Category: Stefan’s Weekly

Michael J. Burry

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen
 
Michael J. Burry is an American, physician, investor, and hedge fund manager. He was founder of the hedge fund Scion Capital, which he ran from 2000 until 2008. Burry was one of the first investors to recognize and profit from the subprime mortgage crisis and became famous when he was portrayed in the biographical drama “the big short”.
 
Why would I dedicate my weekly mail to Michael J. Burry you may ask?
 
I got the idea when communicating with Robert, one of my regular readers after my last weekly mail on my personal investment style. The conversation went very much into the direction of the difficulties I am facing when managing my clients’ assets. Prior to the conversation with Robert I have had a similar conversation with David from Australia.
 
What I wrote to them was that the difficulty for me as a money manager is to see and recognise facts that make an investment an interesting one or a not so interesting one. This may seem obvious but with the amount of information available today, I still want to stress the fact that sometimes it is very hard to see the obvious because our mind gets distracted by market “noise” and headlines and maybe colleagues and/or a client who calls and tells me what he just had learned from a friend, etc.. Thus to recognise the obvious and if possible to recognise it ex ante, is not such an apparent thing. Also, and this is utterly important, it is vital not only to see the risks of an investment but potential chances of it as well. As you know, I am getting paid for investing my clients’ assets and for achieving positive results. Looking at the risk side for too long keeps me from seeing chances.
 
I try very hard to stick to my investment principles and to keep all the noise outside of my focus. I do not read investment-advise from banks and brokers and don’t go to their investment meetings. Most of my investment decisions I take on weekends, as I don’t want to be influenced by prices going up and down and I usually inform my partners during our weekly asset allocation meetings on Monday afternoon about my ideas, which I generally implement afterwards. In this respect I am rather focused and structured.
 
…and still, I do make mistakes and I am really not very good at timing the market. But the long-term results nevertheless are rather inspiring. My client’s portfolios show less volatility and better performance in the long run than any of the markets I am investing in. I am only able to capture a part of the gains on the upside (in average roughly 65%) but during difficult periods, downswings, etc. our portfolios are mainly very stable and, in the past, only lost roughly 15% – 35% of what the markets would lose.
 
You know, I think it is important to question one’s investment approach from time to time and make sure that one’s expertise (especially strong expertise) is not holding one back of seeing chances outside the field of expertise. Michael J. Burry was very successful with sticking to his principles and with seeking chances and exploiting opportunities. The mix was perfect at the time.
 
What is your opinion, Ladies and Gentlemen, I am asking you again, will we see a major market correction or soaring markets? Let me know about your investment style and please share your investment experiences with me and my readers, 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.

Kind regards
 
Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

“Die Nullzins Falle”

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Due to the Easter weekend I decided not to send out my weekly last Friday.

Now, today I would like to mention a book called “Die Nullzins Falle”. My partner Ronald P. Stöferle acted as one of the three co-authors of the book. As the title suggests “Die Nullzins Falle” describes the authors’ views on long-term socio-economic effects of the current ultra-low interest rates. The book takes on purpose a rather critical view and intends to elaborate on the riskier, more unpleasant, maybe even dangerous side of current monetary policies.

The book certainly makes an interesting read and it can be ordered in any online bookstore under the ISBN number: 978-3-95972-019-9.

These days I receive a fair number of messages and phone calls from private clients and investors. As we are approaching new highs in the markets one part of the people calling me or writing to me suggests a sudden market crash, while the other half is seeing even higher prices.

I simply don’t know where the markets are heading but I must admit I like taking profits and that is exactly what I am doing now. I sell bits and pieces here and there. I am selling small positions into the strength. Taking profits is a very satisfying thing to do and even if I may miss out on another up-move, I simply don’t care. Just to be clear, I am not liquidating any portfolio but am rather selling very small positions here and there and only into the strength.

