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, July 31st, the 212th day of the year. There are 153 days until the end of the year. On this day in 1912, the famous economist Milton Friedman was born. Friedman was famous for debunking the Phillips curve, which attempted to explain the relationship between wages and unemployment. When unemployment is low, companies tend to offer higher salaries to attract high-quality workers away from other businesses. Conversely, when more people are unemployed, companies don’t need to compete as much with their salary offers. So, the increase in worker wages will be slower.

Friedman argued that the trade-off was temporary and depended on workers’ being “fooled” by unanticipated wage inflation into thinking that a rise in their nominal wage was a rise in their real wage, thus inducing them to produce more output. His argument was driven by the stagflation of the US economy in the 1970s, which is mirrored in today’s South African economy, where high unemployment did not lead to an increase in wages. Friedman’s argument was important, as it marked the end of the dominance of the Keynesian model in macroeconomics.

“There are no solutions, there are only trade-offs; and you try to get the best trade-off you can get, that’s all you can hope for.”
– Thomas Sowell

At the age of 13, my son Nic was faced with a big choice. He had to decide which high school to attend after finishing primary school at Jan van Riebeeck, a small Afrikaans-language primary school. I left the choice up to him, but I did impose one constraint – the school had to be close to home. Basically, the choice then boiled down to English-language Bishops or Afrikaans-language Jan van Riebeeck High. Many of his friends attended Jan van Riebeeck High, but the school’s sports facilities were not the best. At Bishops, he would not know anyone, but the school’s facilities – sporting and otherwise – were world-class.

Fortunately, as it turned out, he made the right choice for him, and in the process, he learnt a lot about trade-offs.

But it’s not only with the big things – when we go to a restaurant, we can’t have all the tasty dishes. Again, we must choose. Those of us on budgets are faced with trade-offs daily. We can’t just buy everything we want; we must make choices.

I read this somewhere:

“The benefits of the future start with trade-offs of the present constrained by decisions of the past.”

It captures our daily dilemma well. It states that you made some decisions some time ago, which have brought you to the current point. So, now you need to make some choices that involve trade-offs. The better your decisions, the more benefits you’ll gain in the future.

I think that makes a lot of sense, especially when it comes to investment decision-making. Investing is all about maximising the future value of our current pool of capital, which is at its current size because of decisions made in the past. You can’t change those decisions; they are baked into the cake.

It follows that to maximise our future investment value, we need to first identify the trade-offs we must make today.

Trade-offs like:

  • Do we invest all our capital into growth assets like equity, or do we choose to preserve capital by investing in fixed income assets? How much of each? You can’t ensure capital preservation and maximise growth. It’s one or the other – a trade-off.
  • Do we have a home bias in our investments, because it’s a market we know well, or do we diversify offshore to get the benefits of higher growth rates, but with less insight and understanding? You can’t have both – you can have a mix of them, but how much of each? Once again, it’s a trade-off.
  • Do we invest in the “Mag 7”, in the hope of growing our capital pool faster, but at the risk of their valuation levels compressing? Or do we buy a bunch of deep value stocks to minimise our downside, but at the risk of getting involved in value traps?

Once again, you can’t have both – maximum upside with complete downside protection. It’s a trade-off.

There are a few aspects to consider when deciding which side of the trade-off to take.

  • Firstly, there is no one definitive correct answer – each person has their own set of preferences and risk tolerances. It is these individual traits which will describe the optimal set of assets for each one of us individually.
  • We cannot know in advance which choice will produce the best outcome. No one knows – even (especially!) those who claim they do. Because the future is so uncertain, a wise strategy is to diversify your investments across assets with different characteristics.
  • In determining the right mix for you, refer to the first point.

The next step in maximising our future benefits is to minimise the constraints imposed on us by decisions made in the past. Instead of being beholden to those decisions, ignore them and treat them as sunk costs. Today is a new day, and you start with a clean slate. If your portfolio, because of yesterday’s choices, makes you uncomfortable, change it today. Don’t be beholden to yesterday’s bad choice.

Importantly, don’t let the implicit trade-offs that you have to make stop you from deciding. Acknowledge them, deal with them, and move forward.

When someone in my family complains about not being able to have both this thing and that thing, or do this activity and that activity, I always say: life is defined by trade-offs. Everything is a trade-off. Embrace it and move forward. Imagine how boring life would be if there were no constraints to deal with at all.

The same goes for our investment decisions.

In The Markets

1. Woolworths

South Africa’s favourite retailer isn’t doing so well. Declining earnings and cutting the dividend is never a good look – especially not for a business whose brand has become synonymous with quality. Today, the share price is half of what it was 10 years ago!

Woolworths share price July 2025

Management blames the poor economy, but although that has been a contributing factor, several of their own goals also played a role. Following the example of many other South African companies, an ill-fated and overpriced offshore acquisition squandered billions. This was worsened by a persistent failure to achieve product-market fit with their apparel offering.

