Regarding… Vol 4 no 9 – The Best Investment Tool, Ever

Dear Fellow Investors and Friends,

Welcome to 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. I love getting feedback; feel free to drop me a line. It’s great to start conversations.

Today is Thursday, March 12th, the 71st day of the year. There are 294 days until the end of the year.

Amanda and I have been attending the 8th annual BizNews conference in Hermanus this week. Listening to speakers from all walks of life has been fascinating. In my opinion, it is the pre-eminent business conference in South Africa. If you are involved in financial markets in South Africa, I would go so far as to say that it is a must-attend event.

It’s also not torture to spend a few days in Hermanus, a beautiful and well-run town.

Between attending the talks and speaking with the many attendees who have become friends over the years, I have not had time to write my regular weekly letter. Instead, I will share my talk at the conference, reflecting on my investment philosophy in managing the fund I have nicknamed The Cockroach*.

Here it is:

A few years ago, I was at a dinner, and someone asked me what I do.

I said, “I manage money.”

He leaned in and whispered – like we were about to exchange nuclear launch codes – “So… what’s going to happen to the market next year?”

I said, “I have absolutely no idea.”

He stared at me and said, looking genuinely confused, “Then what exactly do you do all day?”

That question perfectly captures the modern myth of investing: that success comes from prediction and activity.

It doesn’t.

It comes from applying judgment – judgment about people, incentives, risk, and time. And for that, history is a far better guide than any prognostication.

In this talk, I am going to let you in on my “investment edge”. It’s by far the best investment tool the market has ever seen. It provides a compelling investment paradigm – a veritable “Dummy’s Guide To” navigating turbulent markets.

Yet, almost nobody uses it.

Here it is: the book “The Lessons of History”, by Will and Ariel Durant, a husband-and-wife historian team.

I read this 100-odd-page book at least once a year and find new lessons and insights each time.

Today I am going to share with you some of those lessons, and how I apply them in managing the fund I have nicknamed “The Cockroach” – the MWI Worldwide Flexible fund.

Lesson 1: in a volatile market, human nature is the constant

British historian and academic Diarmaid MacCulloch once said: “History is a defence. The person who is taken over by lies is no longer sane. So, I’m defending the human race against madness.”

Charles Mackay, in his wonderful book (written in 1849), “Extraordinary Popular Delusions and the Madness of Crowds”, said that “Men think in herds, they go mad in herds, while they only recover their senses one by one.”

The market is a herd of “men”; history is an inoculation against the madness of herds.

Companies change. Regulations change. Markets change. Institutions change. Prices change. But pride, fear, greed, envy, hope, rationalisations and self-deceptions are permanent.

The most important lesson of history is brutally simple: human nature does not change.

John Wain, professor of poetry at Oxford University, wrote, “The world would be a very pleasant and happy place if human beings were – not perfect, there is no need for that, but reasonably decent, anything short of the total unmitigated swine we actually are. Individually, we may be fairly all right, but collectively, as a species, we are contemptible in our greed, cruelty and short-sightedness.”

In ancient Rome, wealthy citizens rushed to lend money at absurd terms during booms, then begged the Senate for relief when the cycle turned.

In 1720, it was the South Sea Bubble.

In the 1840s, railways.

In the 1920s, radios.

In the late 1990s, the internet.

Different eras. Same emotions. What was reasonable at the outset was pushed beyond the point of irrationality by the market. The irrationality justified by otherwise intelligent, reasonable and sane people.

Every bubble is intellectually unique and psychologically identical.

That is why I don’t start investing with spreadsheets. I start with a question historians have always asked: What are people either panic-stricken about, or desperate to believe in – right now?

This is exactly how we think about the Cockroach Fund.

We do not assume people will behave rationally. We assume the opposite.

We know that fear arrives suddenly, greed overshoots egregiously, confidence expands robustly, and strong narratives unfailingly seduce intelligent people into bad decisions.

We know this because history tells us so.

In their book, Will and Ariel Durant said it well: “We have immensely developed our means of transportation. We double, triple, centuple our speed, but we shatter our nerves in the process, and we are the same trousered apes at 200mph as when we had legs”.

So, the portfolio is built on the premise that erratic human behaviour is a constant risk, not an exception.

