Regarding… Vol 3 no 5 – Keep calm and carry on

Dear Fellow Investors and Friends,

Welcome to this 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.

Today is Thursday, February 13th, the 44th day of the year. There are 321 days until the end of the year.

On this day nearly 400 years ago, in 1633, the Italian astronomer Galileo Galilei arrived in Rome to stand trial before the Inquisition for advocating the belief that the Earth revolves around the Sun. He was found guilty of heresy and sentenced to house imprisonment. Apparently, the scientific method of formulating a theory and then attempting to disprove it made those in power anxious, much like it still does today.

“When I see an anxious person, I ask myself, what do they want? For if a person wasn’t wanting something outside of their own control, why would they be stricken by anxiety?”

“What is the fruit of these teachings? Only the most beautiful and proper harvest of the truly educated – tranquillity, fearlessness and freedom.”

– Epictetus

Ryan Holiday’s book, “The Daily Stoic: 366 Meditations on Wisdom, Perseverance, and the Art of Living” is one of the best investment books ever written. It does not contain a single reference to the market, stocks, or portfolio strategy. Instead, it uses the three pillars of Stoicism – acceptance, mindfulness, and philanthropy – to develop key themes like perception, action, and free will, encouraging readers to cultivate resilience and tranquillity.

Success in investing is built on similar pillars:

• Calmness in the face of flashing lights and shouting headlines, designed to create anxiousness and unnecessary action.
• Fearlessness in the face of wild and often meaningless market gyrations.
• Freedom from the tyranny of the crowd, huddling together for safety, relying on that most wayward guide – groupthink.

Blaise Pascal once said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” In today’s age of doom scrolling on our favourite social media apps, this rings true more than ever. Increased activity on social media leads to heightened levels of anxiety, which we are, of course, encouraged to suppress by taking action through buying or selling the latest fads in the market. It’s no wonder that stock market turnover is so high.

Anxious A-types assuage their anxiety by taking action. Any action, no matter how irrational, will do.

A few years ago, Michael Batnick, an American financial advisor who writes a blog called The Irrelevant Investor, shared some extraordinary investing facts. While these facts pertain exclusively to the US market – mainly due to its extensive historical data and status as the largest market – many of these statements will closely relate to our own JSE.

1. Since 1916, the Dow has made new all-time highs less than 5% of all days, but over that time, it’s up 25,568%. 95% of the time, you’re underwater. The less you look, the better off you’ll be.
2. The Dow has compounded at less than 3 basis points daily since 1970. But it’s up more than 3,000% over that time. Compounding really is magic.
3. Why am I using the Dow instead of the S&P 500? They’re effectively the same thing. The rolling one-year correlation since 1970 is .95. Stop wasting your time on this.
4. At the low in 2009, U.S. stocks were back to where they were in 1996. Stocks are for the long run – the very long run – usually, sometimes.
5. U.S. one-month treasury bills went 68 years with a negative real return. What’s safe in the short run can be risky in the long run.
6. At the bottom in 2009, long-term U.S. government bonds outperformed the stock market over the previous 40 years. Stocks generally outperform bonds, but there are no guarantees.
7. Over the last twenty years (accurate at the initial time of writing), gold is up 340%. Stocks are up 208%, with dividends. You can support any argument by changing the start and end dates.
8. Since 1980 (accurate at the initial time of writing), gold is up 153%. Inflation is up 230%. See above.
9. If you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% yearly. When (and where) you were born > almost everything else.
10. Warren Buffett is the greatest investor of all time. In the 20 months leading up to the dotcom peak, Berkshire Hathaway lost 45% of its value, while the NASDAQ gained 225% over the same time. No pain, no premium.

That is an abbreviated list, and I’ve lost the complete one. But I think the following conclusions are worth thinking about:

• The less you look at your portfolio, the better off you’ll be. Tracking your portfolio returns in real-time is injurious to your mental health and, most likely, to your returns.
• To get the most out of compounding, sit still and don’t react to every market jitter.
• When and where you were born trumps just about everything else in the significance not just of your investing outcomes but your investing outlook as well.
• Cash flows are better than commodities. But own both. Diversification helps, not hinders.
• It’s better to be broadly right than precisely wrong.
• The stock market is not the same as the economy. Never confuse the two.
• You invest through the windscreen, not the rear-view mirror.

