Set Ball, Match Ball!

First, we were told that the curbs on individual rights, such as freedom of movement and assembly, were necessary to prevent the collapse of public health systems such as the NHS in the UK. In that new authoritarian environment, it was best not ask for a pass for those with private health insurance. The mass media grabbed the opportunity to gain some readers and viewers by stoking fear porn. This oxygen balloon may give these dying industries a few more years before their financial demise. Politicians had a field day as they exercised their power grab. The young and future generations are left to hold the bag and fill the purse for all the crass policy mistakes that have been made in the name of “we did not know!”

It is now quite clear that politics, and not statistical evidence or risk benefit analysis, have determined many important public health policies. Only a single developed country forsook confinements. In spite of such temerity, this country shows a fatality rate per population which is half that of other countries of similar income per capita. We were told that with the sacrifice of confining the population, we would defeat the virus. At least that is what the Spanish PM told his fellow citizens. He even celebrated the defeat of the virus in May 2020! Then there was as second wave, soon followed by a third wave, and so on…

Those on the right of centre wanted to preserve their right to be treated at home by their doctors with readily available drugs such as hydroxychloroquine or Remdesivir. Those to the left of centre wanted masks and restrictions on free movement. Universities and health authorities provided sets of models on possible paths for the pandemic’s development, which included various scenarios. Many governments and a complicit media highlighted exclusively the worst-case scenarios. Of course, the pro-masks and pro-confinement supporters saw no evil in attending mass protests in the summer of 2020, but abused those who so much as went for a walk. The Governments of many countries had a legal basis for these restrictions, but not the Government of Spain, which has lost two cases before the country’s highest court. Nothing has happened as a result.

The FDA and other drug safety agencies threw caution to the wind when they authorized mass vaccination with experimental vaccines under emergency provisions. We were told that these mass vaccinations would result in herd immunity. As it turns out, there is no evidence that vaccination prevents contagion. South African doctors went to great lengths to communicate that while Omicron was more contagious, the hospitalization and morbidity rates were very low, This was the case in a country where a small percentage of the population had received the full course of vaccines. The often-cited evidence for the vaccine’s efficacy is that 50% of US patients in ICUs are unvaccinated. Let us assume this datum is accurate, it may still not offer statistical significance as only 61% of the US population has received two jabs.

There is also much confusion on the issues of virus lethality and evolutionary success. It is true that mutations are random; therefore, any new strain of the coronavirus could be more lethal than any of the previous strains. It is also true that evolution favours the success of less lethal variants that will be more successful at spreading among the population. This is the case precisely because the host often shows no symptoms and therefore will continue spreading the virus, and also importantly, because most hosts remains alive.

The cancel culture has risen in tandem with this pandemic and has afflicted public discourse in a very dangerous way. When the generally insufferable President of the French Republic gloats about making the lives of unvaccinated citizens miserable, he demonstrates that he is not in touch with the people he is trying to protect. Somebody should tell him that many among “the people” are growing tired of being patronized and lied to. The people are beginning to realize the great damage that this exercise in mass hysteria has produced to the intellectual and social skills development of their children and grandchildren. Keeping children out of school is undoubtedly the most extraordinary conclusion of any policy risk-benefit analysis that we can remember. The Governments of the alleged “free world” have deliberately ruined the future of many children and young adults in order to satisfy the safety demands of senior citizens. This is the parting gift of the baby boom generation to the world, very much in line with their hedonistic and egotistic ethos.

Macron is not alone in his defiling of the rights of the individual. His colleague across the Alps in Italy is capping his long career of creating havoc from positions of power in the public sector with a similar enthusiasm for Big Brother policies. In his memoirs, Stefan Zweig reflected on the imposition of passports to cross borders in Europe after WWI. He found it a shocking affront on privacy. Now some governments demand vaccination passports even though vaccinated people are as likely to be infected as those who are not. The people are also finally realizing that the average age of the victims in many western countries is over 80 years-old and that most fatalities had several co-morbidities. Some conclude that many people are dying with Covid and not from Covid.

Australia and New Zealand may well have the most stringent CoVid related constraints on their citizens among western democracies. Their insularity and remoteness has always been a source of exceptionalism and may explain the docility with which most of the population there has taken to perma-lockdown The Djokovic visa case is intriguing; certainly, it does not shed a very good light on the independence of the Australian consular services. The number-one ranked tennis player in the world and defending Australian Open champion applied for and obtained a visitor visa. Apparently, while he was flying down-under, the Australian Immigration minister revoked his visa because he did not accept Djokovic’s medical exemption for not being vaccinated. He was detained on arrival and incarcerated in a government designated quarantine hotel. His lawyers won an appeal but lost the case at yesterday’s hearing. The court of public opinion had already sentenced Djokovic because of social media photos that show him socialising while allegedly infected with Covid. The people has already ruled that his visa should be revoked as a punishment for his bad behaviour. He has been deported.

