In his keynote session at BNIC#1 in Hermanus, Piet Viljoen reflected on both good and bad investments, emphasising how bad investments can cause significant losses, while “Lollapalooza” outcomes—extremely profitable investments—are rare but attainable. He suggested inverting investment strategies, avoiding bad decisions, and seeking undervalued opportunities like energy stocks or South African equities for potential Lollapalooza returns, highlighting past success stories like Naspers and Nvidia.
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Edited transcript of Piet Viljoen’s keynote address at BNIC#1 in Hermanus
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Thank you very much, Alec. I still remember that walk, and there have been both good and bad times since then, but I believe you made the right decision back then. As Franz mentioned this morning, South Africa is a place where many have left, and I am one of them. The success I’ve had in managing money is not because I’m so good, but rather because my competition is so bad.
The good ones are all a little short, eh, Sean? What’s coming? The bad ones, and the big one, hurt. Okay, so…
Another topic Frans touched on this morning was the role of mass media, both globally and in South Africa. I’ve been on record being critical of the media sector. Essentially, what has happened is they’ve become sellers of clickbait, forcing their globalist opinions on us regular people. This benefits them but not us. As a result, the media sector has become completely discredited.
One of the few exceptions to this is BizNews. For that, I want to congratulate you.
BizNews is a platform that allows for different viewpoints, giving us, as part of this community, the opportunity to make up our own minds. So, Alec, thank you for providing this platform, and it’s an honor to have spoken at all seven of these events. I truly appreciate it.
In this room sits the core of the business community. If you look around, you’ll find many people with differing opinions. We may not agree on everything, but one thing we all seek is that elusive Lollapalooza investment—the one that blows your socks off, a “10-bagger” in no time, an unbelievably good investment. That’s what we all strive for.
Charlie Munger defined a “Lollapalooza event” as the confluence of various factors that together create a huge, nonlinear outcome, either positive or negative. In investment terms, that’s exactly what we seek. But these opportunities are rare, like unicorns.
So, how do we find them? Munger suggested one way to solve a problem is to invert it. If we want to find ridiculously good investments, perhaps we should start by identifying ridiculously bad ones. A ridiculously bad investment destroys a significant portion of your portfolio, driving it to zero and making recovery nearly impossible.
That’s a permanent loss of capital—a truly terrible investment. Let’s start our journey by recognizing the common, everyday bad investments—the ones we often make but rarely admit to ourselves. They’re scattered throughout our portfolios.
The key characteristic of a common bad investment is that it doesn’t completely destroy your portfolio. It may cause a setback, but you can move on.
The reason you survive these investments is basic risk management, such as appropriate position sizing or a price-to-value relationship. When the risk materialises, it doesn’t wipe out your portfolio. It may hurt, but it doesn’t destroy you.
For example, Argentina issued 100-year bonds six or seven years ago. Argentina has defaulted many times and will likely do so again within that timeframe. In fact, three years after issuing these bonds, they defaulted.
However, investors knew the risks and priced the bonds accordingly. It wasn’t a widespread investment in most portfolios, so when the bonds declined by 40%, no one suffered greatly. That’s a common bad investment. But a ridiculously bad investment, on the other hand, destroys portfolios.
These types of investments inflict serious damage. For this to happen, there must have been widespread belief that the investment was promising, like the emperor’s new clothes—everyone clamouring for a piece of the action, regardless of price.
In my investing career, I’ve encountered a few of these. Let me share some examples of what a ridiculously bad investment looks like. The first occurred before I started investing. In the late 1960s, as Howard Marks mentions in his memo Sea Change, there were the “Nifty Fifty” stocks. These were the 50 American stocks everyone had to own because they were changing the world—tech companies revolutionizing industries.
In 1969, if you had bought these stocks, they peaked in 1972. By 1974, you would have lost 90% of your investment. That’s a ridiculously bad investment.
Then there was the TMT (Technology, Media, and Telecom) bubble during the dot-com era. Everyone believed the internet would change our lives, and no price was too high for stocks like Cisco, Dimension Data, and telecom companies.
However, even today, Cisco’s stock price is lower than it was in 2001—23 years later. Dimension Data dropped 90% and was acquired by a Japanese telecom company—a bad joke in itself. These were ridiculously bad investments.
Closer to home, we have Steinhoff. Founded in 1998, it eventually appointed Markus Jooste as CEO, who was seen as a brilliant financial engineer. But as we all know, Steinhoff eventually collapsed, and many prominent investors lost a significant part of their wealth.