Of course, in their earnings report, management blamed the United States: “Recent decisions regarding global trade relations have elevated the forecast risk. This forecast risk includes the macroeconomic outlook for the current year, particularly in the case of South Africa.”

This allows these management teams to continue increasing their remuneration, despite earnings and share prices continuing to go backwards. Here’s a little table showing how things have gone at Woolies since Covid:

Woolworths table

Every metric that matters to shareholders has gone backwards. The one that matters to the CEO has not.

My take: Managers of many companies blame poor external factors for their underperformance. While the remuneration committees might be fooled, shareholders are increasingly voting with their feet.

2. Strategy

Once upon a time, there was a company called MicroStrategy which was a small, struggling IT business. Its CEO was the subject of an SEC investigation and tax-related legal issues, for which he paid significant settlements.

Today, that company is called Strategy. It still owns the loss-making IT business, but it also owns a lot of Bitcoin. In total, Strategy owns 607,770 coins, worth roughly $72 billion. That’s enough to make Strategy the world’s largest corporate owner of Bitcoin, and it’s the result of a buying strategy (pun intended) that began back in 2020, as the firm sought a hedge against inflation.

Strategy has funded its bitcoin buying spree by issuing a combination of common and preferred shares, as well as via debt. The market loves the stock:

Microstrategy July 2025

So far, so good. The company called Strategy is valued by the market at $119bn, a 65% premium to the value of its Bitcoin holdings. No wonder it continues to issue shares to buy more Bitcoin!

If markets are efficient, how is this possible? Why would anyone buy a share of Strategy instead of Bitcoin itself?

The answer lies in regulatory arbitrage. Many investors are not allowed to buy Cryptocurrency by their regulators. Because it’s “too risky”. For instance, South African collective investment schemes (unit trusts) are barred from owning crypto. But they are allowed to own Strategy stock! People like Saylor are taking full advantage of this.

In South Africa, Altvest, listed on the JSE, is doing the same. I will watch their progress with interest.

My view: The law of unintended consequences strikes again. Investors are permitted exposure to a riskier investment because a regulator fails to keep pace with the times.

3. MTN Zakhele Futhi (MTNZF)

Speaking of regulatory arbitrage, here’s another classic. Due to South Africa’s race laws, companies are required to have a certain percentage of black shareholders. There are many ways to facilitate this, and investment banks have earned substantial fees over time for devising structures that comply with Black Economic Empowerment (BEE) regulations.

The most common method involves a company lending money to a black-owned SPV, which then uses the funds to purchase shares in the company. Voila, the shares are marked as black, and the company earns points on a BEE scorecard. The owners of shares in the SPV are only permitted to sell them to other black shareholders, which immediately creates a structure that trades at a significant discount to its actual value, as there are generally far more sellers than buyers and liquidity is nearly non-existent.

Also, most of these schemes struggle to create value for their shareholders, due to the low growth in the intrinsic value of the underlying company (linked to a lack of investment in the economy, partly due to the same BEE regulations), set against the high-interest-rate structure of South Africa.

MTNZF was one of those schemes. MTNZF shares were first issued to the (black) public for R20.00 per share when the scheme was launched as part of MTN’s 2016 BEE transaction. They have traded below this level – except for a brief period in early 2022 – for most of their history:

MTN Zakhele Futhi July 2025

To avoid increasing embarrassment, MTN announced the unwinding of the scheme. MTNZF shareholders were paid out R20 per share last week, with possibly a bit more to come as the remaining MTN shares that underpin the SPV are sold.

My view: MTNZF shares have been a particularly poor investment over the past decade. The only winners here were the banks that organised the scheme and those very few black investors able to buy at depressed prices. A poor advert for BEE and failing to create wealth for its intended black target market. As with most regulations our corrupt, inept government devises, it only serves to entrench inequity and inequality further.

4. SA inflation and interest rates

If you ask any businessperson what the major problems in our economy are, at the top of the list would be our excruciatingly high levels of interest rates.

How high?

Currently, our inflation rate is a subdued 3%. The USA’s rate is similar, at 2.7%. However, our prime lending rate is at a relatively nose-bleed level of 10.25% compared to the USA’s 7.5%.

Of course, let’s not fool ourselves – the USA has many structural advantages that we lack. But even relative to our own history our interest rates are high:

Interest rates July 2025

My take: There was a time, not too long ago, when our interest rates were only marginally above the Core CPI (inflation rate). If we were to return to such a situation, our interest rates could be 3 to 4 percentage points lower. Imagine the boost that would give to the economy!

5. The Merchant West Worldwide Flexible Fund Quarterly Report

This fund, which I have nicknamed “The Cockroach,” published its quarterly report to investors last week. If you are interested in a detailed explanation of the fund’s strategy, its composition, and its performance (in Rand and US$), you can read it here.