While I am currently a net seller of equities, I am still a buyer of equities of companies that seem somewhat out of favour. However, even the companies I am currently considering as add-ons to the portfolios always have to be net free cash-flow positive and not suffering from any negative structural issues. Sticking to that rule I might have to wait a little until such companies’ equities will be traded up again at some time in the future but until then the positive cash-flows will deliver cash returns on capital invested.

What is your opinion, will we see a major market correction or soaring markets? Let me know about your investment style and please share your investment experiences with me and my readers, 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.
 
Kind regards,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Yield or how to receive cashflows in a negative yield environment

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

I received a few mails on my very provocative statement that house pets, farming and children produce an enormous amount of greenhouse gases. I was provocative on purpose. It was my intention to trigger some reactions.

I received two mails on the indirect financing of (nuclear) weapons via government bonds. It seemed most of my readers were never really looking at it that way. Fact is that you will never know what a government is doing with the money you pass on to them when subscribing to one of their bonds. They may buy weapons or build a children’s hospital with it – it is entirely up to them.

I generally receive several mails per month from readers asking me how they should invest their money to achieve the best possible results. As always, I can’t tell you and I am not allowed to give any advice to you just like that, but I am happy to elaborate quickly on what I think seems a decent strategy to still get some yield in a negative yield environment. You know, Ladies and Gentlemen, my goal always is to receive cashflow with limited volatility.

Some of my readers already know about my investment style. My investment style is real asset based and enjoys a rather large equity portion. However, the equity portion is limited to equities of companies producing positive net free cashflows and I like rebalancing the position in my clients’ portfolios from time to time.

This means I define a “normal” weighting, i.e. around 5% for any equity position in a portfolio and harvest the dividends or capital reductions the underlying company shares with its investors. If the price of an equities-position appreciates over time and thus the weighting within the client’s portfolio goes up, I will start cutting back the position down to its initial 5% weighting. If, however, the price of an investment goes down and I can’t find any dramatic change in the strategic and/or earnings perspective and the company still produces positive net free cashflows, I harvest the cashflows and increase the position until it reaches its intended weighting of 5%.

The result of this strategy is astonishing. Volatility decreases massively and performance increases.

When markets are moving up, we only capture a part of the positive performance, because we like to keep a large cash position at hand. But when markets are going down, we usually only lose a fraction of what the market loses. It is during the down moves that we generate alpha. You can have a look at the monthly development of one of our portfolios on our website.

https://www.incrementum.li/en/wealth-management/

It still needs the “right” equities and this is probably the most difficult part. Please let me know about your investment style and please share your investment experiences with me and my readers, 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.
 

Kind regards,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Environmental, Social and Governance (ESG) friendly (Part one)

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen
 
In last week’s part one on ESG investing, I shared some very basic information on ESG investments. Today I would like to point out some of the difficulties one faces when investing in ESG-friendly products. However, the short format of my weekly mail will not allow me to go into the topic very deep, but I am convinced I will make you reflect.
 
Let me start with an interesting and somewhat extreme example. Just imagine you were running a portfolio with an ESG-friendly touch and now just imagine for risk (volatility) reasons you were holding government bonds. No problem you may think, and most investors wouldn’t even think a second about that part of the portfolio. But it strikes me that even though most investment managers who offer ESG-friendly strategies would never invest in a weapons producing company, they are happy to give loans to countries spending enormous amounts of money on weapons of all sorts and sometimes even nuclear devices.
 
Ladies and Gentlemen, by buying government bonds and/or treasuries of the United States of America, Israel, the U.K., China, India, Pakistan, etc. investors are supporting the financing of weapons of mass destruction. The average investor does not think badly about it, I even think the average investor would not think about this at all and yet by buying government bonds and/or treasuries, investors are providing loans to governments, which the respective governments may use to buy and/or build weapons of mass destruction.
 
This is why I am of the opinion that if so called ESG-friendly products contain government bonds and/or treasuries and/or gilts or whatever one wants to call such papers, no truly ESG-friendly investor should touch such products.
 