Steinhoff became another example of a ridiculously bad investment. So, what do all ridiculously bad investments have in common? At their outset, they were expected to be good. As a result, risk management principles were ignored, and portfolios took on oversized positions. If we invert this, we can conclude that ridiculously good investments often start out looking like bad ones—under-owned, cheap, and viewed as unlikely to succeed.
Let’s consider some examples of ridiculously good investments. In 1998, Naspers was just an over-the-counter stock in the newspaper publishing business. It was generating cash, and management used that cash to invest in tech ventures, most of which failed. But one was Tencent. The rest is history—Naspers became a ridiculously good investment.
In 2012, Microsoft was seen as a dinosaur in software, led by an out-of-touch CEO, Steve Ballmer. But along came Satya Nadella, the cloud, AI, and now Microsoft is a 20-bagger.
Nvidia in 2012 was nearly bankrupt, but its shift into AI and machine learning transformed it into another ridiculously good investment. The common thread is that these investments were unpopular at first.
Lollapalooza outcomes happen when investments initially seem unattractive. Right now, one such example could be energy companies. Despite the narrative around net zero, carbon-based fuels will be with us for a long time. Energy companies are currently out of favor and under-owned, but they could offer Lollapalooza outcomes.
Grantham, Mayo, Van Otterloo (GMO) believes deep value stocks, which are trading at a discount to intrinsic value, represent another potential opportunity. South African equities, particularly small and mid-cap stocks, are another example. These companies are under-owned and cheap, yet they are not poor businesses—they’re good businesses trading at very low valuations.
Any one of these could turn into a Lollapalooza outcome, a ridiculously good investment. The best time to buy these stocks was two to three years ago when pessimism about South Africa was at its peak. But it’s still a good time now.
Thank you.
Read more: BNIC#1 Frans Cronje: South Africa’s path forward – GNU’s strengths, risks, and future
Edited transcript of the Q&A session with Piet Viljoen at BNIC#1 in Hermanus
Alec Hogg :
Yeah, well, you know the drill. Given that, Piet, well, where Tony has been to all the conferences, Piet has spoken at all of them, and I think you know why.
But it’s the Piet versus Magnus show, and we’ve got Magnus coming later. Is Magnus here? No? He’ll come later. But it really was a member of the community who said, “Let’s fix this once and for all.” Piet, there’s half a million rand, and Magnus, there’s half a million rand.
And certainly, you took the lead from the beginning and have been excelling ever since.
Piet Viljoen:
Well, just to clarify, the Merchant West Investments Value Fund only invests in South African companies, not offshore ones like BHP Billiton or Richemont. It mainly focuses on mid and small-cap companies.
Alec Hogg:
If we follow the Lollapalooza argument, where does the word “Lollapalooza” come from?
Piet Viljoen:
I believe it came from one of Charlie Munger’s commencement addresses. It’s been used widely since then to describe sensational opportunities. It’s a fantastic word.
Alec Hogg:
So, the Lollapalooza opportunity here: should people put their money into the Merchant West Value Fund, which you manage at ReCM, or buy the individual stocks in it?
Piet Viljoen:
You can do either. But I would prefer you buy the value fund because the danger in picking individual stocks is that you might choose the wrong ones. The fund holds a portfolio of stocks to diversify against potential risks with specific companies. While discussing individual stocks is interesting, I try to avoid it because anything can go wrong with even the best businesses. By picking just one or two stocks, you expose yourself to significant risk. That’s why I believe the Value Fund is the better choice for exposure to South African businesses.
Alec Hogg:
At one of the events, you were bullish about the company that owned WeBuyCars—Transaction Capital. Could you tell us what happened there?
Piet Viljoen:
You’re giving me too much credit. After COVID, Transaction Capital was priced reasonably at 25 to 30 rand per share. But as it went up to 50 to 60 rand per share, I thought it got too expensive and no longer compensated for the risk. I sold my position then, not because I predicted management issues but because the risk-reward ratio was no longer in our favor.
Alec Hogg:
That’s your job, right? To monitor and manage these situations.
Piet Viljoen:
Exactly. My job is to monitor the price-value relationship and act accordingly.
Alec Hogg:
Looking at South Africa, the Springboks’ success has uplifted the country’s spirits. But why hasn’t the JSE reflected that? Is there something deeper going on?
Piet Viljoen:
I think it started with the elections and the subsequent formation of the government of national unity. This gave confidence that the future wouldn’t be dominated by extreme politics. But I believe Eskom’s improvements are a bigger confidence boost. Energy is crucial for growth, and if we can fix Eskom and provide affordable electricity, that will be a game-changer for the economy.
Alec Hogg:
Our long bond yields have also dropped significantly. What impact does this have?
