Dear Fellow Investors and Friends,
Welcome to my newsletter, where I share my efforts to understand markets and the world around me.
I appreciate you taking the time to read this. I love getting feedback; feel free to drop me a line. It’s great to start conversations.
Today is Thursday, the 19th of February, the 50th day of the year. There are 315 days remaining until the year’s end. This week marks the start of the Chinese New Year, and this year is denoted as the year of the horse. More specifically, this year is the year of the fire horse, as each of the 12 Chinese zodiac signs is associated, in turn, with one of the 5 elements – earth, wood, fire, metal and water. The year of the Fire Horse only comes around every 60 years. The last time it happened was in 1966, at the start of the Chinese Cultural Revolution – a time of great social upheaval which left deep scars on Chinese society.
Often, the year of the Fire Horse portends change and volatility, which brings the lyrics to this great Talking Heads song to mind:
You may find yourself living in a shotgun shack
You may find yourself living in another part of the world
You may find yourself behind the wheel of a large automobile
You may find yourself in a beautiful house with a beautiful wife
And you may ask yourself,
Well…how did I get here?
And you may ask yourself, “How do I work this?”
And you may ask yourself, “Where is that large automobile?”
And you may tell yourself, “This is not my beautiful house”
And you may tell yourself, “This is not my beautiful wife”
– “Same as it ever was” by the Talking Heads.
The government wants to give you a bag. Inside this bag is money that they recently printed. The bag is supposed to make you feel richer, for which the politicians and bureaucrats want you to be grateful.
But be careful – this bag will make you unhappy.
Here’s how democracies work. The government’s overriding objective is not long-term prosperity; it’s short-term happiness. Just enough to get you to the ballot box to vote for them. Policies are designed to feel good now but inevitably have the unintended consequence of hurting you later. When the hurt arrives, the government is nowhere to be seen. Same as it ever was.
As Amanda said one evening last week, most people should prefer a benevolent dictator over a matzah-pudding democracy. But they don’t – they have been conned into playing the democracy game.
This game is as old as the hills. Governments hand out bags of money – tax breaks, subsidies, stimulus, incentives – and then quietly take back more than they gave you through indirect taxes, inflation, regulatory costs, levies, fees, and friction. For a long time, most people still ended up with something in the bag, which produced a reasonably contented electorate.
But that balance has broken.
Increasingly, those who understand how the system works have shifted the burden to others. Their bags got bigger. Everyone else’s got smaller. By month-end, there was nothing left to put away – just enough to survive. You can’t compound capital if you’re permanently treading water.
Even worse, many were left without a bag.
So, the players who could play the game became fewer and richer. Those who couldn’t became more numerous – and poorer. Only recently has this widening gap become impossible to ignore, despite endless political lip service to “corrective” policies. Under the cover of DEI and ESG initiatives, the global elites just become wealthier. Greta Thunberg’s handlers succeeded in their mission.
But this is not new. Inequality is not a bug in the system – it’s a feature. It’s a forcing function. It’s what motivates sacrifice: parents working longer hours to earn more so their children can be educated, those children earning more, and their children doing even better. Over generations, families move up the curve, and society benefits. If everyone were perfectly equal, no one would bother.
The problem is not inequality. The problem is excessive inequality.
Instead of trying to forecast how things will play out, let’s look at history. History is very clear about what happens when the gap stretches too far.
Lesson of history #1: In the Roman Empire, rising inequality and fiscal stress were met by debasing the currency. Silver coins were diluted until confidence collapsed. The empire didn’t fall because of barbarian invasions – it fell because the money failed.
Lesson of history #2: In pre-revolutionary France, wealth concentrated at the top while the state tried to paper over deficits. When inflation and food shortages (“let them eat cake”) followed, redistribution came not through policy, but through violence.
Lesson of history #3: In Weimar Germany, inequality, debt, and political instability ended in inflation so extreme that it destroyed the middle class, the very group that had played by the rules. The only players left were those who ignored all the rules of decency.