You see my point, right? When investing in ESG-friendly products you have to be careful because sometimes you do not get what you expect. On the other hand the run on ESG-friendly products is important these days, especially as regulation forces investment managers in that direction. Trouble is, realistically there are simply not enough truly ESG-friendly investments available and therefore investment banks and financial product designers must become “creative”.
 
Anyhow, there is one more thing I want to add. Today everyone is fixed on CO2 emissions even if “greenhouse gases” in general are a much more important factor than CO2 emissions only. By now just about everyone should appreciate the fact that it is greenhouse gases we have to look at because greenhouse gases (GHGs) are absorbing infrared radiation and cause the so-called greenhouse effect. As you may know GHGs are both natural gases, such as carbon dioxide, water vapor, methane, and nitrous oxide, as well as human-made gases, including chloro- and hydro-fluorocarbons. Yet, it is very easy to blame a diesel car taxi driver for polluting our cities but let’s face it keeping for example a house pet for the sheer pleasure of keeping a house pet is probably even worse. According to the Humane Society of the United States, there are 86.4 million cats and 78.2 million dogs in homes around the U.S.. Just imagine, the enormous amount of greenhouse gases the global population of house pets is producing directly and indirectly.
 
Now tell me, why is the media not tackling this issue, why are they so concerned about fossil carburates but do not seem to be considering house pets, or children, farming, etc? I would almost assume, because you cannot win elections by telling the electorate to put to sleep their house pets and to stop reproducing, i.e. stop having children. It is much easier finding one weak opponent – today it’s the diesel car producers and drivers – and bang on their heads until everyone believes that producing diesel cars is the worst thing that ever happened to humanity.
 
What drives me crazy is that large masses of people can be irritated and thus manipulated so easily.
 
Ladies and Gentlemen, I urge you to ask questions, always. Do not just believe what the media and politicians want you to believe. The first ones have only one interest, to catch your attention for as long as possible, like this they can charge higher rates for adds and thus earn more money, the later ones only interest is either to be elected or to be re-elected. This is it! They don’t care about you, they either want your attention to make money or your vote to get power and make money.
 
As always, I encourage you to send me your feedback and/or questions 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.
Kind regards,
 
Yours truly,
 

Stefan M. Kremeth
Wealth Management
Incrementum AG

Environmental, Social and Governance friendly (Part one)

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Once every few weeks I receive messages by readers that ask me about Environmental, Social and Governance (ESG) friendly investments. I think it is about time to take up this topic.
 
This week, in part one, I would like to share some basic information and explain some of the terminology used in connection with ESG friendly investments. Next week I would like to offer my point of view on the difficulties arising when trying to choose ESG friendly investments.
 
Let’s start with ESG. ESG stands for Environmental, Social and Governance and defines certain standards used to screen investments.  You may have read or heard of the following terms, like SRI and/or CSR. SRI (Socially Responsible Investments). SRI basically covers as the name would suggest the field of socially responsible investing and looks for investments that are considered socially conscious because of the nature of the business the company conducts, while CSR (Corporate Social Responsibility) is a business model that may help companies be socially somewhat accountable to it its stakeholders and the general public.
 
When looking for an investment, one my come across the terms of “Impact Investing” and/or “Green Fund”. Impact investing aims to generate specific beneficial social or environmental effects in addition to financial gains and green funds should invest only in sustainable or socially conscious companies, avoiding the rest of the investment universe.
 
When looking at ESG investments, statistics on CO2 (carbon dioxide) emission are probably one of the most common denominators used to explain negative environmental effects. However, I prefer statistical data on so called “greenhouse gases” as such statistics offer a wider, more complete picture. The most commonly known greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide and ozone.
 
Ladies and Gentlemen the above basics are needed for my next weekly, which I promise will be somewhat more spicy.

