Dear Fellow Investors and Friends,
Welcome to another edition of my newsletter, where I share my efforts to understand markets and the world around me.
I do appreciate you taking the time to read this. Feedback is welcome; it’s great to start conversations.
Today is Thursday, May 15th, the 135th day of the year. There are 230 days until the end of the year.
On this day:
- In 1905, Las Vegas was founded in Nevada, transforming a desert stopover into a future entertainment capital.
- The first Mickey Mouse film, “Plane Crazy,” was screened in 1928, marking the debut of the iconic character.
- In 1940, the first McDonald’s fast-food restaurant opened in San Bernardino, California, laying the groundwork for the global fast-food industry.
What do all these have in common? They tap into unchanging human behavioural traits: greed, the desire for entertainment, and attraction to low prices. These are always good to invest behind, as the success of all three of these initiatives showed.
Today, I want to focus on the first one: greed, together with its close cousins, pride and lust. TL;DR – investing in these traits can lead to lollapalooza outcomes.
Every morning on my way to work, I pass by a shop that sells Ferraris. Now, I’m no petrolhead, cars have always been a means of transport for me. I’m also not partial to blatant displays of wealth. I’ve always thought that if I wear clothes that display a brand prominently, they should pay me to do so. Unfortunately, I have had no offers forthcoming, so I wear mostly unbranded clothing.
But each time I see one of those sleek machines, I have to admit – my heart skips a beat. Despite my best intentions, I can’t help myself.
No, this story isn’t about me rationalising the purchase of a Ferrari, which even if I could afford to, just isn’t going to happen.
The story is about that holy grail for investors: things that don’t change. Companies that provide goods and services where demand is not fickle, subject to fashion or altered by regulation. Such companies have dependable cash flows. Dependable cash flows are valuable cash flows, which in turn make for a good investment.
Morgan Housel even wrote a book about it: “Same as Ever: A Guide to What Never Changes”.
The deadly sins of pride, lust and envy have been with us since time immemorial and are not about to be evolved or legislated away. The business models of brands like Hermès and Ferrari are built on exploiting these aspects of human nature.
If you think you can walk into a Ferrari shop (after having won the lottery, of course!) and buy one of their cars, think again. You need to work your way up the system. Start with a second-hand car, apply to buy a new, entry-level car, eventually be approved, and then apply for a better one, and so on. It’s a process that many are willing to undergo, driven by lust. Lust, and the envy of those who already have a fancy red car with a prancing horse logo. Lust, envy and the pride of driving around in a car few others can ever even think about owning.
Ferrari will always have customers, as these behavioural traits are unlikely ever to change.
In fact, not only do companies that exploit these traits have a dependable customer base, but they also have significant pricing power. Their products are subject to something called the Veblen effect, an economic phenomenon where the demand for a good increases as its price rises, contrary to the typical law of supply and demand. The main driver here is conspicuous consumption. If I have a Birkin bag, you want one too, mainly because you can’t get it. Even better, if Taylor Swift carries a Birkin bag at some event, every young lady wants one. Not because it’s such a great bag, but because of pride, lust and envy.
This trumps all rationalisation, making the purveyors of those bags a great business.
There is a lot of truth in the old joke of how to sell more Ferraris – by doubling the price.
It’s no wonder that when I first started thinking about my “Forever Portfolio” of equities, the luxury goods companies of LVMH, Hermès and Ferrari were the first ones on the list.
I haven’t bought them yet, as they are far too expensive. At the outset, I gave myself two to three years to accumulate the 10 ”Forever Stocks” I want to have as the equity portion of the WW Flexible Fund (aka “The Cockroach”).
So far, I have full positions in two of the stocks and starter positions in three of them. The time to start buying one of the luxury goods companies is coming closer.
Or is it?
My reluctance to pay up for the stocks has given me cause to think. Lust, pride, and envy drive the powerful and valuable Veblen effect, but do these characteristics truly add value to society?
The other companies on the “Forever Stock” wish list add value to their client base by being useful. Disney and Nintendo provide entertainment for the whole family, Berkshire provides an exemplary investment culture, The London Stock Exchange Group (LSEG) provides liquidity and information to investors, and so on. However, luxury goods companies exploit negative human behavioural traits.
Is that good for society? Is a world driven by envy and lust a world we want to live in? Do such stocks belong in my “Forever Portfolio”? Do I want to contribute to the exploitation of people’s weaknesses or help them have a better life?
