Capital Returns Unveiled: The Double-Edged Sword of Successic

Good Morning Ladies and Gentlemen

”Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”

Deng Xiaoping

Entrepreneurs, organisations, and politicians often make significant errors during periods of notable success. Such advantageous phases can lead to complacency and overconfidence, which may obscure potential risks and foster an environment where critical decision-making processes are compromised. This phenomenon suggests that a heightened sense of achievement may inadvertently trigger detrimental decision-making practices, ultimately affecting the sustainability of any organisation’s success.

Capital Returns

The core theory of capital returns suggests that capital tends to flow toward businesses that generate high returns and retreat when returns fall below the cost of capital. This process is not static but cyclical and marked by continuous fluctuations. The influx of capital encourages new investments, which, over time, expand capacity within the sector and eventually cause a decline in returns. Conversely, when returns are low, capital exits, leading to a decrease in capacity. This reduction eventually paves the way for a rebound in profitability, which in turn attracts capital once again, restarting the cycle.

Periods of Pronounced Success

Reflecting on the introductory text and evaluating which companies are presently thriving and how they are likely to utilise the funds they receive, I cannot help but feel that, given the massive investments in AI, a few companies might be overstepping their bounds. Additionally, recalling our discussion on capital returns theory from the previous section, I conclude that we may wish to avoid companies that currently seem invincible and are at the height of their success. Conversely, there may be promising opportunities among companies undergoing challenging phases, experiencing declining margins, and in need of restructuring or streamlining their business operations, i.e., entities that may not yet be on the radar of analysts and asset managers. What is your point of view?

Food for Thought

With today’s quote, Deng Xiaoping once advised: to observe calmly; secure one’s position; manage affairs with composure; conceal one’s abilities and bide one’s time; excel at maintaining a low profile; and never to seek leadership. This philosophy wasn’t just rhetoric; it was the blueprint for China’s remarkable transformation. Under Deng’s steady hand, China shifted toward capitalism and, in doing so, lifted an astonishing 500 million people out of poverty.

Yet, this long-term, strategic vision stands in stark contrast to the short-term, reactive tactics often seen in countries that have already reached their peak. Where some leaders chase quick wins and make frequent course corrections, Deng’s approach was characterised by patience, discipline, and a relentless focus on the bigger picture.

But such a strategy is not without its price. The Chinese model’s success came at the cost of limited political participation; a reminder that every path to prosperity involves trade-offs. As always, there is no free lunch, Ladies and Gentlemen.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
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Mail: smk@incrementum.li