As always, I encourage you to send me your feedback and/or questions 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.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Low inflation is going to stay for some time! Readers feedback

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

My last weekly mail on Japanese conditions in global government bond markets triggered a few messages by readers. Unfortunately the format of my weekly mail doesn’t allow me to publish all of the answers in full length but as usual I am very happy to include some of the ideas and comments I have received. In general everyone seemed to agree that there were no signs of higher bond yields, nor any sharp inflation increases on the horizon, at least not in advanced economies. My old friend Mark could even imagine negative inflation especially since he strongly believes that borrowing reduces future growth and I wouldn’t argue against that.

Anton added his believes of interest rates remaining under the manipulation of central banks for some time in the future, as to allow continuous debt servicing going forward. However, he sees at least two major issues with this. First artificially low interest rates are bad for efficient capital allocation (i.e. low interest rates in the US have incentivised corporates to lever up, do M&A and share buybacks at the expense of investment spending, including higher wages. Second artificially low interest rates benefit owners of financial assets at the expense of savers. Again, I wouldn’t argue against that.

You know, Ladies and Gentlemen, I am seriously troubled when other people’s ideas become “religion” and whenever this is the case, I think we need to be careful. Anton made an interesting statement in this respect. He mentioned that this is why he valued “so dearly the Enlightenment as a philosophical, theological and scientific movement because it liberated our civilisation from dogmatic thinking…now and again our society falls back into that rigid form of looking at things, but that’s the echo of the cyclical nature of human history…perhaps the future is brighter.” What a statement, I sure like that one and hope for my remaining life span to be long enough to live that bright future!

Last but not least I wanted to share a short statement by Robert, who pointed out to me an important fact in respect to the cash-flow strategies I am so fond of. Fact is that depending on where you are domiciled, cash-flows stemming from investments in financial assets are taxed in different ways and sometimes even in a “prohibitive manner” and thus taxes most probably will have a more or less negative impact on the strategy as such. This is certainly true. However, as I cannot possibly know all the different tax laws, I hope for your understanding.

As always, I encourage you to send me your feedback and/or questions 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.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Japanese conditions – low inflation is going to stay for some time!

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Japanese conditions in global government bond markets are more and more likely. But what does it mean for our investors with reference currency Euro or Swiss Francs, if Germany’s 10-year government bond yields 0% or almost 0%, Switzerland’s 10-year government bond even yields -0.75%. What does it mean, if central banks own large portions of their countries’ government bonds (the Bank of Japan owns 49% of Japanese government bonds, the European Central Bank owns 20% of European government bonds and the U.S. Federal Reserve System owns 13% of U.S. government bonds)?

The answer is not so trivial and since we do not have any long-lasting experience in this, we cannot really know where the situation is heading. One thing is certain though, as long as central banks are buying government bonds in the primary (direct at source) or secondary (at exchanges) markets at current or even increased rate, government bond markets will not become free markets (free in an economic sense) but stay manipulated. Manipulated may be a strong word for one or the other of you and I am not judging, but let’s face it if in any market of any product in the world one single buyer buys all the “leftovers” there will never be a fair price defined by offer and demand for that very product. In the case of government bonds one would assume that a country as over-indebted as Japan would have to pay much higher interest rates to sell their government bonds to investors than for example Germany a country running on a much, much lower debt to GDP ratio than Japan, only that this is not the case. The reason for this is central bank intervention.

Personally I believe Japan is indicating a direction in this respect as Japan is somewhat running ahead of us sitting here in Europe. Japan is running on low or ultra-low interest rates for decades already and Japan is in a situation of constantly increasing government debt levels that have reached roughly 250% of GDP. What we can learn from Japan and what we can expect to experience in Europe including Switzerland (at least partially and maybe to some lesser extent) is the following:

  • Debt to GDP ratios will rise.
  • Interest rates will stay low due to central bank interaction.
  • Government spending discipline is not going to increase.
  • Government bond markets stay manipulated by central bank interaction.
  • Government bond markets’ liquidity problem is going to stay due to central bank interaction.
  • Inflation will stay low.
  • Central bank status quo for decades.

