Month: February 2018

Dear Ladies and Gentlemen

I received quite a few mails and even calls from readers concerned about the recent drops in equity markets.

I truly understand people being worried.

It is never pleasant to see the value of one’s portfolio go down. However, unfortunately and as inconvenient as it may seem, it is all part of it, it is all part of being an investor. Markets move up and down and while it is a pleasant feeling to be an investor in an uptrend, it is rather annoying to be an investor when markets are going down. Therefore, you should adapt your investment strategy to your risk appetite.

I personally believe that if you are an equities investor investing in companies with solid business cases, producing regular net free cashflows being at least partially distributed to investors, you will be receiving dividends even if the underlying equities are down. Those dividends you may spend or reinvest and over time such equities will move up again.

I know, this is not a very sexy investment strategy, it is much cooler to find the next apple, amazon and Netflix but the chances to find them are very slim especially if you want to be among the first ones to discover them and the risk of having discovered a company with a great business case that will never make it is actually very high.

Now, two of my friends replied yesterday to my last weekly mail’s message on social proof, quoting the part where I mentioned “There may come a situation where a lot of people seek exit through a small door “. This certainly became reality during this very week, only, I wrote about it in connection with real estate investments and this week it happened mainly in all other markets.

Anyway, let us have a look at herd behaviour. I very much believe that heard behaviour is probably not the most profitable investment strategy. Investors employing a herd-mentality are forced to constantly buy and sell their investments following the latest investment ideas or market noises. You know, it is extremely difficult if not to say impossible to time trades correctly and to ensure entering a position right in the beginning of a trend.

I would even go as far as to say that when a “herd investor” gets to know about a trend, the trend will probably already have matured, and the strategy’s wealth-maximizing potential will possibly have already peaked, which would mean that herd following investors are late buyers and thus most probably late sellers, or in other words herd-following investors will likely be entering the game too late and lose money as those at the front of the investment crowd will already move on to the next investment opportunity.

Now, Ladies and Gentlemen, this is a very simplified way of explaining things, but I think if you take away from this weekly mail the idea of being loyal to your investment strategy without trying to time your investments too much and without being worried too much about what others are doing, over time your investment returns should be higher than by acting the other way around.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

Stefan M. Kremeth

Dear Ladies and Gentlemen

People tend to consider actions of others to reflect correct behaviour. This psychological and social phenomenon happens all the time and is known under the name of “social proof”. Social proof is believed to be particularly prominent in uncertain social situations, which means situations during which people are unable to determine an appropriate mode of behaviour. It is furthermore driven by the assumption that the surrounding people enjoy more knowledge about a given current situation.
One explanation for social proof is that thousands of years ago, when people were still hunting in groups to feed their families, at a given moment a risk could emerge (i.e. some dangerous animal was trying to attack the hunters). During such events it seemed less risky to act like the other hunting-cohort members (i.e. running away) than trying to find out what the real issue was, risking, ending up as a snack for the dangerous animal. The effects of such social influence can also be referred to as “herd behaviour”.

Now, Ladies and Gentlemen, why would I be writing about this?

The reason is that in the investment industry herd behaviour may lead to decisions that are either correct or mistaken and I have the impression that today we are in a situation where herd behaviour can be detected in the residential real estate business.
During the last years of decreasing interest rates, real estate investments were among the only investments that would yield positive investment returns. Not only were they generating rental income but because the hunt for yield was pushing asset prices (thus also prices for residential real estate) up, the valuation of residential real estate portfolios went up as well. For pension fund managers and very wealthy individuals this was what I would call a double yummy. Now, unfortunately this very special situation seems to be over soon. Yields are going up, slowly for the time being but still the direction is not pointing south anymore. Eventually this will have a negative influence on the valuation of residential real estate investments and if, like in some areas of Switzerland, excess capacity is building up, valuation may even get a real hit.
Furthermore, as soon as the large cohorts of baby boomers will hit retirement age, at least some pension funds will be forced to liquidate residential real estate investments in order to generate cash but who will buy such investments at a time when demographic change will lead to dissaving of pension schemes?
There may come a situation where a lot of people seek exit through a small door. You know what I mean, right?
This is not imminent you may say, and I think you are right, but I think it is worthwhile keeping it in mind when considering entering this field.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!