Piet Viljoen:
A 300 basis points drop in long bond yields is a massive reduction in the cost of capital for businesses. This boosts the value of their profit streams. I don’t think this benefit is fully reflected in the market yet.
Alec Hogg:
What if, five years from now, South Africa has consistent and affordable energy coupled with a confident entrepreneurial class? Could we see a Lollapalooza effect then?
Piet Viljoen:
Absolutely. If that happens, we could enter a virtuous growth cycle. South Africa has experienced this before, like in the early 2000s, following the post-1994 economic management. That boom lasted until the global financial crisis, and South African assets performed incredibly well.
Alec Hogg:
Regarding Eskom, what are your thoughts on the Western world’s push towards renewable energy? If you were advising the Eskom board, what would you say about managing their assets?
Piet Viljoen:
I have strong views on this. South Africa has massive coal reserves and unused coal energy-generating capacity. We should use these assets to generate cheap energy and grow our economy. Once we’ve reached higher growth, we can talk about transitioning to net-zero emissions. But right now, we need to focus on our development, not what the global powers want.
Alec Hogg:
But what about global warming and melting icebergs?
Piet Viljoen:
South Africa is a tiny contributor to global carbon emissions. Even if we all started driving electric vehicles powered by wind, it wouldn’t make a difference. The major players—China, India, the U.S.—are where the real impact comes from. Our responsibility is to look after our citizens first.
Alec Hogg:
Later today, we’ll hear from Don Ncube about gas exploration in South Africa. Are you bullish on the future of oil and gas?
Piet Viljoen:
Oil and gas exploration is often filled with over-promises. On the South African coast, significant finds have been made, but progress has been slow. If we have gas resources, we should be using them to benefit the country.
Alec Hogg:
Lastly, on Bitcoin, you once said Bitcoin should make up about 2% of a portfolio as insurance. Our Bitcoin portfolio has grown significantly. Should we sell it down to 2% again?
Piet Viljoen:
I can’t remember giving a precise 2%, but I do believe in having some exposure to Bitcoin as a hedge. Its limited supply and potential to act as a store of value in a world where fiat currencies are being inflated make it worthwhile. Personally, I buy small amounts of cryptocurrency regularly, but it’s not an amount that would ruin my life if it went to zero.
In the future, over the next 10 to 20 years, not the next year or two, when fiat currencies that were once regarded as stores of value get debased significantly, I think Bitcoin will be a good risk diversifier in that environment. I know there are people in this audience as well who really knock my visits to Davos with all the globalists, as you call them. But I go there to learn. And one of the things I learned was in a session with our partners at the Financial Times. Niall Ferguson, the economic historian who has written so many wonderful books, was fielding questions. He said that if he lived in a country with a turbulent currency or at risk of social unrest, he would have a significant percentage of his portfolio in Bitcoin. This was interesting because he referenced what had happened in Ukraine, and similarly, I presume in Israel. Looking at that context, 2% seems like a fair allocation for South Africa. I wouldn’t argue with that.
Alec Hogg:
Bruce Dakers says Bitcoin is up 400% since 2020. Is this not a “Lollapalooza” investment? I know Bruce is very bullish on Bitcoin.
Piet Viljoen:
It depends on where your starting point is. If you bought a year ago at $60,000 a Bitcoin, it hasn’t turned out to be a “Lollapalooza” investment. But if you bought in 2016 at around $100 a Bitcoin, it certainly has. However, the key question is what role it plays in your portfolio. I believe it can act as an anchor of value in a turbulent future.
Alec Hogg:
There’s a follow-up question from Cobus Fourie: “What digital assets or crypto constitute a ridiculously bad investment as part of a portfolio in your view, by virtue of its mismatch in design intent?”
Piet Viljoen:
That’s a difficult question. Speculative activity in cryptocurrency has declined significantly in recent years, as seen in Bitcoin’s relatively stable price. I think its speculative nature is decreasing while its usefulness as a hedge and functional asset is growing. You can move value across borders, as in places like Zimbabwe where the currency has no value, and Bitcoin provides a way to retain the value of your money. So, over time, the use cases for it are improving.
Alec Hogg:
Our crypto expert, Stafford Masie, will be with us in March for the next BNC conference. He’s been buying Bitcoin since it was around $5, so he’s very much an advocate. He explains Bitcoin far better than I do, and I hope you don’t miss that one, Piet.
David Melvill didn’t ask about gold, but he mentioned that you recommended Combined Motor Holdings (CMH) at a previous conference, stating it was priced as if it were a failed company. Since then, it’s up 30%. Are there any other similar companies you could highlight?