The Cockroach is an aggressively diversified fund. It avoids leverage and can thereby withstand extreme market conditions. Through rebalancing, it is forced to buy into weakness generated by fear and forced to sell into strength generated by overconfidence. That’s also why its nickname is the Cockroach: it’s built to thrive during good times and survive during bad.

The goal is not to be right in every environment. The goal is not to win popularity contests or be the prettiest girl at the “beauty parade” which the institutional imperative forces on investment managers.

Even the fund’s nickname is not designed to win popularity contests.

The goal is to still be standing, ready to compound an intact pool of capital, when human nature inevitably asserts itself. Diversification enables this.

Lesson 2: cycles are the system

Every generation believes it is living through unprecedented times. Almost none of them are.

• In 1929, people believed modern finance had eliminated recessions.
• In the 1960s, the “Nifty Fifty” would grow forever.
• In 2006, house prices would never decline.
• In 2021, interest rates were assumed to be permanently irrelevant.
• In 2025, the magnificent seven were one-decision stocks.

Each belief collapsed under the same force: the force of the cycle driven by human psychology, which works something like this:

• Prosperity breeds confidence.
• Confidence facilitates leverage.
• Leverage increases fragility.
• Fragility guarantees crisis.
• Out of crisis, renewal arises.
• Renewal brings prosperity.

And so it goes.

In March 2020, investors calmly told me capitalism itself might not survive widespread lockdowns. Eighteen months later, those same investors feared they hadn’t bought enough speculative tech stocks.

Same people. Same data. Different conclusions.

Cycles overpower intellect. You don’t have to predict them. But you need to respect them.

In the Cockroach Fund, we never assume that current conditions are permanent.

High growth, low volatility, cheap money – these are not permanent states of nature; they are phases of a cycle. And every cycle carries the seeds of its own reversal.

That is why the fund is not fully invested at all times, why liquidity matters, and why we resist the pressure to “do something” just because markets are moving.

We don’t try to predict the next phase of the cycle.

We try to remain solvent and flexible across all its twists and turns.

The requirement to remain solvent at all times means the Cockroach must always hold 25% of its assets in cash. No matter the market circumstances. It is an anchor and a source of deferred gratification – you always have money to buy an asset that might have fallen foul of the cycle. Importantly, you are never forced to sell.

But not just any cash. Bearing in mind that cash – money – is always some government’s liability, I prefer to own liquid assets (i.e. the liabilities) of systems with sound monetary and fiscal policies. Today, the bulk of the cash is in US$ and ZAR.

US$ because that is the fund’s default currency. And ZAR, because our interest rates are so high, the carry you pick up more than compensates for the persistent depreciation. At the margin, I am moving money to Japan – one of the few markets in the world where interest rates have risen over the past 18 months or so.

Lesson 3: survival beats brilliance

History does not reward brilliance.

It rewards survival.

The graveyard of history is filled with brilliant generals, brilliant politicians, and brilliant investors who ignored risk. Napoleon did not lose because he lacked intelligence. He lost because he ignored the risks posed by an overly long logistics chain and freezing winter weather.

In investing, brilliance without resilience leads to the same bad outcome that Napoleon experienced.

Risk is not volatility. Risk is a permanent loss of capital.

Building a margin of safety into your work is not pessimism. It is awareness of risk.

When the engineers who build bridges over-engineer them, are they described as pessimists, or are they simply aware of the history of collapsing bridges? Why is it different in markets where we always seem to reach for yield?

The Cockroach Fund is explicitly a “stay rich” strategy, not a “get rich” strategy.

We accept that we will underperform in euphoric markets. That is the price of avoiding permanent loss when brilliance is superseded by risk.

Risk, to us, is not volatility or short-term drawdowns. Risk is being forced out of the game at precisely the wrong moment.

In their book, Will and Ariel Durant say: “Like other departments of biology, history remains at bottom a natural selection of the fittest individuals and groups in a struggle where goodness receives no favours, misfortunes abound, and the final test is the ability to survive”.

The Cockroach may not be your favourite animal, but it is a survivor.

Bonds, and specifically government bonds, are widely regarded as a boring asset class. But it is a stable asset class that provides a useful source of income. Because governments issue them, the risk of default is low. As such, the Cockroach always allocates 25% of the fund to this asset class.

History shows that over the past 220 years, 51 of 52 countries that reached a gross debt-to-GDP ratio of 130% have defaulted. It is estimated that the USA will reach 130% next year. France is not far behind. But the narrative says everything’s fine.

