceutical industry.
• I have decided to include a stock exchange instead of a pharmaceutical company, but I still need to decide which one. This interview with James Davolos of Horizon Kinetics makes a strong case for owning exchanges – as well as TPL and Landbridge, for what it’s worth.
• Microsoft or Apple? I haven’t been able to choose yet. If you have thoughts on this, remember that sharing is caring.
• Finally, Estee Lauder has sold off dramatically due to its exposure to China. This is a cyclical problem, not a structural one, so EL is on the buy list when I next add to the portfolio in January.

Speaking of China, stocks like EL are my preference for exposure to the Chinese economy. Although great companies like Tencent are there, they tend to be “single-economy“ businesses. So, if something untoward were to happen in China, the whole investment could be wiped out.

Has this company discovered a cure for cancer? A perpetual motion machine? Time travel?

It would seem so, looking at the share price:

A twenty-bagger in two years!

Would you be disappointed if I told you all they did was buy some Bitcoin?

Because that’s precisely what they did. Not exactly revolutionary. That, and draw up a plan to do one of the biggest secondary capital raises – $42 billion – in stock market history to…wait for it…buy more Bitcoin.

MicroStrategy holds Bitcoin worth around $18 billion and has about $4.2 billion in long-term debt. This suggests a net asset value of $14 billion. Plus or minus a bit, depending on the actual price of Bitcoin at any particular time. Oh, yes, it also has a small, loss-making IT business buried underneath all that Bitcoin.

Would you be surprised to learn that its market value is around $80 billion?

So, a Bitcoin owned by MicroStrategy is worth 5 times as much as a Bitcoin I might own.

To try and justify this premium, I could tell you about Saylor’s analogies for MicroStrategy, which range from calling it the first “Bitcoin Treasury Company” to comparing MicroStrategy to a “big crypto transformer.” But I won’t insult your intelligence.

I won’t because the CEO will.

He justifies their intention to raise $42 billion by referencing Douglas Adams’ book The Hitchhiker’s Guide to the Galaxy. In it, the supercomputer Deep Thought presents 42 as the answer to “the Ultimate Question of Life, the Universe, and Everything.”

My take: There must be some kind of arbitrage here, but I can’t figure it out. Oh, wait…

Intel is a cautionary tale for anyone who gets carried away by paying up for growth in the technology sector.

Remember “Intel inside”, the ubiquitous sticker on every computer a generation ago? Well, that’s gone now – and so is the share price:

It peaked at around $40 per share a quarter of a century ago when the good times were rolling. Today, it is trading at half that. AMD, Taiwan Semi, and Nvidia have eaten their lunch.

In 2000, the Intel P/E was around 45. Today, the multiples of AMD, Nvidia and TSMC are in a similar region.

Intel is currently on track for its first annual loss since 1986 as it struggles to attract customers to its nascent foundry business. In August, Intel announced the layoffs of some 15,000 employees. All this pain has come despite Intel being one of the biggest beneficiaries of the Biden administration’s push to upgrade the United States’ domestic chip-making industry.

Could the same happen to today’s chip leaders? Who knows. But on current multiples, the market is pricing in much certainty about the future.

My take: the one thing that is certain in the technology industry’s future is change.

Elon Musk initiated his acquisition of Twitter on April 14, 2022, when he made an unsolicited offer to purchase the company for approximately $44 billion. The deal finally closed in October of that year, just over two years ago.

Since he took over, X has become a much better tool. There is less spam, fewer bots, and less censorship. A tightly curated timeline can be a thing of beauty. Yes, there are fewer celebrities, many of whom have moved to the desolate tundra of “Blue Sky” or “Threads.” But who needs celebs pushing a product or their distorted view of the world, in any case?

There is no doubt that Musk overpaid for the asset, just like businesspeople have overpaid for media assets throughout history (how is Independent Newspapers working out for you, Iqbal?)

Here’s the latest: According to an article by Axios, Fidelity, part of the initial acquisition consortium, just marked up the asset value for the first time. The bad news is that, even with the valuation boost, Fidelity believes X is worth nearly 72% less than the $44 billion purchase price.

According to Axios, X Holdings may have an equity stake in xAI – Musk’s AI competitor to OpenAI. This could help explain Fidelity’s X markup. It is common knowledge that anything related to AI is more valuable today than yesterday.