I strongly recommend buying a copy of Ryan Holiday’s The Daily Stoic. Drawing on tried-and-tested psychological sustenance is an absolute godsend during uncertain and volatile times. A few years ago, I wrote about how the Stoic philosophy helped me during some dark times in “Stoic WP.”

My business partner, Jan van Niekerk, has a saying: “‘n Benoude kat maak benoude sponge” – its translation into English loses some of that Afrikaans oomph: “A scared cat jumps in scared ways”. But the stock market and its intermediaries make money from investors jumping from one asset to another, so it’s in their interest to keep us jumping.

Remaining calm is the best defence. That’s the benefit of Stoicism.

AI (Artificial Intelligence) is the flavour of the day. Every company professes to be somehow using it, just like they were putting everything on the blockchain a couple of years ago.

But what is it?

As with most things, I defer to the experts. So, I’ve collected three essays on the subject, hoping to illuminate the black hole of AI knowledge in my brain.

The first is an article by my go-to tech expert, Ben Thompson of Stratechery fame – whom I’ve quoted many times, most recently last week, if memory serves. In this specific piece, Thompson discusses recent developments in the AI world, specifically AGI (Artificial General Intelligence)

Some quotes:

“…the future may arrive but be unevenly distributed, and, contrary to what you might think, the larger and more successful a company is, the less they may benefit in the short term. Everything that makes a company work today is about harnessing people – and the entire SaaS ecosystem is predicated on monetising this reality; the entities that will truly leverage AI, however, will not be the ones that replace them, but start without them.”

“AI’s like Deep Research are one of the most powerful arguments yet for prediction markets. During the U.S. presidential election, prediction markets had their moment in the sun when they were far more optimistic about a Trump victory than polls. However, the potential – in fact, the necessity – of prediction markets is only going to increase with AI. AI’s capability of knowing everything that is public is going to increase the incentive to keep things secret; prediction markets in everything will provide a profit incentive for knowledge to be disseminated, by price if nothing else.”

“It is also interesting that prediction markets have become associated with crypto, another technology that is poised to come into its own in an AI-dominated world; infinite content generation increases the value of digital scarcity and verification, just as infinite transparency increases the value of secrecy. AI is likely to be the key to tying all of this together: a combination of verifiable information and understandable price movements may be the only way to derive any meaning from the slop that is slowly drowning the Internet.”

My take: Although we know AI is an important technology, I don’t think we can divine who the eventual winners from AI technology will be. Just like there were big winners from the Internet in 2000, but we had no idea who they would be. AI is, therefore, a space worth monitoring.

The second piece I’d like to highlight is my go-to expert on valuation, prof Aswath Damodaran from NYU.

In this piece, titled “DeepSeek Crashes the AI Party: Story Break, Story Change or Story Shift”, he discusses the effect of the news that China has developed a low-cost alternative to the much more expensive versions currently available in the West.

Prof Damodaran walks through the AI story, identifying the winners and losers (from a valuation point of view) at each stage.

Here are some juicy quotes from the article:

“The truth is that even if DeepSeek is stopped through legal or government action or fails to deliver on its promises, what its entry has done to the AI story cannot be undone since it has broken the prevailing narrative. I would not be surprised if a dozen other start-ups are using the DeepSeek playbook to develop their own lower-cost competitors to prevailing players.”

“Put simply, the AI story’s weakest links have been exposed, and if this were the tale about the emperor’s new clothes, the AI emperor is, if not naked, is having a wardrobe malfunction for all to see.”

My take: As Prof Damodaran emphasises, valuation is a dynamic exercise. Things can and do change, and valuations change as a result. However, the big news from China’s entry into the world of AI is that current valuations need to be adjusted downwards.