And it is, until it isn’t.

There are two ways to default – loudly, as South Africa did in the 80’s when it told its creditors it could not pay them what it owed. Or softly, by devaluing the bonds through the relentless creep of inflation. Most governments default softly.

The Cockroach is interested in maintaining the value of its capital in real terms. So, an inflationary default is a real risk. As a result, the Cockroach owns no bonds from Western developed markets. It owns bonds from financially sound emerging markets.

Lesson 4: consensus is comfort, not truth

History teaches us something deeply uncomfortable:

Large groups of intelligently confident people can be wrong – together.

In fact, history suggests groups are often at their most wrong when they are at their most confident.

Before every major collapse, there is near-universal agreement that the risks are understood, contained, or irrelevant. Dissent is not debated; it is dismissed.

• In the late Roman Republic, warnings about debt and social instability were branded as unpatriotic.
• In the years before 2008, anyone questioning leverage or housing prices was told they “didn’t understand modern finance”.
• In more recent cycles, sceptics are waved away with phrases like “OK, Boomer”.

Consensus is seductive because it removes the burden of independent thought. If everyone agrees, responsibility is widely distributed, with not too much falling on any one individual, which can lead to a false sense of security.

After all, if everyone is doing it, it must be safe?

Consensus does not eliminate risk; it conceals it.

Markets are most fragile when disagreement disappears, when everyone owns the same assets for the same reasons and is financed in the same way. At that point, the system becomes efficient only at one thing: amplifying shocks.

That is why discomfort is often a prerequisite for good investing. It’s a truism to say that if you don’t own at least one asset that makes you uncomfortable, you are not fully diversified.

True opportunity rarely announces itself with confidence and applause.

It usually arrives quietly, wrapped in neglect, uncertainty and a poor reputation.

Consensus feels safe. Truth rarely does.

This principle is central to how I run the Cockroach Fund.

We are not trying to own what everyone else owns, nor to look clever in bull markets.

We are deliberately willing to look wrong, early, or out of touch.

When consensus pushes capital into crowded trades, we focus instead on balance sheets, liquidity, protection and optionality. We look for wide open spaces.

When markets agree that certain risks no longer matter, we assume those are precisely the risks that will matter most. The Cockroach is designed to survive the moment when consensus breaks – because history tells us it always does. And those risks that didn’t used to matter are promoted to the front and centre of everyone’s thinking.

The Cockroach’s allocation to equities is always at 25%, and always different to that of the crowded trade: the market.

I am in the process of putting together a portfolio of stocks that I call “10 stocks, forever”. These are stocks of companies that:

• Are high-quality businesses
• Are globally diversified businesses
• Have a strong value-creating culture
• Are Lindy, i.e. they have been around a long time

The idea is that once the portfolio is in place, it doesn’t get touched again. More inactivity, lower frictional costs – less chance of making a mistake.

At present, I have added exposure to small and mid-cap South African stocks via the MWI Value fund. This is not a permanent position; it will only be in place while the extraordinary undervaluation of these stocks lasts.

Lesson 5: power shapes narratives

Narratives do not spread because they are true. They spread because they are useful. History shows that narratives are rarely neutral. They are shaped – consciously or not – by the incumbents with the most to lose. These incumbents have the most power, leverage, and influence. When financial systems are stressed, the stories that dominate are almost always the ones that protect incumbents.

Tell me where you have heard these sayings before:

• “Banks are systemic, and too large to fail”
• “Inflation is ‘transitory’ and
• “Losses are “contained”.

These narratives are not designed to inform; they are designed to maintain confidence, long enough for power to reposition itself.

The Cockroach Fund is explicitly built to not rely on those narratives being true. Let’s face it – very few of us here in the room are part of the incumbent power bloc.

So, I always work on the assumption that when stress arrives, rules will change, goalposts will move, and explanations will only follow afterwards. Everything will be rationalised.

But you won’t get your money back.

That is why incentives matter more than stories. Understanding incentives leads you directly to assets that are dull, solvent, and misunderstood; rather than exciting, celebrated, and fragile.

History is merciless to fragility. History tells us that capital providers without political or institutional power are rarely the first to be protected.

Look around you – that’s us. We are the fragile ones. We need to protect ourselves; the system will not do it for us. The powerful incumbents who run the institutions are looking out for themselves, not for us.

