Regarding… Vol 2 no 46 – Roughing it

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 12th, the 347th day of the year. There are 19 days left until the end of the year. Before you know it, you’ll need to start planning your New Year’s Eve celebrations. If you celebrate, that is.

In their song “Time”, Pink Floyd nailed my feelings about New Year celebrations well:

“And then one day, you find
Ten years have got behind you
No one told you when to run
You missed the starting gun.
And you run, and you run to catch up with the sun, but it’s sinking.
Racing around to come up behind you again
The sun is the same in a relative way, but you’re older.
Shorter of breath and one day closer to death.”

Heraclitus was a well-known ancient Greek philosopher. His famous saying was, “No one ever steps in the same river twice.”

He meant that after you step into a river, both you and the river have changed. So, everything is different the second time you step into the river.

Heraclitus taught that everything was in flux, constantly changing. Nothing is stable; only change is real.

Here are some of Heraclitus’ other sayings:

• “The poet was a fool who wanted no conflict among us, gods or people. Harmony needs low and high, as progeny needs man and woman.”
• “The rule that makes its subject weary is a sentence of hard labour. For this reason, change gives rest.”
• “Always having what we want may not be the best fortune. Health seems sweetest after sickness, food in hunger, goodness in the wake of evil, and at the end of daylong labour, sleep.”

I guess what Heraclitus was saying was that when you get stuck in the same pattern, life feels like clockwork, and you become a bot, repeating the same things over and over. He implied that life is only possible where tension between opposites exists. It’s good to suffer so you can feel the opposite.

Any cyclist knows exactly what Heraclitus is talking about – the beauty of cycling lies in the contrast between the pain endured and the joy of accomplishment, which adds depth to the experience. Without the pain, there is no joy. And if there were, it would be a shallow, unremarkable delight.

If you look at what most improves human health, well-being and mental health in the context of modern life, it’s discomfort, right?

Instead of comfort eating the ninth slice of pizza, having some rails on your eating is uncomfortable. But you will be healthier. Exercise is generally uncomfortable, but good for you. How about this: during the 1960s, NASA discovered that reading comprehension improved after exercising on a balancing board.

Have you noticed how time seems to speed up as we get older? There is a theory that variability in experiences tends to slow down time. When we are young, every experience is new and different from any previous one. This is why time seems to drag by so slowly. By age 50, there is nothing new under the sun, and time seems to speed up.

Despite this, we prefer our lives to follow a smooth path; the more predictable the outcome, the better. Heraclitus’ insights notwithstanding, we perceive change and uncertain outcomes as risky and will do almost anything to avoid it.

As Father John Misty sings on “Bored in the USA”:

“How many people rise and say
My brain’s so awfully glad to be here for yet another mindless day
Now I’ve got all morning to obsessively accrue
A small nation of meaningful objects they’ve gotta represent me too
By this afternoon, I’ll live in debt
And by tomorrow be replaced by children
How many people rise and think
Oh good, the stranger’s body’s still here
Our arrangement hasn’t changed”

As in life, so with investments.

When we are told, “This investment is expected to produce an 8% annual return”, this is how we picture it working out:

But on the way to an average of 8% annual returns, this is what each years’ actual returns could look like:

On the way to 8% compound annual returns, you would face many opportunities to say, “No, this is too uncomfortable. I need to dial the risk back. Maybe those doomsday preppers are right after all, and everything is going to 0.”

Doesn’t it always feel like bear markets just last forever? Giving you ample time to consider simply tapping out to make the pain end.

Of course, if you choose the smooth path at any point (or what you think is the smooth path), the only certainty is that you will not achieve the 8% return.

In the short term, markets are voting machines driven by emotions. Therefore, prices tend to fluctuate more than the underlying businesses’ value, so irrationally low prices will periodically be attached to solid businesses. Undoubtedly, the availability of such prices can’t be thought of as increasing the hazards for an investor free to either ignore the market or exploit its folly.

