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  De Beers’ success depends upon its using the diamonds it has purchased as the collateral behind its bank loans. The banks, however, are waking up to this stupendous scam. Cautiously, they are wondering if they can tiptoe out the door before their peers also wake up and the exit becomes crowded.

  Perhaps the end is closer than we expect. At this writing De Beers refuses to send annual reports to potential U.S. investors, in an apparent attempt to keep its situation under wraps.

  My advice? Sell diamonds and buy emeralds, rubies, and sapphires.

  A factor complicating South Africa’s relationship with the world is the international media’s fascination with its problems. Journalists seem more excited by violence than anything else. The media are hungrily waiting for South Africa to blow up, to give them a terrific story. What is unfortunate is that the media does not undertake any sort of detailed analysis of the issues. The blow-ups with the dictatorships in Zaire or Uganda were reported as flash fires and the media moved on. However, the media have their way with South Africa, refusing to acknowledge that they are a part of the problem.

  This notion became clear to me when we visited Leon Louw, a white South African who ran his own political and economic think tank. He had analyzed the factors that had led South Africa into its present situation in a series of brilliant articles and best-selling books.

  His books point out that apartheid should be dismantled because it is a horrible distortion of the marketplace, hurting whites as much as blacks. He had set aside moral arguments in favor of economic ones. He looked at the reality and practicality of the situation and said, “Of course apartheid’s immoral, but even if it’s not a moral question for you, if you just want to be richer or face reality, this is ruining our country. It will lead to war, rebellion, and a host of other problems.”

  Louw was selling white South Africans on the fact that they would be better off if they didn’t have apartheid. In the West we think of South Africa as a land of black and white conflicts, of which it has plenty, but it also has a multiplicity of political parties and interests producing far more than bipolar racial conflicts.

  Normally, Tabitha and I didn’t look up people like Leon Louw, because we wanted our trip to be serendipitous, to encounter only the people we bumped into. However, South Africa was so interesting and we knew so little about it that this time we made an exception.

  His think tank was in a big old home he had converted into an institute. Naturally, the house, like every large house in Johannesburg, was behind gates and walls. Because of civil war, robbers, whatever, there were walls everywhere, with electronics and all sorts of modern security. Jo’burg was a walled city with walled homes.

  In the conference room we described our trip.

  He said, “God, why aren’t I doing this? As much as I like what I’m doing, why aren’t I traveling with you?”

  Louw struck me as a committed, smart, and perceptive guy, the kind who noticed the true nature of the emperor’s new clothes. He saw clearly what had caused his country’s problems. I felt enormous rapport with him.

  As an illustration of what South African blacks could do, he described the local public-transportation system. Twenty years before, the government had had a monopoly on public transportation, fielding battered buses that didn’t serve the population well. A system of gypsy cabs, minivans, and buses had sprung up. Since these gypsy drivers hadn’t been allowed to use the government’s bus stops, they’d employed a system of hand signals. Riders in the street would signal where they wanted to go, and drivers would respond with their hand signal, “No, I’m not going that way,” or “This is the South Square bus.”

  This spontaneous system had worked so well that over time the government had been forced out of the public-transportation business. Now the private Johannesburg system is superb. Here is a classic case of customers and entrepreneurs meeting each others’ needs—over the objections of their common enemy, government regulations established “for their own good.”

  Louw and I both agreed philosophically that if we could get the government out of most activities, as in his transportation story, everybody would be better off. He had also demonstrated in his writings that the blacks in South Africa were historically far better farmers than the whites. This had been one reason why the land had been taken away from them. Apartheid originated at least partially from economic interests.

  It’s hard to believe, but codified apartheid—another example of economic difficulties leading to ethnic strife—has existed only about forty-six years. When South Africa was having economic problems after World War II, the politicians had decided to save the economy and themselves with a lot of new regulations, licenses, and requirements—a way to protect some businesses. The blacks had suffered the most in the end. The morass became more complicated as ever more racially divisive laws had been enacted to prop up the entire rickety, jury-rigged concoction. It was another example of statism, one that had taken on a life of its own as a racist policy.

  An international investor is forced to consider South Africa. It is such a marvelous country, chock-a-block full of commodities, with gigantic resources, huge assets, a wonderful climate, a big population, a large market, and a great infrastructure. In every way, South Africa is the California of Africa, in terms of geography, weather, size, variety, and potential. It not only has mountains and ocean frontage, it has amazing flowers, birds, and animals.

  I asked Leon what was the future of his homeland.

  His view was that apartheid was now crumbling under its own weight. Its restrictions on the economy had become so strangling that South Africans would have to start over. This meant, of course, that they would have to get rid of apartheid, because most of the country’s regulations flowed out of solving the problem of how the whites could control competition, preserve their positions, and become prosperous at the expense of the blacks.

