Month: September 2020

It seems my last weekly mail “Double Standards” hit the nail on the head. I received many very positive feedbacks and exciting comments. One of them I would like to share with you: “people’s outrage is definitely selective, and the selectivity conveniently coincides with people’s preexisting political objectives. Stories attributed to anonymous (and, one often suspects, nonexistent) sources are also commonly used to justify political positions. The pressure to join one of two extreme sides and abandon individual thought is also very real”. Very well formulated, I am happy to say!

Today I would like to concentrate on what is called the theory of “mean reversion”.

In capital market theory, the term mean reversion is an extension of regression to the mean by negative autocorrelation to market price and volatility changes. This may sound a bit complicated, but it is not. In other words, the theory suggests that asset prices and historical returns eventually will revert to the long-run mean or average level of the entire dataset of an explicit asset and is thus focused on the reversion of only relatively extreme changes, as average growth or other fluctuations are an expected part of the paradigm.

The mean reversion theory is used as part of a statistical analysis of market conditions and can be part of an overall investment strategy. It applies well to the ideas of buying low and selling high, by hoping to identify abnormal activity that will, theoretically, revert to a regular pattern. The theory implies that markets tend to exaggerate and that they correct themselves over time not only randomly, but have a “memory” and reverse previous trends. (As some of you may notice, this theory is in contrast to the “market efficiency” hypothesis, a theory I will cover in my next weekly mail).

Therefore, an excessive increase in the price of an asset means that it must come down to more “normal” levels in the future and vice versa. The extreme case is speculative bubbles. The same applies to volatilities and sales volumes and mean reversion for series running into the future means that in the long run, yield rates and interest rates do not just fluctuate around a mean value, but virtually actively return to it.

Ladies and Gentlemen, to be frank, this is a theory and not a 100% bulletproof investment truth. However, I think it is always interesting to look at the long price-trend-lines of an asset and ask yourself why the current price is above or below such a long price-trend-line and if there may be in one way or another an exaggeration in the market, offering an investment opportunity for long-term investors. You know, this theory has led to many investment strategies that involve the purchase or sale of stocks or other securities whose recent performances have significantly differed from their historical averages. However, a change in such returns could also be a sign that a company no longer has the same prospects it once did, in which case it is less likely that mean reversion would occur, and therefore the theory could not be applied in every case. Percentage returns and prices are not the only measures considered in mean reverting; interest rates or even the price earnings ratio (P/E) of a company can be subject to this phenomenon.

Please feel free to share your ideas and thoughts with me, but please do not 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
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Sahra Wagenknecht, former parliamentary party leader of the Left Party in the Bundestag in Germany, warns against double standards in the debate about consequences for Russia after the poisoning of Kremlin critic Alexei Nawalny.

Wagenknecht explained to the “Neue Osnabrücker Zeitung” that anyone who demands an end to the Nord Stream 2 natural gas pipeline concerning Nawalny must evaluate all other raw material suppliers to Germany according to the same criteria and demand consequences there too. “Everything else is hypocrisy.

To poison an opposition politician with the nerve poison Novichok is a heinous crime, she said. “But even if the Kremlin should be responsible for it (for which there is no evidence so far), it is no more heinous than beheading or flogging opposition members to death, as is common practice in Saudi Arabia, from which we (i.e. Germany) obtain oil,” she said. “Nor is it any more heinous than tearing up innocent civilians with drones, as the United States, which supplies us (i.e. Germany) with its fracking gas, has done in well over a thousand cases.

Ladies and Gentlemen, I am by no means a left-wing political supporter, as I by no means a right-wing political supporter but instead I am usually trying to seek common sense, and what Ms. Wagenknecht states is common sense to me and shows political double standards with the example of Russia. One serious problem we face today comes about different views and different opinions, i.e. individual thinking and the sometimes non-acceptance of it. It almost seems, that we live in a time where individualism is less and less accepted, and that collective outrage hits everything and everyone oscillating away from the mainstream opinion.

Please let me know your thoughts.

Now, I receive many messages or questions to equities investments. You know, Ladies and Gentlemen, I am not allowed for regulatory reasons to give any advice in this formate, and as unbelievable as it may seem (and as inconvenient as it really is – especially to me and my clients), I simply am unable to foresee the future. However, I, of course, have my very own humble opinion and I think if as a long-term investor you hold a well-diversified portfolio based on equities and other investments that yield some cash flow stemming from dividends, interest payments, and the like, you may well have to accept volatility as the price for the cash flow you receive with your portfolio and in a 0% yield environment, the price for a positive cashflow yielding portfolio may even be slightly higher volatility.

However, a volatile portfolio is not, by definition, a bad portfolio. It depends on your very personal strategic target and your return expectations if you have to accept volatility as the price to pay for reaching your return targets long-term. Nevertheless, I do think only a small part of investors have the courage and knowledge to invest that way, and the general public would get too afraid to keep money in a portfolio going up and down and – unfortunately – most investors seek immediate gratification, and sadly enough this is not the way “investing” works.

Please feel free to share your ideas and thoughts with me, but please do not 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
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

I was asked to write an article on gold for the “Global Executive” magazine. The introductory part of the article reads like this:

“By August 21, the year to date price of gold had gone up a hefty 27%. While many other asset classes experienced difficult times, the gold price not only showed significant resistance against global concerns on political issues, trade disputes, an oil price crash, Brexit, Covid-19 pandemic, social unrest in the U.S. and other countries, and more but was able to show a substantial positive outperformance over many other asset classes. Gold usually moves upwards if investors fear any form of disruption. To mention only fear regarding the recent performance increase, however, would not do the price development justice, as various reasons lead to this price increase. In August 2018 one ounce of gold would cost slightly over USD 1’200. Today one ounce of gold costs almost USD 2’000. Over the same period, interest rates for U.S. government bonds have come down to almost 0%, which means the opportunity cost of holding gold versus U.S. government bonds practically disappeared. Furthermore, the interest differential between the USD currency region and the EUR currency region virtually disappeared as well and resulted in a weakening of the U.S. Dollar in relation to the Euro. A weaker U.S. Dollar, lower interest rates, speculation, a pandemic, political unrest in the U.S. and other countries, trade wars, massive global financial stimulus, fear of inflation, if not hyperinflation, and more, all of these are the main drivers for the current outperformance of gold.”

If you feel like reading more, please do not hesitate to click on the link below and enjoy the read:

https://www.incrementum.li/en/journal/the-outperformance-of-gold-a-possible-explanation-summer-2020/

And please, Ladies and Gentlemen, never forget what I have been mentioning on numerous occasions:

“We keep gold, we see some very particular and robust long-term positive features of holding gold, but just because we hold gold, we are not hoping for war, hyperinflation and the like.”

Please feel free to share your ideas and thoughts with me, but please do not 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
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li