History shows there are only two ways a surplus concentrated in the hands of the few gets redistributed. Either it is taken by force – war, revolution, confiscation – or it is taken quietly through policy. That policy is called inflation.
Peter Turchin, in his book “End Times: Elites, Counter Elites and the Path of Political Disintegration”, argues that the most dangerous combination in any society is massive wealth inequality plus elite overproduction – too many educated, ambitious people chasing too few real positions of power and status. That mix has always produced instability.
We already have record inequality. We already have elite overproduction. And now AI is accelerating both – simultaneously. So whichever path society chooses from here – and right now it could go either way – the game will change.
But the outcome is inevitable. Fiat money will be the casualty.
That’s not ideology. That is history. That is the future.
Here are the rules of the new game. Take the bag – but don’t keep what’s in it. Exchange it for something that cannot be printed. Scarcity is the clue. If supply can’t be expanded at will, it will eventually outrun whatever’s in the bag. Gold. Land. Productive assets, like businesses – own things with pricing power. Maybe illiquid, but real. Then wait. As more bags are filled with printed money, demand rises, supply doesn’t, and prices follow.
The final rule is simple:
Don’t be the bag holder.
Because in every historical cycle like this, the bag always ends up worthless.
In The Markets
1. Space is the Place
The big news this year will be the IPO of Elon Musk’s business SpaceX. In anticipation, Musk has merged SpaceX with xAI. The combination brings Musk’s rockets, Starlink satellites, the X social media platform and the Grok AI chatbot all under one roof. Makes sense, doesn’t it?
The merger places a value of $1 trillion on SpaceX and $250bn on xAI. Based on these numbers, if the IPO proceeds, it will be the largest IPO ever. Of course, the merger is not a transaction between two well-informed, unrelated parties. Musk can put any value he wants on them, really.
SpaceX earned $15.5 billion last year, which, assuming a $1trillion valuation, implies a price-to-sales multiple of 60x. That puts it among the likes of Palantir. For context, Meta and Alphabet trade at around 10x sales.
Why is there so much hype around the space project? The best real estate in space is the Low Earth Orbit (LEO) bands of around 550km above the Earth. This is where the physics of communication and safety reach a perfect equilibrium. These orbits are high enough to minimise atmospheric drag, allowing satellites to stay aloft for years without excessive fuel consumption, yet low enough to keep signal latency at a crisp 20-40 milliseconds – ideal for high-speed data centre operations.
But like all good real estate, there is only so much available. SpaceX is attempting to colonise the LEO band by launching as many satellites as quickly as possible. To date, it has launched almost 10,000 satellites, and plans to launch another 3,750 by 2028. This is an expensive operation that requires a capital infusion.
What better way than to create huge hype for an IPO?
I have written about IPOs many times before. In essence, it is an insider selling a part of their business, which they of course know very well, to the public, who know it much less well. IPOs generally tend to be one-sided transactions, where the seller extracts all the value. Statistics bear this out: in a comprehensive survey of all IPOs between 1980 and 2025, Jay Ritter found that the majority of IPOs lost money over five years following their debut.
Another way of saying that Musk is raising a lot of capital cheaply is that investors are committing substantial capital at low returns. One man’s success is another man’s failure.
My take: The brew of related party transactions and overhyped IPOs is reliably toxic for investors
2. Related parties know
Companies like SpaceX, which do significant related-party deals, are not a great place for investors to go hunting for returns. When insiders transact, the odds are always against outsiders making money. In South Africa, we have another data point that supports this view.
Paul Mann, the CEO of ASP Isotopes, wants to build a global critical mineral business. To do so, he recently acquired failed Helium miner Renergen – with expensive paper – and is now buying Opeongo, a US biotech start-up. But the sellers of Opeongo are – surprise, surprise – Mann himself, as well as his fellow board member Dr Todd Wider.