Perhaps one of the most extraordinary developments in this story is Rafael Nadal’s public condemnation of Djokovic’s position on vaccination. Djokovic’s older nemesis has used this opportunity to pontificate on individual responsibility and equality before the law. How soon he forgets that just a couple weeks ago, he tested positive for Covid just a few days after having a mask-less had lunch with King Juan Carlos. It is interesting that Nadal, one of the most successful athletes in history, would not see the irony in this story. Perhaps, subtlety is better suited to Federer’s style.

In a recent interview, Rochelle Walensky, the Director of the Center for Disease Control (CDC) stated, “You know really important study if I may just summarize it. A study of 1.2 million people who were vaccinated between December and October and demonstrated that severe disease occurred in about 0.015% of the people who received their primary series and death in 0.003% of those people. The overwhelming number of deaths, over 75%, occurred in people who had at least four comorbidities. So really, these are people who were unwell to begin with. And yes, really encouraging news in the context of Omicron.”

Anti-vaccine suppoters have been using this statement to justify their views. Immediately, the media fact-checked the story to reinforce Walensky’s intended message which is that when it comes to vaccinated patients, Covid is generally fatal only for those patients who have four or more comorbidities. This would be a great endorsement for vaccination if the unvaccinated who die did not also show comorbidities. Unfortunately, for Ms Walenski line of argument, it turns out that they do.

Since the outset of the Pandemic fatalities occur overwhelmingly among people who are older than 70. In the case of Italy, a country for which there are very good statistics from the public health agency, 80% of fatalities were older than 70 with an average age of 82. This data will surprise nobody who has been looking at these figures for the past two years. What may surprise some people is that the Italian public health services detected a statistically significant incidence of comorbidities among patients who died of CoVid.

The authors’ conclusion in the paper “Comorbidity status of deceased COVID-19 in-patients in Italy” published by Aging Clinical and Experimental Research in June 2021 was:

In those deceased in-hospital due to COVID-19 in Italy, disease combinations defined by multiple cardio-respiratory, metabolic, and neuropsychiatric diseases occur more frequently than expected. This finding indicates a need to investigate the possible role of these clinical profiles in the chain of events that lead to death in individuals who have contracted SARS-CoV-2.

The best thing about the vaccination drives is that these vaccines seem to be a good prophylactic, the worst aspect is that they reinforce the slippery slope towards authoritarianism that has taken hold of some of the world’s oldest democracies since 9/11. With the rise of authoritarian regimes and their apparent success in tackling the big issues that afflict people’s lives, the “free world” is succumbing to political polarization and inane debates.

It is high time to accept that the Cold War is not over yet. China and Russia are aggressively confronting our political system. If we continue to fall in the trap of accepting the efficacy of the lack of transparency of these primitive polities, we are doomed to fall into the abyss. While most in the West are more concerned today about domestic politics, we would be well advised not to give up seven centuries of halting, yet steady progress, in the development of just societies since humanism flourished during the Renaissance. Some western countries experimented with collectivistic political systems in the 1930s and 1940s with terrible outcomes for all.

It is one’s duty as a citizen to question authority and received wisdom. This is not heresy, as the rising wave of the cancel culture would like you to believe. The unquestioning mind is the source of the success of all evil. Nefariously, censorship is rampant and encouraged, not only by government but also by the other 50% on the other side of any contentious issue. The sooner we realize this is a dangerous path to take, the better for all.

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Good Governance as an Investment Strategy

Apple is the most valuable company in the world today. Had you invested $10,000 dollars in Apple’s stock when Forrest Gump was released on September 23 1994, you would be sitting on a cool $6.7MM. Had you waited to invest for the release of the IPhone on January 9 2007, you would still have $661k in your account. The same $10,000 investment made when Tim Cook was appointed interim CEO in January 2011 would be worth today $189k.

Apple’s board of directors has eight other members, all of whom are independent. Dr Art Levinson is the current Chairman. He is also the CEO of Calico, an Alphabet Inc. venture and is the former CEO of Genentech. Al Gore, the former US Senator and Vice President, is the longest serving board member with an 18-year tenure. Conversely, Monica Lozano, the CEO of College Futures, and Alex Gorsky, the Chairman of Johnson & Johnson, are very recent additions. The role of the board is clearly defined.

“Apple’s Board of Directors oversees the Chief Executive Officer and other senior management in the competent and ethical operation of Apple on a day-to-day basis and assures that the long-term interests of shareholders are being served. To satisfy the Board’s duties, directors are expected to take a proactive, focused approach to their positions, and set standards to ensure that Apple is committed to business success through the maintenance of high standards of responsibility and ethics.”