  A big problem here was the African Nationalist Congress, Nelson Mandela’s party. Mandela’s heir apparent in the ANC was about forty years old and a Communist. In the days when it was Communism versus capitalism, the ANC naturally had chosen the Communist side. After all, the colonialists had all been capitalists, and nobody wanted to agree with them on anything. The ANC still embraced the passé, old-time left-wing mentality, which, though it hadn’t kept up with the world, still ran the party. When Mandela died or lost power, the younger people would take over.

  Many people in South Africa, especially the blacks, were of the radicalized, we-are-owed mentality, just as they were in other African countries that had become liberated: “You’ve stolen from us for three hundred years. Therefore, we’re owed. We’re going to take everything away from you.”

  Though not without justification, this attitude had destroyed economic development and spoiled these countries for everyone. Should the ANC come to power, its left-wing “reforms” would possibly set South Africa back a decade.

  My view is that the country might have to go through a period of wild money printing, taxes, and deficits before a sensible investor should invest there. There might be more racial strife and civil unrest. The height of that unrest, however, when every other investor is fleeing the country, might be the time to buy South Africa’s currency, the rand. Assuming the ANC wouldn’t have gone to complete statism, this could be the currency’s low point for decades.

  Leon’s view was more optimistic, and his could be right. He felt that one day Mandela’s ANC would win the South African election, that eventually many whites and most of the blacks would vote for him. Leon figured the ANC would be in power for a single term of four or five years, depending on how the constitution was set up.

  The ANC would be the rough political equivalent of the U.S. Democrats or Britain’s Labour Party. After this single term, because of the ANC’s international noncompetitiveness, the South African equivalent of the Republicans would win the next election. Politics would settle down and economic progress would reaccelerate.

  Not that
the “Republicans” worldwide have all the answers. They don’t. The two-party system leads to a rotation between the left and right wings of society, which tends to establish the stability that is the best environment in which to invest.

  When I reminded him of post-war Africa’s “one man, one vote, once” tradition, he responded that the world press would never let South Africa go the way of the myriad northern examples, such as Zaire, Kenya, and Zambia. I wasn’t so sure the rest of the world had that much say in the matter. Even if it did, there was still the unresolved threat of tribal civil war.

  While I was fascinated by South Africa and its possibilities—who wouldn’t want to invest in the Germany or California of Africa on the ground floor?—the best thing I could do was to wait until I was convinced of the nature of the coming change.

  An investor is better off doing nothing until he sees money in the corner just waiting to be picked up. One of the biggest mistakes most investors make is believing they’ve always got to be doing something, investing their idle cash. In fact, the worst thing that happens to many investors is to make big money on an investment. They are so flushed, excited, and triumphant that they say to themselves, “Okay, now let me find another one!”

  They should simply put their money in the bank and wait patiently for the next sure thing, but they jump right back in. Hubris! The trick in investing is not to lose money. That’s the most important thing. If you compound your money at 9 percent a year, you’re better off than investors whose results jump up and down, who have some great years and horrible losses in others. The losses will kill you. They ruin your compounding rate, and compounding is the magic of investing.

  In Johannesburg we stayed with an old college friend and his wife, Humphry and Serenity Mullard. This was again an exception to our rule of not looking up old acquaintances, but I hadn’t seen enough of him over the previous twenty-five years and I couldn’t pass up the opportunity.

  A white South African, Humphry had become involved, on his return to his homeland, with Serenity, a black woman twenty years his junior. The two had lived together at a time when he could go to jail for the rest of his life for the crime of “cohabitation.” At Oxford, and even when he was president of the student body at his own South African university, he had been anti-apartheid. For years he and Serenity had lived together in a white neighborhood in Johannesburg, fifty yards from a police station. In South Africa, he said, there was much more interracial dating than the rest of the world imagined. Now they were married, with a son.

  Serenity was a teacher in Alexandra, the hottest township in terms of violence, struggle, and bloodshed. Tabitha and I went to see what her school was like. Outside, the children played marbles on the well-swept earth, reminding me of my days shooting marbles back in the third and fourth grades. Older boys played soccer the way we’d played baseball and football. The teenagers, however, didn’t appear as lively but seemed more withdrawn than we had been.

  Her classroom had about forty desks, each jammed against the other. Her classes held seventy to seventy-five students, which meant only forty had desks. The rest stood, milled around, or didn’t come to school. All the windows were broken out. Fortunately, the weather was good here, so that didn’t present a great problem.

  She taught the fourth grade. Her class brought back memories of my grammar school days in Alabama. Back then, we constantly made posters and put pictures on the walls. In Alabama in the fifties, there were atlases, charts, and other teaching aids pertinent to the work.

  Not here. If Serenity wanted chalk, she had to buy her own, as there was no budget for supplies. Here there was no bulletin board, no pictures, and no charts. The paint was peeling, and she had no books.

  She took us to the school library, and we were shocked it was called one. While it was the size of three classrooms, its metal shelves were almost empty, displaying only a handful of books. Its only magazines were Africa Today, a periodical from the Zulus, and another from the ANC local. We saw no other African periodicals and certainly no foreign periodicals. One atlas and one encyclopedia, both old and tattered, lay on the shelves. Once there had been more, but they had been ruined either by usage and age or stolen.