I manage the fund on the basis that:

• Liquidity matters more than promises
• Assets that depend on continued narrative support are inherently fragile
• Assets that are not created through someone else’s liability impart freedom.

We avoid structures where returns rely on policymakers, central banks, regulators, or financial intermediaries “doing the right thing.” Not because they are malicious, but because history shows that when they act under pressure, with imperfect information, and with clear incentive asymmetries, nothing good comes of it for the ordinary investor.

For example, the current narrative holds that gold is a crowded trade and that private assets are the panacea for the low nominal returns the market offers. Yet statistics show that family offices have less than 2% exposure to hard assets like gold, while they have over 30% in illiquid, poorly marked private financial assets.

The distribution power of large financial firms has never been more evident. The narrative they are pushing has resulted in a gross misallocation of assets, which, of course, will only become evident later.

The Cockroach is designed to survive narrative failure – the moment when confidence evaporates, and power reveals where it really sits.

The fund is designed to absorb shocks, not to maximise excitement. The fund always holds 25% in real assets; hard assets like gold, precious metals, land, royalty businesses like Texas Pacific Land, and hopefully one day, when our regulators allow it, cryptocurrencies. Hard assets give the fund resilience against inflationary or extractive government and/or institutional policies.

Policies that will be implemented once the current narrative fails.

Lesson 6: time is the real advantage

Charlie Munger once said, “The big money is not in the buying and the selling, but in the waiting.”

Modern markets worship frenetic activity while history distrusts it.

• Jesee Livermore became famous for market action and tactical brilliance, yet his life also illustrated the instability of a career built around constant movement and speculation. History remembers not just the wins, but the ruin. He ultimately committed suicide. Activity can produce legend in the moment and regret in the long run.
• In the late 1990s, constant trading, rapid IPO flipping, and obsession with short-term momentum were treated as signs of sophistication. Yet history’s verdict was brutal: many of the most actively traded “story stocks” disappeared, while the patient owners of a few real businesses did far better over time.
• Before the 2008 crash, structured products, leverage, and perpetual deal-making created the appearance of intelligence and control. Activity itself became a substitute for judgment. History showed the opposite: the institutions moving fastest and trading most aggressively were often the most fragile.

It’s said that compounding should be classified as one of the seven wonders of the world. But compounding’s main ingredient is patience; the patience to let events unfold and not try to micromanage things daily. Unfortunately, investors tend to abandon their biggest edge – patience – at the first sign of turbulence. Initially, being patient feels irresponsible – until compounding has had the time to work its irresistible magic.

Modern markets equate activity with intelligence, but history usually treats frenzy as a warning sign.

In managing The Cockroach, I try not to chase the daily dopamine rush the market can bestow on short-term traders. Frequent activity raises frictional costs: taxes, spreads, commissions, mistakes, and emotional exhaustion. Modern markets frame this as engagement. History frames it as leakage. The more people trade, the more the system transfers wealth from the impatient to the patient.

Time is the quiet ally of the Cockroach Fund.

I don’t measure success in months or quarters. I measure it in survivability, consistent purchasing power, and optionality through cycles.

By remaining patient, liquid, and humble about what I don’t know – which is a lot! – I allow time to do the heavy lifting.

Compounding is not dramatic, but history suggests it is something you can rely on.

Investing is an infinite game – a game without a final whistle, a game where there is no end. There is just a never-ending iteration of shocks and surprises, ups and downs. The winner is the one who survives. Not the one who has won investment awards for performance over the past 1,3 or 5 years. That says nothing about their ability to survive. At best, it points to an investor who has had a run in which their investment process and philosophy have been temporarily in sync with the market. At worst, it reflects a lucky guess. Neither of which is guaranteed to keep you in the game over the long term.

The Cockroach is a survivor, which allows it to compound over long periods. It survives because it is diversified across – and within – the four major asset classes: 25% each in cash, bonds, equities, and hard assets. Each of which responds differently to different economic environments.

In the end, investing is simply applied history, and human history is a brief point in time. Its first lesson is modesty. I believe that forecasting breeds false certainty, while history provides certain understanding.

History shows us:

• Humans do not change.
• Cycles repeat.
• Power drives narratives.
• Survival matters more than brilliance.
• Time rewards patience.

If you understand history, you do not need to predict the future – you only need to avoid repeating its most expensive mistakes.

* I manage the fund on behalf of Merchant West Investments (Pty) Ltd (FSP 44508)