The actual risk to your ultimate investment outcome lies in how you choose to react to market volatility rather than the volatility itself.

Volatility is to be expected, not avoided; volatility is an opportunity, not a threat.

You have to rough it to enjoy the good life.

Last week, I wrote about small-cap stocks also making new highs, confirming the bull market. The big US tech stocks continued making new all-time highs this past week.

Here’s Apple:

Meta:

Amazon:

And how about Tesla, back at $420!

And so on and so forth.

The one stock I would like to highlight – mainly to rub my nose in it – is Spotify. I identify as a music lover, and I don’t own the stock. How ignorant can one be?

Here’s a chart of its share price:

It’s up 7 times since its low less than two years ago, which turns out – with the benefit of 20/20 hindsight – to have been an ideal time to buy the stock. Here’s a post on X  (by @sleepwellCap) setting out the investment case.

In short, artists have less power, the relationship between labels and Spotify is more symbiotic, and Spotify has more pricing power AND discipline than many – including me – initially thought.

Finally, to illustrate the difference in market perceptions of new media and old media, here is the share price of Vivendi:

Amongst other old media assets, such as advertising agencies, pay television networks, and magazine publishing, Vivendi also owns a 10% stake in UMG. UMG – Universal Music Group – is one of the world’s biggest music rights owners.

When I studied the SAB business model long ago, I initially thought its value lay in owning its beer brands. That is until one of its executives pointed out that no one could compete with them because of their scale in distribution, not the power of their brands.

My take: Spotify is the music distributor, while UMG owns the assets – the music rights. It’s clear where the superior value lies. Why did I not see that a long time ago? This has turned out to be a huge mistake of omission.

Once again, a foreign investor is swooping on a South African company, hoping to take it private. They obviously see something here that we locals don’t.

I’ve been banging on this drum for a while. We just don’t seem to want to properly value our local businesses, many of which are run by excellent management teams with good capital discipline. Some even have limited competition due to the dearth of capital in the local market.

Yesterday, it was announced that the Zahid group – a Saudi Arabian conglomerate – in conjunction with the CEO, wants to take Barloworld private. There are many reasons why a company would want to go private, but being undervalued always features high on the list.

Here’s Barloworld’s share price:

The offer is R120 per share, a significant premium to the trading range it has been stuck in for the past few years.

Later in the day, news broke that UK investment manager Silchester would not sell for less than R130 per share. So, we have a situation in which an offshore buyer wants to take it private, and an offshore investor says the price needs to be higher.

A quick perusal of the shareholders register shows that local institutions own only a tiny portion, which explains their lack of interest and, I guess, the low share price.

Many South African companies have been or are the subject of take-private offers from foreign buyers:

• Most famously, AB InBev acquired SAB
• Heineken acquired Distell
• Ardagh Group acquired Consol
• DP World buying Imperial Logistics

And many other small companies as well.

My take: Barloworld is the South African market writ large.

Although Mr Krugman was a Nobel-winning economist, he falls under the media category due to his consistently populist – and incorrect – views on the economy. The news broke this week that he resigned as a columnist for the New York Times after a stint lasting 25 years.

He made a lot of dire forecasts, but this one in 1998 took the cake when he said, “By 2005 or so, it will become clear that the internet’s effect on the economy has been no greater than the fax machines.”

My take: Forecasting is a mug’s game, and when you have the confidence that comes with a Nobel prize, it gets a lot worse.

If you want a good take on the future, it’s probably better to listen to a historian than an economist. And there are few better historians than Niall Ferguson.

In this hard-hitting interview with Russian/British satirist/political commentator Konstantin Kisin, Ferguson discusses the 4th generation amnesia cycle of history.

In his words:

The historian’s role is to counter the amnesia of the youth to convey as vividly as possible what the aftermath of, for example, the Bolshevik revolution looked like: and in so doing transcend the amnesia of the fourth generation. All the teaching of the holocaust has failed if Generation Z students are chanting from the river to the sea, as that implies a second holocaust. Why Hitler was bad has somehow gotten lost in translation four generations later. That’s also why you get such obvious contradictory positions like “Queers for Palestine.”