My take: X is a valuable tool that is hard to compete with due to its scale and ubiquity. Also, it is capital light. The AI industry, on the other hand, is facing rapidly increasing competition and capital requirements to stay in the game. Not a good mix.

I’ve said this a few times before, but now the market has broadened, further reinforcing the bullish view. Until recently, the large cap tech stocks had been leading the market higher, with the rest lagging.

But now, the last shoe to drop is that even the small caps have come to the party, with the Russell 2000 hitting new all-time highs:

My take: I would not be short in this market. If you are scared or cautious, taking some exposure off the table might be appropriate, but this is not a market to short.

In Regarding…Vol 2 No 40, I wrote about how we could improve the duration and quality of our lives. I believe this is important because, as an investor, I want to be able to compound for a long time – and pick up my grandchildren (see below).

Many of us find ourselves in a rut. We tell ourselves we are too old, sore or compromised in many different ways to even think about starting to train.

But here’s the good news: It’s never too late to start.

This comprehensive meta-analysis of trainability found that all types of exercise increased mitochondrial content, capillarisation, and VO2 max regardless of age, suggesting that “…despite an age-related decrease in physical performance, regular exercise training can oppose this decrement, that mitochondrial and VO2 max trainability is largely maintained throughout life and highly affected by the total training load, and the initial fitness level primarily determines that trainability.”

Unfortunately, it is behind a paywall. However, if you are interested in this sort of thing, it is well worth subscribing to the Substack.

My take: The biggest favour you can do for yourself and your family is to get moving. Don’t worry much about the how and the when. Just do it.

There is a disturbing consensus – mainly amongst liberals in the more affluent areas of developed countries – that the world would be a better place if there were just fewer people in it.

Here’s an article that provides an antidote to this type of privileged and constrained thinking. The thrust of this piece is that a larger population would mean fewer diseases, better transportation, livelier streets, enriching experiences, more innovation, more money, more peace, and less conflict.

And more people to enjoy it all.

If you’re worried about too many people on Earth, there are 400 times more fish than people.  This is what the world looks like from a fish’s POV:

It’s all water!

I am 100% sure there is no barrier human ingenuity can’t overcome. Just like we’ve done for centuries.

My take: I want lots of grandchildren. Lots and lots. I made the mistake of only having one child, but then I got lucky and married Amanda, who brought two more into my life. If we only have three grandchildren, I would be very disappointed.

Those who know me know that I (try to) live according to the Stoic philosophy. I wrote about it in Regarding…Vol 2 No 14. Therefore, I enjoyed this podcast. In it, Ryan Holiday speaks to author Donald Robertson about his new book How to Think Like Socrates. The book investigates the mythology surrounding the ancient philosopher and shows how we can apply his wisdom. They discuss Socrates’ fascinating life, flaws, and enduring influence on the Stoics.

Speaking of Ryan Holiday, he posted this note about the Stoic approach to gratitude on Thanksgiving day.

The money quote: ”What I began to do was try to find ways to express gratitude, not for the things that are easy to be grateful for, but for what is hard. I wanted to practice seeing everything as a gift from the gods, as Marcus Aurelius wrote. Because while it’s easy to count my blessings of the good things in life, it’s much more challenging to see the bad things as gifts, too. But with this practice, I’ve learned to see they can be.”

My take: life is not fair and mostly not easy. Accepting this, and not raging against it, opens huge horizons of opportunity.

Afrikaans music as a genre of music does not have an excellent reputation. I know songs like “Leeuloop” by Robbie Wessels or “Hop Hop Spinnekop” by Kurt Darren are super popular, but these songs are like the candy floss at the Kermis. Good for a sugar rush but with absolutely zero nutritional value.

So, I assembled a nutritional Afrikaans playlist with the songs I grew up with and loved. It’s real music, reflecting real life, sung by real artists. In Afrikaans.

Here it is on Spotify and Apple Music.

Even if you’re not Afrikaans, I hope you enjoy it!

That’s all for this week.

But I will leave you with this:

Child: Dad, why is my sister’s name Rose?
Dad: Because your Mother loves roses.
Child: Thanks, Dad.
Dad: No problem, Bitcoin.

Piet Viljoen
RECM