Are these questions even worth thinking about as an investor?
There is a reason Warren Buffett, who built one of the biggest businesses in the world by buying predominantly high-quality businesses, never acquired a luxury goods business. I guess it’s similar to why they never bought a tobacco, alcohol or pharmaceutical business, despite acknowledging their strong economics and profitability. The moral and ethical considerations weighed too heavily.
This is not to say Buffett was being “holier than thou”, but when ethics and morals become questionable, government intervention is often not far behind. And the dead hand of government is something to avoid in business as far as possible.
I have not included any stock from those three industries in the “Forever Portfolio” for the same reason.
My thoughts on the luxury goods industry are not yet clear, but I am leaning towards a negative answer. And my conviction grows every morning when the Ferraris in the shop window tug at my heartstrings.
However, the question remains open for now.
Markets
1. UnitedHealth
This company is the biggest health insurer in the USA and also a significant health benefits manager. The US is the world’s largest healthcare market, by some estimates generating $600 billion in revenues, compared to global revenues of $ 1 trillion.
Therefore, the USA generates 60% of the worldwide healthcare market, despite having only 3% of its population and 24% of its GDP.
Something is out of whack. And Donald Trump has noticed and wants to do something about it.
As a result, the dead hand of government regulation is encroaching on the healthcare market, particularly in the pharmaceutical industry, where prices in the USA are significantly higher than those in the rest of the world.
Despite – or maybe because of? – these high prices, the US healthcare system doesn’t work very well:
(I guess we get what we pay for here in South Africa – another massive indictment of our incapable government).
In December of last year, the CEO of UnitedHealth was assassinated in cold blood in New York. A sure sign that your business is not very popular. No wonder President Trump has jumped on the bandwagon, promising to cut the prices of drugs.
Interestingly, he doesn’t intend (at this stage) to target the pharmaceutical businesses, but rather the intermediaries – the health benefit managers, such as UnitedHealth, who interpose themselves between the drugmakers and patients and take a significant margin in the process. It’s this margin that is under attack, and the share price doesn’t like it:
To add insult to injury, UnitedHealth Group announced Tuesday that CEO Andrew Witty, who apologised on a conference call for the company’s recent performance, is stepping down for “personal reasons.” Chairman Stephen Hemsley, the former longtime CEO, will replace him. Here’s the thing: a 2020 study by MIT Sloan Management Review found companies’ stocks perform 10.1% lower under so-called boomerang CEOs.
My take: I’m not sure how this plays out in the pharma sector, but it strengthens my view that it is generally a sector to avoid, especially in the USA. More importantly, the question is: what will Trump do next? He has introduced significant new sources of unpredictability into markets, and if there is one thing markets hate, it is unpredictability. Highly rated stocks are especially vulnerable here.
2. Coinbase
On 19 May, Coinbase will join the S&P 500 index. The market responded positively to the announcement:
What does Coinbase do, you may ask? Perplexity tells me it is recognised as the largest U.S.-based crypto exchange and the world’s biggest bitcoin custodian as of 2024. In effect, it is a technology company that operates a secure online platform for buying, selling, transferring, and storing cryptocurrencies such as Bitcoin, Ethereum, and many others. In some circles, it is called “The Goldman Sachs” of crypto.
Don’t tell the FSCA, though! Here on the Southern tip, the regulator still has serious misgivings about the crypto space. As a result, despite the FSCA declaring crypto assets “financial products“, they are still excluded from the asset classes that collective investment schemes (unit trusts) are permitted to hold.
Even more interesting is that Discover Financial is the company being dislodged from the index by Coinbase. Discover Financial Services operates a direct-to-consumer digital banking and payments model that combines credit card issuance, a proprietary payments network, and a suite of consumer banking products.
My take: Crypto could eventually disintermediate precisely this type of business. Although it hasn’t happened yet in the physical world, the index may be ahead of its time. Also, if you buy one of the popular index funds that track the S&P 500, you will inadvertently hold crypto exposure – despite the best nannying efforts of the FSCA to protect investors against their own better judgment.
3. Amazon’s annual letter
A few weeks ago, Amazon reported its annual results and published its letter from the CEO, Andy Jassy, along with it. I read a few annual letters religiously; Amazon’s is one of them. Others include JP Morgan’s letter by Jamie Dimon, Berkshire Hathaway’s letter by Warren Buffett, and the HCI letter written by Johnny Copelyn, here in South Africa.