Since the hype around its listing last year in October, when the share price reached a high of R475, it has now drifted all the way down to R80 per share:
My take: I would always avoid situations where insiders are setting prices in transactions where they are on both sides of the deal. The odds are just not with you.
3. The bigger, the better
The fund management industry faces several headwinds.
- Costs are increasing rapidly. Encouraged by large firms, the regulator imposes increasing compliance costs on the industry. The large firms can deal with it easily, while small firms’ margins are pressurised.
- At the same time, fund managers have been completely disintermediated from their clients by the intermediaries, the IFAs (Independent Financial Advisors). This has led to fee pressure, as IFAs and other intermediaries take an increasingly large slice of the fee pie, while scapegoating fund managers for their high fees.
- Fund managers with active mandates consistently underperform the index, leading to outflows from their funds. This, in turn, further pressures their fee base.
- As a result of margin pressure, smaller managers struggle to invest enough in distribution, which is by far the most important part of an asset management business.
It is no wonder that consolidation is the name of the game – smart firms are putting their pride in their pocket, and selling their business to, or merging with, larger firms.
Due to a fixed cost base, asset management is an industry with strong returns to scale. If you put two suboptimal firms together, you get one profitable one.
In South Africa, Sanlam – a progressive thinker in the financial services industry – quickly grasped the concept of scale benefits. Last year, they sold their active management business to N91 in the biggest consolidation deal in South Africa to date. Similarly, Stonehage Fleming also sold their business to US-based Coriant.
In the UK, we received news this week that one of its most venerable institutions, Schroders, has been acquired by US-based Nuveen. Schroders’ share price has been languishing due to a lack of growth. The deal with Nuveen is at a premium of 34% to the market price, so the selling shareholders are getting a good deal:
My take: Schroders’ controlling family have done a good deal for themselves and their fellow shareholders. The industry needs consolidation, and so do its shareholders, who face a simple equation: merge/sell, or fail.
In the cockroach
Last week I did a trade! There was just under 1% of the fund* in US$ cash, reflecting interest and dividend income. I used this to buy a little bit more of the IB01 – the iShares US Govt bond 0-1 year ETF, basically just earning a little bit more income than on current account. Every little bit counts!
Over the past three weeks, I’ve covered the fund’s cash, bond, and hard-asset exposure. This week, I’m going to address its equity exposure. This is what it currently looks like:
Some notes:
- The fund used to have 8% exposure to yen deposits. Last month, I used some of those to buy yen bonds.
- To keep cash levels at 25%, I sold some South African bonds, which have had a fantastic run, and invested the proceeds in the Merchant West Enhanced Income fund. In my (admittedly biased, but substantiated) view, it is one of the best income funds in the country. Despite the strength of the rand, our relatively high interest rates continue to generate positive carry for US$ investors like this fund.
- Despite the potentially fiscally profligate Japanese prime minister’s landslide re-election, the Yen has continued to strengthen, which is a good sign. I am considering moving more US$ cash into yen cash. The yen is one of the most, if not the most, undervalued currencies in the world. Easily taking over the mantle once worn by our beloved rand.
- The inverse US yield curve continues to reward investors in the short end of the yield curve.
Finally, compliance says I have to say:
There are two parts here:
- The “ten stocks forever” positions, which I started building 18 months ago. So far, I have bought Nestle, Berkshire, LSE Group, Walt Disney and DSM Firmenich. For various reasons, these stocks have done poorly over the past few months. I am contemplating adding Nintendo, Mastercard and either Apple or Microsoft soon.
- I have bought two indices and one fund as placeholders until I have managed to buy 2.5% of each of my “10 stocks forever”. These are the iShares Emerging Markets ETF, the iShares MSCI World ETF and the MWI Value fund. The EM ETF and the Value fund have shot the lights out – the MSCI World ETF, which contains no Emerging market exposure, not so much.