Ernst Roets is a South African political activist, writer, and filmmaker. He currently serves as the Chief Executive for Strategy and International Liaison at AfriForum, a civil rights organization that advocates for the interests of minority communities in South Africa.

Recently, he made a powerful video of his visit to Auschwitz. Now, if you have never been to one of the infamous German concentration camps, I can highly recommend it. These places help us understand the depths of depravity the human species can sink to if power is concentrated in the wrong hands.

In the video, Roets is visibly moved, but right at the end, he discusses the three roles tradition can play in our lives:

• We can live in tradition, i.e. be stuck in the past
• We can live outside of tradition, live as if no one has lived and experienced things before us
• We can live from tradition, i.e. recognise we are rooted in tradition, which can help us make sense of the present

He then points out that we can have similar relationships with history.

My take: The past is prologue; we learn from it and it helps us to recognise our mistakes and avoid repeating them. Both Ferguson and Roets emphasise this. We need to “live from history.”

John Lennon was gunned down this week 44 years ago. I still remember where I was when I heard it on the news.

In his Bloomberg column on Monday, John Authers also remembered the murder and said, “The senseless tragedy at least offered an excuse to listen to some of his music again. So watch Now and Then, last year’s triumphant use of AI to resurrect him one last time. Also, these:  A Day in the Life, Tomorrow Never Knows, Mind Games, and Jealous Guy.”

An even better tribute is that every year on John Lennon’s death anniversary, the National Trust lights his bedroom in his childhood home so that fans can commemorate his life.

My take: It’s hard to believe Lennon was only 40 when he was shot; he’s been dead longer than he was alive. But in such a short time here on earth, he sure achieved a lot.

I just finished reading “The Road to Serfdom” by economist Friedrich Hayek. Alec Hogg kindly gave it to me at the last BizNews investment conference.

In it, Hayek argues convincingly that, while socialist ideals might be tempting, they cannot be accomplished except by means that few would approve of.

Here’s an interesting podcast that discusses the book.

My take: Hayek should be required reading for anyone who supports socialist ideals. He explains why, in practice, they never seem to work out as intended.

I had the pleasure of spending a few hours this week with Ken – otherwise known as Mr. Chenin – tasting some of his excellent wines. He has come up with an idea to have a wine and investment pairing at his winery outside Somerset West.

There are many similarities between making a good wine and building a sound investment strategy. So, combining the two makes a lot of sense. I also happen to like wine, so I am naturally attracted to the idea.

It would probably take place during the first quarter of next year. If you’re interested, drop me a line; I’ll keep you updated. But be aware – it’s not only about tasting some of his good stuff; you will also have to listen to me. Briefly.

My good friend Mark Rosin (of the Friday Song fame) has been putting together best-of lists for over 25 years – I have not even known him that long! This year, he has put together two lists: one for “everything else” (e.g. pop, rock, folk, etc.) and one for jazz.

Here is his review of the year’s music. Marc’s writing skills match his superb taste in music. Even if you don’t like the music – you will, though! – his writing is worth it.

You can dip into the songs here:

“Everything else” on Apple Music and Spotify

Jazz on Apple Music and Spotify

Mark also sends out a WhatsApp every Friday morning with a great song and its musical backstory. It will improve your Fridays dramatically. So, if you’re not a subscriber, why not? Email him at markgrosin@gmail.com, and he’ll put you on the list.

That’s it for the week…and the year. Thank you for taking the time to read my musings. And for those who engage with me on whatever I happen to write about at any particular time – please keep on doing so. The engagement is an absolute joy.

I hope you can spend some quality time with your family over the Christmas holiday. It is the most memorable time of the year, and I’m fortunate to spend it with those closest to me this year.

Enjoy the holidays, but always remember to be careful out there!

Piet Viljoen
RECM