Finally, the third article is by Dan Rasmussen, who runs the asset management firm Verdad Capital. He has just published a book called The Humble Investor. I haven’t read it yet, but if his short articles are anything to go by, it is a must-read.

His article is titled “AI and the Mag 7.” In it, he discusses the enormous amounts of capex being spent on AI by the Mag 7 companies and the chance (likelihood?) that the money will not be well spent.

Some quotes:

“Taking a pessimistic view on Silicon Valley innovation is one of the worst things an investor could have done over the last decade.”

“We are at a level of market concentration not seen since just before the dot-com bubble burst in 2000, and the largest US companies by market cap are betting huge percentages of their net income on AI-related capex.”

“It’s impossible to know which AI models will be more Yahoo than Google. But what is clear is that AI companies are burning cash without much revenue to show for it.”

My take: Capital expenditure booms almost invariably lead to overcapacity, ultimately resulting in write-downs and reduced profitability, regardless of the industry. Those who believe that “it’s different this time” bear a significant burden of proof.

There’s a saying (which I just made up) that goes something like this: “Fund managers have identified 75 of the previous 4 bubbles.” It always sounds smart to be pessimistic.

But this chart from Richard Bernstein is a bit worrying:

In a recent Bloomberg column, John Authers quoted Bernstein: “Narrow markets are the exception because of capitalism. You’ll find through time that when people think only a few companies have a future, these narrow markets turn out to be a lot of speculation.” The question is why this would change. He added that with the US stock market now representing a record-high percentage of global market cap, “US exceptionalism was the argument to make 15 years ago. It’s not an argument for today.”

I don’t want to weigh in on this argument, mainly because I don’t know whether he is right or wrong. And we’ll only know after the fact. However, it is worth pointing out that risks in the US market are elevated. One of the most valuable tools in this regard is the high yield spread, or the spread over the risk-free rate that risky lenders are charged to borrow money:

High-yield credit spreads at 285bps are roughly half their long-term average of 545bps. The last time spreads for dodgy borrowers were this low (in the USA) was in 1998 and 2007. It’s not a good look.

Insider action confirms elevated risk levels. In January, just 98 companies had at least one insider purchase their shares, compared to 447 at which at least one insider sold. That buy-sell ratio (0.22) is on track to be the lowest on record (going back to 1988), per Washington Service.

Finally, no one is short anymore. When everyone leans on the same side of the boat, bad things tend to happen. Or, at a minimum, the system becomes more fragile to shocks. This chart, courtesy of Liberty’s Highlights:

My take: Risk is always present in markets, but bad things tend to happen when it is underpriced. It’s the way of the world.

Also, when the dot-com bubble burst in 2000, and US tech and other growth stocks crashed, the equal-weighted US index delivered positive returns for the year.

So it’s not all doom and gloom – move along, please; there is no need for anxiousness. Timing sharp market drawdowns is next to impossible. A better framing of the situation is viewing such drawdowns as a potential opportunity to cheaply buy more of what you like.

Chinese brands are taking the world by storm. TikTok, Huawei, Haier, and many others have become global brands. Now, BYD is joining them. Most motor vehicle share prices are in the dumps, hitting new lows regularly. But BYD just hit a new high (in US$ terms) yesterday, announcing its arrival on the world stage:

Here is a short video of BYD and their cars. In short – these guys are making stunning cars.

BYD has just announced that it will add advanced driver-assistance features to most of its lineup at no extra cost, including its God’s Eye system. This system relies on cameras and radar sensors to assist drivers with features such as valet parking, adaptive cruise control, and automated braking.

It took Japanese cars 30 or 40 years to go from the derogatory ”Jap Scrap” to the most reliable vehicles around. Today, a new Cruiser is a sign of having arrived. I’ve seen Toyota Camrys with 400 km’s on the clock in good nick, still being used as taxis.

My take: BYD sold 4 million vehicles last year, ranking it 7th worldwide. Few have heard of it or seen its cars on the road. BYD will gain global acceptance quicker than Toyota. It is the future of motor vehicles.