6. Local vs. Offshore

As most of you are aware, in South Africa, there is a perennial debate over which will provide the highest investment return: onshore assets versus offshore assets. A member of Alec Hogg’s BizNews community decided to put real money to the test. He gave me R500,000 to invest locally, and he gave the same amount to top financial advisor and proponent of offshore investing, Magnus Heystek, to invest offshore.

I invested the full amount in the Merchant West Investments Value fund, and Magnus has invested in various offshore funds, switching between them periodically.

My reasoning for preferring onshore to offshore assets was purely based on relative valuation. My view was that local assets already price in all the negativity that we are all so very aware of, and that any outcome better than the overwhelmingly poor one we all expect would result in a positive outcome for local assets.

The score after three and a half years is that the Value fund is still comfortably ahead of the offshore selection – despite our incompetent government, slow economic growth and high interest rates. This goes to prove, once again, that valuation trumps sentiment.

That’s not to say you should have everything invested in South Africa. To the contrary, the risks we are all so aware of might eventuate and overwhelm the attractive valuations.

You can watch yesterday’s interview with Magnus and me here, and judge for yourself.

My take: With almost 18 months left in the challenge, despite their outperformance, SA assets remain attractively priced. They contain embedded (upside) optionality along three vectors:

  • Any, however unlikely, improvement in the political situation.
  • An improving environment for commodities, which will have positive knock-on effects on the local economy.
  • A flow of funds into emerging markets, as the highly indebted situation of developed markets results in financial repression, making their assets unattractive to global investors.

Let’s see.

In The Media

1. How to get rich

A few weeks ago, I wrote about how to stay rich, should you find yourself in such a fortunate position. In the piece, I neglected to provide any advice on how to get rich in the first place. I will rectify that now.  The most assured way of getting rich is either to inherit it or to marry it. If this doesn’t work for you, then here is Naval Ravikant with a post on X containing some much better advice on how to get rich without getting lucky. If you find that interesting, here is the full article, with Ravikant elaborating on each point.

My take: Ravikant is a well-known Indian American entrepreneur, investor, and philosopher, recognised as the co-founder and former CEO of AngelList, a significant platform connecting startups with investors. In my opinion, he is among the more sensible voices in Silicon Valley.

2. Stratechery on content and community

Stratechery is a blog written by Ben Thompson (@benthompson on X), which provides analysis of the strategy and business aspects of technology and media, as well as the impact of technology on society.

This piece on content, community, and the evolution of the content industry was one of the most interesting things I read this week. Essentially, it argues that the content value chain has historically faced bottlenecks – such as oral transmission, manual duplication, and printed distribution. Each of these was profitably resolved through technological advances, including writing, the printing press, and the Internet. The last unresolved bottleneck – creation – is now under pressure from AI, which can generate content on demand, thereby commoditising nearly all content production.

Given that – like most professional investors, whether they know it or not – I am in the content creation business, it was of tremendous interest to me.

My take: AI will inevitably lead to content becoming a commodity. However, it can also create opportunities for generating long-term economic value by building meaningful communities. These communities are founded on unique, non-commoditised content. In my small way, I hope to be part of that.

3. Nick Cave, “Tupelo”

Tupelo is one of Nick Cave and his band, The Bad Seeds’ iconic songs, and one of my all-time favourites. First released forty years ago (this week!) on the album “The Firstborn is Dead”, the song references both the birthplace of Elvis Presley – Tupelo, Mississippi – and the dramatic, mythic atmosphere surrounding his birth. It alludes to the 1936 tornado that struck the city, and to earlier blues songs, specifically John Lee Hooker’s “Tupelo,” which also described a catastrophic flood in the same location.

“Tupelo” featured in this week’s edition of The Red Hand Files, in which Cave was asked if changing your mind about something was a sign of weakness. He referenced his deep misgivings about AI and its effect on the creative process. His friend, filmmaker Andrew Dominik, then told him that he had created a video for the song to mark its 40th birthday. But the video was created using AI to animate still photographs.

To quote Cave, “So I watched Andrew’s film, then watched it again. I showed it to Susi (his wife). To our surprise, we found it to be an extraordinarily profound interpretation of the song – a soulful, moving and entirely original retelling of “Tupelo”, rich in mythos and a touching tribute to the great Elvis Presley as well as to the song itself. As I watched Andrew’s film, I felt my view of AI as an artistic device soften.”

My take: I agree with Cave – the ability to change one’s mind is the very definition of strength. Here’s the film, judge for yourself.

I’m looking forward to spending a few days in Mauritius next week where I will be attending to the affairs of our investment company Astoria. And enjoying some sun, away from the cold and rain here on the Southern tip.

But wherever you are – remember to be careful!

Piet Viljoen
RECM