The board meets “only” four times a year, yet not all members are able to attend all meetings. The eight non-executive members serve on one or more of three committees: Audit, Compensation, and Nominating and Corporate Governance. Non-executive directors hold executive sessions without the presence of management, including the CEO, at least four times a year typically following regularly scheduled board meetings. Board members also regularly meet Apple Inc.’s stakeholders including employees. “Candidates are selected for their independence, character, demonstrated leadership, and relevant skills and experience, including financial literacy.” Although Apple’s board seeks diversity currently, only three members are female.

Apple’s board does not play a role in setting the company’s strategy or running the business. Those functions, as is usually the case with US corporations, are the purview of the company’s executives. The investor relations website displays prominently the top eighteen executives (five of whom are female). There are division heads such as World Wide Marketing, but also a Director of Greater China, and heads of corporate function such as general Counsel or Communications.

You would think that many companies, especially the perennial under-performers so abundant in the periphery of the EU and Emerging Markets, would study and implement such a successful governance model; you would be wrong. For many years now, friends have reprimanded us often for being too negative on these companies and their leaders.

While this is possibly the case, stock market performance is clearly not supportive of many strategies. ENEL, a utility, is Italy’s largest company by equity market value today. It was not public in 1994, but had you invested €10,000 at its IPO in September 1999, you would be sitting on €33,252. You would have made more money from a constant maturity fund invested in 10 year Italian Government Bonds.

Inditex is the parent company of Zara and Spain’s most valuable company. €10,000 invested at its IPO in 2001, would be worth today €144,138. Yet, while this 13.8% CAGR is a very decent long-term return, the stock has treaded water for the past five years.

Petrobras is the largest company in Brazil. $10,000 invested in 1994 are worth $53,480 today. Had you invested instead in Chevron, you would have $161,789, which is three times as much money, even though Chevron has “only” compounded at 10.7% in that period.

Samsung Electronics is the most valuable company in South Korea, and perhaps the closest comparable to Apple. This company has been tremendously successful in becoming one of the largest semiconductor manufacturers and in giving Apple a run for its money in the smart phone market, yet $10,000 invested in its stock in 1994 is worth just $504,974 today, which is 92%, less than an equal investment in Apple in that period.

Governance is a very important contributor to shareholder returns for better or for worse. Ferrari is the second most valuable company in Italy today. It was spun-off from FCA in 2016. This was one of many such distributions to first Fiat and subsequently FCA shareholders executed by Sergio Marchionne and supported by Fiat’s controlling shareholders.

The total value creation that ensued is complicated to calculate precisely but suffice to say that Fiat’s equity market value in September 1994 was €7,345MM. Since then shareholders have received 50% of Stellantis in a merger with Peugeot worth €28.2bn today, as well as a €5.5bn dividend prior to the completion of the merger in 2020. In 2016, FCA shareholders received 80% of Ferrari worth €37.9bn today. Over the years, they also received Fiat Industrial in a 2010 spin off, as well as stakes in Faurecia, Il Corriero de la Sera (a newspaper publisher), and Editoriale (a publishing house).

In 2004, Mr Marchionne accepted the CEO position in an asset rich and cash flow poor industrial conglomerate. With a deft hand for simplifying an unwieldy industrial conglomerate, assisted by the luck that often accompanies the bold in the case of the Chrysler merger, lots of Hutzpah, and the support of the board, he returned the Agnelli family to the ranks of the seriously wealthy. Their 52% stake in Exor N.V., a listed Dutch holding company through which they own their stakes in Stellantis, Ferrari, Partner Re, CNH Industrial, Juventus FC, the Economist, and Grupo Editoriale is worth nearly €10bn today. Quite a few companies would benefit from such vision from its controlling shareholders.

Just as was the case in January 2021, there is a very big rotation underway from the Growth to the Value factors. Perhaps some underperforming management teams and the boards that oversee their function will get a respite as a result. Nevertheless, we are of the opinion that many of these companies’ shareholders will benefit from changes in strategy and in some cases in management. There is a very large opportunity to redress the wrongs of three decades of poor decision-making and underperformance, but there needs to be a catalyst to get the ball rolling. We would like to help set that process in motion by opening up a constructive dialogue with management and independent board members. We have such a strategy in place in one of our investment vehicles.

It is not always fun nor comfortable to rattle the cage. Indeed, it may call for some changes in our personal lifestyle, as perhaps it will become uncomfortable for all involved to be sitting next to the targets of one of our campaigns at the golf club’s spike bar. We are fully cognisant that most of our efforts may be ignored, but we also believe that some people eventually do the right thing when it is shown to be in their best self-interest as well. In any case, we cannot hide our excitement and enthusiasm for this new venture. We are also grateful to the person who suggested we should make this strategy our focus.

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