Piet Viljoen:
Yes, there are many such companies. CMH is a classic example, and I still think it’s undervalued. There are several companies on the JSE trading at absurdly low valuations because no one wants to own them. One of my favorite stocks is Sabvest Capital, run by Chris Seabrooke. He has compounded net asset value (NAV) per share by over 20% for the past 20 years. Yet, it’s trading at a nearly 40% discount to its NAV. If you buy that share at the current discount, assuming Chris hasn’t lost his touch, you’re looking at earning a return of around 20%, with the potential for much more if the discount closes.
Alec Hogg:
Ross Wilson asks about Nvidia, which you’ve mentioned in the past as a good investment. It seems like everyone wants to get in at any price now. Could it turn into a ridiculously bad investment?
Piet Viljoen:
Yes, it could. Nvidia’s 80% profit margin is extremely high, and I’d be surprised if other cash-flush tech giants don’t try to enter its market. Companies like Apple and Microsoft could eventually compete with Nvidia, as it’s such a profitable and growing market. Nvidia also faces a risk that not many people talk about—the single point of failure at Taiwan Semiconductor (TSMC). TSMC manufactures the majority of Nvidia’s chips. If something happens to TSMC, Nvidia would be left without chips to sell.
Alec Hogg:
That’s interesting, especially considering Intel’s investment in U.S. chip manufacturing. If Taiwan were to fall under threat, could Intel or others eventually catch up?
Piet Viljoen:
Intel and others would need a long time to match TSMC’s expertise in manufacturing cutting-edge chips. Nvidia relies on TSMC for this advanced manufacturing, and catching up could take years.
Alec Hogg:
David Melvill comes back with a gold question. You’ve had a large exposure to physical gold and gold mining shares in the past. Gold is at an all-time high now. Will you be taking profits or do you see more upside?
Piet Viljoen:
I need to clarify. My gold exposure isn’t in the Value Fund, which generally doesn’t hold mining stocks. The significant exposure is in the Merchant West Worldwide Flexible Fund, which I call the “cockroach fund.” It’s designed to protect wealth under almost any circumstances, with a fixed allocation of 25% each to equities, bonds, cash, and commodities—mainly gold. In the commodity portion, 14% is in physical gold, and 6% in gold streaming companies like Wheaton Precious Metals. Streaming companies don’t mine but finance mining companies, taking a percentage of revenue.
Alec Hogg:
Chris De Lange asks about the potential impact of South Africa being removed from the grey list, possibly by 2025. What do you think?
Piet Viljoen:
It would be another step toward normalizing our financial system. Our regulators have been working hard to get us off that list, and with the right leadership, it will happen. It’s part of a broader journey toward improving the economy.
Alec Hogg:
How much of an advantage is it to be perceived as “dumb,” as you mentioned earlier in the context of Eskom’s board not going along with the crowd?
Piet Viljoen:
It’s a significant competitive advantage. When people think you’re dumb, they often leave you to your own devices, allowing you to focus on doing the right thing. Managing money requires seeing the world as it is, rather than how the consensus views it. Often, that puts you outside the mainstream, but it’s an advantage when you’re focused on getting things right.
Alec Hogg:
Derek Mathews asks, “How much of a disruptor is BRICS to international markets?” He mentions its impact on global grain markets.
Piet Viljoen:
The BRICS economies form a strong and growing bloc. They have significant buying power and economic influence, larger than the U.S. in some respects. However, I don’t see BRICS as a cohesive unit. For South Africa, it’s important to play the game wisely, making friends on all sides without taking a rigid stance.
Alec Hogg:
Last question from Sanjay Daya: Other than Palantir, are there any emerging AI stocks, particularly in South Africa?
Piet Viljoen:
There are many AI stocks, but it’s hard to predict the winners. A hundred years ago, there were 500 car manufacturers in the U.S., but only three survived by 1960. Similarly, in 2000, there were hundreds of internet companies, but only a few, like Amazon, became dominant. It’s difficult to identify the future leaders during times of massive innovation like the current AI boom.
Alec Hogg:
Thanks for that. And to those unfamiliar with the term, a P/E of 10 means a company’s shares trade at ten times this year’s profits. Today, Nvidia’s P/E ratio is around 80.
Piet Viljoen:
Yes, Nvidia is priced for perfection, and it’s hard to generate returns when so much is already expected. Investors need to be patient and wait for opportunities when these stocks trade at more reasonable valuations, as they have in the past with companies like Microsoft and Amazon.
Alec Hogg:
That’s a great insight, Piet. It’s been a privilege talking with you.
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