Regarding… Vol 2 no 9 – Social Studies

Dear Fellow Investors and Friends

Welcome! I do appreciate you taking the time to read this.

I’m Piet Viljoen, and today is Thursday, the 7th of March, the 67th day of the year. There are only 299 days left until the end of the year.

Today, we are more than halfway through our ride from Jeffreys Bay to Cape Town. We have a big shift coming up today; 148 km from Swellendam to Hermanus. On Friday, we have a shorter one to Gordon’s Bay. And on Sunday, we ride the Cape Town Cycle Tour. It’s been an amazing ride so far, and a privilege to ride with 15 very special people. Friends – some from as far back as primary school (Laerskool Pretoria Oos) 50 years ago, some of them colleagues and some of them business associates. And my wife, Amanda. All of them are great people.

Onwards!

Also, on this day in 1876, Alexander Graham Bell received a patent for the telephone. Mr Bell could not have foreseen that 148 years later, his invention would have led to people watching cat videos on TikTok and shouting at each other on social media.

John Paul Sartre famously said, “Hell is other people”, but if he were alive today, he might have said: “Hell is other people on social media”.

Humans are social animals. We like to connect with groups – a cycling trip with friends; a rugby match with thousands of other fans. And we like to have high-quality connections.

Nothing is better than listening to your friend tell a funny story or shouting at the ref’s obvious bias along with all the other thousands of members of your team’s tribe.

But, we all have that one person in our lives; the one who argues with everything you say, the one who always wants to be right – and show that you are wrong – the one who doesn’t hesitate to point out your failings. But often we stay friends with them, despite the friction, because they have other good qualities.

Social media is like that friend, except there are a lot of them. If you’re not careful, you can end up with all these “friends” pointing fingers at you and yelling, spoiling your day.

Low quality and not pleasant.

The easy way out is to just tune out the noise by going off the app. Many people have done this – famously including Sam Harris. He left X due to it “not being optimised for his well-being”.

I have a deep respect for the intellectual rigour of Sam Harris, but he is wrong here. What he probably meant is that he had not properly curated his timeline to optimise his well-being.

I find X a tremendous font of helpful information: deep dives on interesting stocks, macro-economic analysis, useful training information, reviews of new and old music and links to beautiful writing. I simply wouldn’t be able to do without it. It seriously enriches my life.

But I do have one rule that governs my engagement – that it should be a decent, pleasurable and controlled experience. I just don’t see why I should spend any time at all engaged with media that upsets or angers me. A healthy debate, in which two (or more) reasonable people can exchange points of view can be a rich source of learning. A shouting match, or even worse, cheap points scoring, is not.

For some reason, there are people, mainly under the cloak of anonymity, who take pleasure in spreading vitriolic messages, perpetrating ad hominem attacks or just generally trying to make life unpleasant for others. Sometimes, they have an obvious agenda, but mostly, it reflects a sad psychological state. But why they do this doesn’t matter; avoiding them does.

Here is my strategy for positive engagement on X:

1. Work hard at curating a timeline that adds richness to your life.
2. Do not engage with anonymous accounts unless you know who they are and understand their reasons for being anonymous.
3. Mute accounts that are consistently snide or sarcastic or cannot help themselves from scoring cheap points.
4. Block accounts that engage in ad hominem attacks.
5. Never follow accounts that do not add to your experience positively.
6. Build lists of accounts you follow by topic. Instead of having a jumbled timeline, you can control what you read about and engage with and when you do so.
7. A corollary to this is not to allow the algorithm of the media of your choice to determine what you read or listen to. The algorithm’s main aim is to keep you engaged, not productive. And it is very good at doing so. Flaneur, don’t doom scroll.
8. Do not follow conventional media news sites. They have turned into a mosh-pit of clickbait links. Don’t spoil your timeline with “news”. If it’s important, news will find you – you don’t need to find it.
9. Pay for the blue tick on X; it gives you much more control over your experience. Cancel your subscriptions to conventional media if affordability is an issue.

In the ’60s, Timothy Leary coined the phrase – “Tune in, turn on and drop out”.  He says it was given to him by Marshall McLuhan, a philosopher whose work was the cornerstone of media theory. His message is still valid today:

• Turn on – activate the new forms of media.
• Tune in – interact harmoniously with this new environment.
• Drop out – be selective in how and where you interact with it.

According to the statisticians, more people meet online than anywhere else these days. Apparently, the days of picking up someone in a bar are over. I don’t know if that is a good or a bad thing, but if so, it should be a boon for online dating sites, of which Bumble is one. One of my sons actually met his girlfriend on the site!

But since its IPO in 2021 (don’t buy IPO’s!) the share price has declined consistently. It has now lost more than 80% of its initial value.

Why is this?

1. It doesn’t have a clear moat – its market share is way behind that of its main competitor, Tinder. And in social media, it’s often a winner-takes-all situation.
2. SBC, or stock-based compensation. Bumble issues a lot of shares to its executives. Free cash flow is around $120mn p.a. Stock-based comp is a similar amount. Yet another business run for the benefit of its executives, not shareholders.