Overall, the equity portion of the fund has not performed well and is below our target weight of 25%. That said, in any well-diversified fund, such as the cockroach, there will always be elements that underperform. Having access to 25% of the fund in money market assets will always provide it with fresh ammunition to take advantage of soft prices in other assets, such as equities.
One of my investment principles is to always invest in a broad index. That is why the fund has such a large exposure to broad ETFs. The broad index exposure can be supplanted from time to time with exposure to undervalued situations – like the South African small and mid-cap market, which is one of the most undervalued asset classes in the world. That is why we own the MWI Value Fund.
Next week, I will discuss my view of the current environment that each of the components of the equity portion of the cockroach finds itself in. I might even have added to some of them by then, as I need to get the equity weight back up to 25%. If I do, I will report back on the how and why.
It’s almost the end of February, which means it is time to make your choice for your tax-free savings account. The MWI Worldwide Flexible fund (aka the cockroach) is available as an option. Juan Mirfin at Merchant West Investments can help you do the necessary admin. Call him at 021 552 7007, or juan.mirfin@merchantwest.co.za.
* I manage the fund on behalf of Merchant West Investments (Pty) Ltd (FSP 44508)
In The Media
1. 26 Rules to Be a Better Thinker in 2026
Ryan Holiday is a renowned writer and thinker on the topic of Stoicism. His books, “The Lives of the Stoics” and “The Daily Stoic”, have pride of place on my bookshelf. A while ago, I came across a blog he wrote, called “26 Rules to Be a Better Thinker in 2026”.
It’s filled with advice on how to deal with this brave new, AI-filled world. The killer quote:
“The irony of AI, this cutting-edge technology, is that it makes the humanities more valuable than ever. It makes brainpower even more important. Reading. Knowing things. Having taste. Understanding context. Detecting lies or nonsense. In short: being a discerning, critical, clear thinker.”
Read the piece for yourself and see if it makes as much sense for you as it did for me.
A few highlights:
- Embrace contradiction
- Ask good questions
- Seek out people who disagree with you
- Ego is the enemy
2. Book Review: Orbital, by Samantha Harvey (2023)
This is a beautiful little book. In just over 100 pages, it manages to not only convey the peculiar world astronauts inhabit on a space station, but also the wonder of looking down on Earth, as they orbit it.
In a space station, there is no discernible day or night – you orbit the earth 16 times in 24 hours. This means you experience 16 sunrises and sunsets every “day”. The word “day” loses its meaning, as do the words “up” and “down”. Life in a space station becomes surreal on many levels, and Harvey gives the reader good insights into some of the absurdities.
As they deal with the challenges of living in space, the astronauts can also observe the beauty of Earth from different angles. Each astronaut is from a different country, and each of them experiences the beauty of the earth – and the fragility of humanity that inhabits it – in a slightly different way.
Ultimately, the book becomes a beautiful meditation on what it means to be human, with all its associated frailties, weaknesses, and strengths.
I can’t remember where I came across the recommendation to read this book, but I will look to get hold of more of Harvey’s writing. It’s a pleasure to read.
Last weekend, Nic and his mates, Taylor Wyatt-Smith, Simon Prior, and Blaise Lourens, completed the Blue Lagoon Triathlon. Here they are post-race, rocking their RECM tri-suits:
Unfortunately, I couldn’t (try to) compete with them, as Amanda and I were invited by our friends Mark and Ronel Straughn to join them at a lodge in the Thornybush nature reserve. So instead of bike, run, swim, we were tracking leopards:
I’m not sure whether I have any Chinese readers, but if I do – happy New Year!
This week marked the start of Ramadan, and I know I have many Muslim readers. So, Ramadan Mubarak to you and your families.
The BizNews conference is on in Hermanus from 10 to 12 March. You can have a look at the programme and sign up for it here. As conferences go, it’s a highlight for me every year. Not only is the content good, but Hermanus is also a pleasant town to visit, especially in March.
Whatever you are doing this weekend, remember to be careful out there. You never know if a leopard is lurking about.
Piet Viljoen
RECM
19 February 2026