The letter once more affirmed Amazon’s relentless customer obsession, as well as its prioritisation of long-term building over quick, short-term wins.
It’s no wonder the share price has done so well over such a long time:
That’s a ten-bagger in the last 10 years! And it still has a long runway.
You can read the letter here. As a bonus, they always attach the first letter to the shareholders from 1997 as an addendum to the current one, making for fascinating reading.
My take: To take advantage of the Lindy effect, one of the prerequisites for being included in my 10-stock “Forever Portfolio” is that the company must have existed for at least 50 years. I am considering relaxing this requirement to include Amazon instead of one of the luxury goods companies, such as Ferrari or Hermès. More customer satisfaction and less customer exploitation make the world a better place.
4. Horizon Kinetics first quarter portfolio update
And now for something completely different. I have long been an admirer of Steven Bregman and Murray Stahl, the founders of the asset management firm Horizon Kinetics.
According to Perplexity, Horizon Kinetics has evolved from a boutique, research-driven investment adviser into a diversified, publicly listed asset management firm that focuses on independent thinking and innovative investment strategies.
If I had to rank the people in the fund management industry who have most influenced me over the past 10 years, it would be Bregman and Stahl. They are wonderfully original thinkers with the knack of looking at the market from a completely different perspective to almost anyone else.
Here is their 1Q25 quarterly comment. In it, they expand on their theory that the demand for data centres will continue to grow rapidly, forcing the big tech companies to continue their massive capital expenditures. Interestingly, they believe the significant investment opportunities lie in the infrastructure supply to data centres: land, water, energy, and materials, rather than the demand for services from these centres.
You can also watch a video clip of the presentation here.
My take: These guys are that rare breed in today’s markets: original thinkers. Those who think about the investment landscape in conventional terms might find some of their views outrageous. But in my view, that’s the only way to achieve satisfactory investment outcomes over the long term.
5. The Cockroach 1Q25 report
While we are on the topic of quarterly reports, you can read the report of the MWI Worldwide Flexible Fund, also known as “The Cockroach,” here.
My take: Since I revised the investment process in 2020, the fund has continued to generate above-average investment returns with below-average volatility, all without resorting to any complex or elaborate strategies.
In The Media
1. Can Litigation & the Courts Save South Africa?
In this fascinating interview, Russ Lamberti from Sake-Liga interviews Prof. Koos Malan, an emeritus professor of Public Law at the University of Pretoria. The interview covers:
- The recent ruling by the constitutional court on the “kill the Boer” chant.
- The separation – or lack thereof – between the judiciary and the ruling elite.
- Sake-Liga’s perspective on using the courts to effect meaningful change and promote a better business environment.
My take: Change is possible, but the right approach needs to be taken.
2. “Friday Song People” covers.
I love nothing more than a good cover of a good song. So, I was delighted when my friend Mark Rosin of Friday Song fame requested that his subscribers nominate their favourite covers.
I duly nominated 10 songs. Couldn’t help myself.
Mark then compiled a lengthy list of all, or at least most, of the nominees. He did say that some of them were a bit too corny to include, but he tried to include everything as he didn’t want to hurt anyone’s feelings.
He only included one of my songs.
In any case, here is the playlist.
It makes for wonderful listening, and I think there’s something for everyone’s taste. Try to identify the original and the person or band covering it without looking.
You can follow Mark on Spotify and you can reach out to me if you would like to be subscribed to his Friday song. You’ll receive one song every Friday via WhatsApp, along with a deep dive into why the song is so special, written by someone who knows more than a little about music.
Come for the song, stay for the writing
Enjoy the music!
A few significant events occurred during my holiday over the past two weeks.
The leader of the Catholic Church, Pope Benedict XVI, passed away, and a new pope was chosen, Pope Leo XIV, the first American pope.
Also, at the Berkshire Hathaway annual shareholders meeting, Warren Buffett, the leader of the Church of Value Investors, announced his retirement. He received a 10-minute standing ovation from his 50,000-strong congregation in Omaha. It is truly the end of an era. The world will likely never again experience anything like him.
These leaders both brought joy to their followers and will be sorely missed.
Closer to home, my son Nic did the double: he passed his CFA Level 1 exam and completed his first-ever triathlon. Here he is, smiling, after surviving the ocean swim, bike and run:
Am I allowed to say I’m very proud of him?
But after all this, life carries on. So be careful out there.
Piet Viljoen
RECM