My take: avoid it like the plague.

This company and Moderna were at the forefront of developing vaccines for COVID-19. Many people have different views on both the vaccines and the Covid pandemic. I’m not going to jump into that hot mess here.

But the market has made up its mind:

My take: From hero to zero. The market is smart. I don’t want to own this share, either.

Pick n Pay (PnP) was once South Africa’s pre-eminent food retailer. It was founded by one of our great entrepreneurs, Raymond Ackerman. But over the past decade, it has consistently lost market share to Shoprite, Woolworths and Spar.

The main reason for this can be laid at the feet of poor capital allocation.  PnP used to pay generous dividends, but there is always a tension between paying dividends and reinvesting in a business. Some would argue that PnP did too much of the former and not enough of the latter.

Be that as it may, its recent results were quite poor. The company passed its dividend and has run up quite a bit of debt. The market is concerned:

My take: So am I. PnP owns some really good businesses, but the original brand is in big trouble. Best to stand aside here, and see where the chips fall.

Both of these assets have no intrinsic value. Both of these assets have limited supply. Both of these assets have irrational proponents as well as opponents.

But both of these assets have just gone to all-time highs:

My take: I don’t think this is a coincidence. In a world of abundant capital, assets with limited supply tend to get more valuable in fiat currency terms over time. This is the world we live in.

Dell has received a touch from the AI fairy’s brush. Apparently, they build the servers that are used in the data centres where the LLMs (Large Language Models) are being built, which underpin AI. As an aside, I have learnt through bitter experience that when people throw acronyms around like confetti, it’s time to invest in things that are best described by whole words.

In any case, this was a summary of their most recent earnings report:

“Dell Technologies exceeded expectations in FY Q4 2024, showcasing strong performance and highlighting opportunities in AI and server optimisation”

And this is how the share price reacted:

My take: You can’t fight this. So don’t.

Okay, so this is not an all-time high. Or anything close to it. But the share price has more than doubled from its recent lows.

I thought it was interesting to have a look at this one, as in 2021, it was regarded as the “Amazon of Africa”. That was before Africa said, “Hold my beer”.

My take: Nigeria and Egypt are their core markets. You can ask MTN how Nigeria’s going for them. As for Egypt – it’s not good. What’s happening here is very simple: a short squeeze (see last week’s note, “Squeeze Play”). These things can go up a lot, but you must be careful.

This is from the blog, The Science of Hitting. You can find the full piece here.

To put this number into perspective, Microsoft’s net income over the past 12 months was $72bn. Depreciation and Amortisation was $13,5bn and Cash from Operations was $87bn. Deducting their capex leaves cash belonging to shareholders (“owners earnings”) of just over $40bn.

$72bn translates into earnings per share of around $12 per share, which puts Mr Softee on a P/E of 34, using accounting earnings. On owner’s earnings, they are on a multiple of 67 times – for a free cash flow yield of 1,5%. Exciting long-term shareholder returns generally do not start from here.

My take: Nvidia’s revenue is everyone else’s capex. The higher Nvidia’s earnings estimates go, the lower you need to take everyone else’s free cash flow. You can’t have it both ways.

This week, I’m spending almost all my time on a bicycle, so I’m not watching or listening to very much stuff. However, I have been doing a lot of reading and thinking about the social media environment.

Here are three interesting pieces: the first one from Ben Hunt (@epsilontheory on X – well worth a follow) and the second from Kyla Scanlon (@kylascan on X – also worth a follow) which was published on the Epsilon Theory website. The third piece is from a blog by Ted Gioia called “The Honest Broker.”

1. How does technology rewire the intricate circuitry of the teenage mind?If you have kids, this is required reading. I see quite a few dysfunctional young people, and social media is not innocent.
2. We we don’t trust each other anymoreThis is a great piece exploring the breakdown in social trust. Killer quote:“It’s unquestionably clear to me at this point that if I want to go far and go fast, I need to focus on cultivating positive emotions in whatever I’m doing. Cultivating ease, joy, and fun is, to my utter surprise, one of the highest ROI skills.”  
3. The State of the Culture, 2024TL;DR of this Honest Broker blog:“Some companies get people hooked with pills and needles. Others with apps and algorithms. But either way, it’s just churning out junkies. This equals what we experience all around us: a happiness decline and a depression increase.”

Here is a chart from Kyla’s piece:

And this is a chart from Ted Gioia’s piece:

Both are self-explanatory about what’s going on in media.

That’s it for this week!

Except, of course, for my promised update on how Amanda is dealing with your generosity.

As a reminder – she promised to drink a tequila for every R1k raised in our fundraising effort for the RECM Foundation. She set the target at R50k. But due to your generosity, we have (so far) raised R78k.

So, she needs to drink 78 tequilas (!). Here is number one, last night:

Amanda is not scared – as you can probably see, so if you can, make her work harder! Here is the Back a Buddy link to donate.

Don’t be like Amanda – be careful out there!

Piet Viljoen
RECM
7 March 2024