  We were introduced as visitors from New York. The personnel and teachers struck me as dispirited, even numb, which was not surprising. It was a hopeless situation. The school had three thousand or four thousand students, a few hundred books, seventy-five people in classrooms with forty desks, and no materials. Earlier in the week three or four students had been killed in riots, which certainly contributed to making the school unsettled and uneasy.

  As we moved through this depressing school, I thought a lot about teachers, how many good ones there were. They don’t earn much money and often not much respect; they still go in and teach every day. Many of the teachers who had helped me had taught their hearts out. Despite the backwardness of parts of Alabama in those days, they had believed in teaching and loved it. They had wanted everyone to learn. And I had learned an enormous amount from them, even though when I got to Yale I hadn’t thought I’d learned much, and probably I hadn’t compared with someone from Hotchkiss. My teachers had insisted we master such basics as the multiplication tables and the rules of English grammar.

  Serenity’s colleagues also wanted the kids to learn. They went in every day determined to teach the children something, knowing many students didn’t want to learn, that the conditions were overwhelming, that it was a hopeless situation. Even if these students did learn something, their future wasn’t bright. We were awed by Serenity’s courage, that with no resources, no materials, and very little support from her school district, she, too, came to class every day determined to make that day work.

  …

  At last we drove into Cape Town.

  We had now made it from the top to the bottom of the African continent—five thousand miles as the crow flies—and covered almost eleven thousand miles. The trip had been a sensory feast, everything from the Sahara’s windswept moonscapes to the lush richness of Zaire’s rain forests.

  Cape Town was such a beautiful modern city that we understood what a frontier Botswana still was. Even though South Africa was the most prosperous and well-developed country in Africa, I still had the strong sense that if Mandela’s African National Congress gained power the country would go the way of old Argentina after Perónism ruined it. It was a shame, but so many blacks obviously felt it was their turn to get something back that they wouldn’t be looking toward long-term economic development. As an investor, what worried me about Africa was that if South Africa didn’t turn out well, the entire continent could become Zaire.

  This was a country with a wonderful climate, lots of technical knowledge, good workers, and great opportunities. Nigeria, because of its natural resources, principally oil, once could have been the continent’s economic engine. As a result of economic mismanagement, which had led to a resurgence of ethnic and religious pride, it was likely to split into two or three countries before its political problems were over. No country other than South Africa had the infrastructure, the heritage, the collective memory, and the capital base to be the engine of the African continent’s growth.

  As roads went, we could have been in Kansas, we could have been in Europe. The phones worked. There was gas everywhere, and restaurants, hotels, hardware stores, and all the other amenities of modern life. Thus, South Africa had a leg up on China, which needed more infrastructure. We hadn’t seen many vehicles in China, and in its western half, roads hardly existed; but South Africa had roads, highways, telephone lines, electricity, and an adequate water system.

  All this infrastructure existed because Cecil Rhodes and a few other fellows had stumbled upon diamonds and gold. If these fellows had stumbled on diamonds and gold in such profusion in Zaire, Zaire would have become an economic powerhouse. It wasn’t just that Cecil Rhodes had exploited the blacks. He and his crew did, of course—they used cheap labor whenever they could. The real point was th
at the discovery of diamonds and gold forced capitalism to put in an infrastructure in order to get its profits out. This brought South Africa prosperity and gave it a base on which to build.

  People forget that back in our nineteenth century it was hard-bitten capitalists like Commodore Vanderbilt and Jay Gould who not only became fabulously wealthy by laying railroad track but also built the infrastructure enabling America to make gigantic economic leaps. Cecil Rhodes did the same thing in South Africa. As another example of capitalism aiding infrastructure, remember that wonderful paved road back in Niger as we came out of the Sahara? The reason it existed was because it was needed by a local uranium mine.

  In Third World countries—in fact, everywhere—there is no better way to develop an infrastructure. If there are profits, somebody will put down roads and telephone lines.

  No politically correct way exists to lay down an infrastructure. Many of us would like to think bureaucrats from the World Bank can sweep into a country and figure out precisely what needs to be built in order to have that country develop successfully. Unfortunately, their projects tend not to be located in the right place economically. Often these bureaucrats will build a bridge over a river, but unless there’s some potential economic activity to exploit that bridge, it will not raise the region’s prosperity. Running water may be brought to a village because it’s good for the people, but that doesn’t necessarily lead to prosperity. The place to put roads, telegraph lines, and water systems is near beehives of economic activity—mines, factories, and cities built by entrepreneurs willing to risk their capital to take out profits.

  Is it likely a bureaucrat earning a secure seventy-five thousand dollars a year will make a better judgment of what will work economically than an entrepreneur about to risk his own money, reputation, and opportunity? I promise you the entrepreneur will give the question far more thought and will examine a hundred times more variables and problems than the bureaucrat will. The entrepreneur will make sure he can communicate with his investments, house his workers, and get his products out over a decent road.