Last Sunday was one of the major events on the American calendar – Super Bowl Sunday. Having spent my preteen years growing up in America, I still get excited about it all these years later.

This year’s final (Super Bowl LIX – #59) was held at the magnificent Superdome stadium in New Orleans. The Superdome was being built while I lived there. Before it was finished, major football matches were played at the Tulane stadium, right around the corner from where I lived. I remember earning some cash by selling parking in our driveway for the big matches.

It just happened that Superbowl VI (#6) was played at Tulane Stadium, with the Miami Dolphins against the Dallas Cowboys. My dad took me to the match, and I remember it being a freezing day. When I Googled the details of the game, it turned out that that day was the coldest day ever in New Orleans! I can’t remember much about the game, but I will never forget the razzmatazz before, at halftime, and even after the match.

I recorded this year’s Super Bowl and watched it on Monday night. The Kansas City Chiefs lost to the Philadelphia Eagles, but the football was again of secondary concern. What stood out for me was

• Americans like nothing more than putting on a big production, and this one was bigger and better than any they have put on before. It really is worth watching.
• Flags and uniforms everywhere. The sense of national pride was tangible.
• It’s estimated that 127.7 million viewers tuned in to the event, up from the previous record of 123.7 million set last year. The Super Bowl viewership has increased over the years, while much of traditional TV has declined.

This year, the halftime show came in for a lot of criticism. Kendrick Lamar rapped his way through his allotted 15 minutes. It left me unmoved – but you can judge for yourself here. Can you even understand what he’s saying/singing/rapping?

But do compare it to the 1993 show with Michael Jackson, which you can find here. Adjusting for production values, Jackson steals the show.

O.K. Boomer.

The Founders Podcast, created and hosted by David Senra, explores the lives and lessons of history’s greatest entrepreneurs. So, what does that have to do with Bob Dylan?

This episode, released in June 2022, focuses on “Chronicles: Volume One by Bob Dylan, an Autobiography.”

It turns out that Dylan was a significant influence on Steve Jobs. Apparently, one of Dylan’s quotes that Jobs kept referring to was, “You have to keep moving. If you’re not being born, you’re busy dying.” Also, “life is not about finding yourself; it’s about creating yourself.”

Those two quotes could inspire any entrepreneur. They drove Dylan to become the best musician/lyricist/songwriter of his era – arguably of all time. And, by implication, Apple under Jobs to become one of the best businesses of all time.

You can listen to the podcast here.

I am ashamed to admit that I haven’t read the book yet. It’s high up on my list now.

Dr. Cronje is the most insightful political analyst in the country. His work on last year’s election was accurate despite the media’s portrayal of a different story (once again, illustrating how out of touch with reality mainstream media has become).

Recently, Alec Hogg interviewed him; you can watch it here. My main takeaway is that South Africa has reached a crossroads, just like where we were in 1985. That was when PW Botha wagged his finger at the world in his infamous Rubicon speech. Of course, shortly after that, South Africa went bankrupt and had to reschedule its loan repayments to the rest of the world. So much for the “Groot Krokodil.”

Today, another leader wags his little finger at the world, expecting the world to take a step back. He will probably be as surprised as PW when the world shrugs and walks away.

I always find it amazing how much history repeats itself. The ANC is repeating all the mistakes of the National Party.

Let’s see what happens this time. It could still go either way.

But before we all get anxious about our seemingly never-ending clown parade of politicians, I also remember the bull market on the JSE of 1986/87, when there was a horde of new listings, and the stock market hit new highs almost daily. The economy is not the stock market, and neither are politicians.

Remember – keep calm and carry on.

Oh, yes, we did the 99er road race as a family last week. Here’s a before and after pic:

My son Nic only recently started cycling, but he completed the race in 3 hours. He kept calm and carried on, and I’m very proud of him!

That’s it for the week!

And even if you are keeping calm, you also need to remember to be careful out there.

Piet Viljoen
RECM