This list is by all means not complete. But it shows why I believe there will not be either a quick fix or hyper-inflation anywhere soon.

Therefore, ask yourself if you really want to invest your money following an unlikely scenario? Because maybe it makes sense to invest in cashflow returning strategies and keep some precious metals for the ultimate worst-case scenario, no?

What is your opinion?

As always, I encourage you to send me your feedback and/or questions 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.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

A simple calculation

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

If you belong to the people who pay their bills primarily in Swiss Francs and/or Euros you belong to a rather large cohort of a few hundred million people living most probably somewhere on the European continent.

Today, I would like to show you with a simple calculation why I prefer equities over bonds.

If you keep your money as liquid and as safe as possible in a bank savings-account (hopefully with a bank offering some sort of government guarantee or at least a bank not getting involved in investment banking and/or corporate debt) or you have it invested in Swiss and/or German government bonds, you, Ladies and Gentlemen, will most probably receive 0% interest. Maybe you will even have to pay a small interest for depositing your money at the bank or for investing it in government bonds of short maturity and in any case, you will have to pay some small banking fees here and there on a regular basis.

This means, in the case of you wanting to invest your money in a Swiss and/or German government bond for 10 years because of its relatively low volatility, you will have to accept 0% interest or in other words no income whatsoever from such an investment and even worse, you will actually lose small bits and pieces of your money (fees) over the entire 10-year period. This truly means that at the end of a 10-year period you have less money than when you started and in real money terms, which means adjusted to purchasing power, you may have lost 10% – 20% due to inflation over that period.

To me this seems not a very attractive investment.

On the other hand, if you invest your money over 10 years in some solid listed company that pays regular annual dividends of 4.5%, thanks to the effect of compounding you will receive some 50% return over the same period. True, you will most probably have to accept higher volatility, but doesn’t the proposed return deliver an incentive high enough to accept such volatility?

Ladies and Gentlemen, to me it does!

Now, I know this is a very simplified calculation but both examples are real and possible in today’s market environment. Solid company delivering 4.5% dividend yield on one side and 0% 10-year government bond on the other side.

Think about it!

As always, I encourage you to send me your feedback and/or questions 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.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

What’s next?

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

I receive a fair number of messages asking about my view on the markets. As my regular readers all know, I still cannot foresee the future although I am trying hard but so far, I was totally unsuccessful.

However, if we take the core messages of my recent weekly mails about long-term investing into considerations and also what Mr. Andy Haeberli, Profond’s CIO, mentioned in last week’s interview, then – at least for me – there is not much room for investments outside the “real asset” bracket.

To make money with easy to understand, straight forward fixed income strategies seems difficult with current low interest rates. Either you accept elevated currency- or counterparty risks or you will not find decent yields on your fixed income investments. When it comes to real assets you may will have to accept higher volatility – as in equities and/or precious metals – but you get higher returns in the long run.

You may know, that we offer a cashflow based mandate for our private clients and while we cannot diversify those portfolio’s entire volatility away, we receive very decent cash returns on invested capital and interestingly enough, at least half of the companies whose equities we hold in those mandates, just announced dividend increases.

Now, Ladies and Gentlemen, what I want to say with this is, that if you are willing and capable of accepting volatility in your portfolio, you may appreciate rather stable cashflows on your invested capital and this should not to be neglected because the effect of compounding interests will help you to increase those cashflows even more (in theory exponentially) over time.

While I don’t know where markets or single investments are heading, I am confident that by following a strict investment process in seeking and harvesting positive cashflows, you may not get rich over night, but you will be able to steadily increase your capital over time.

There is no magic in this and crashes may occur at any moment. However most solid global companies keep paying stable dividends even during stock exchange crashes. This means if you do not have to sell a solid investment during a stock market crash and if you are patient enough to wait until stock markets recover, your loss potential is most probably going to be limited. However, it all comes down to picking the right stocks and this is hard work and involves a lot of research and number crunching.

As always, I encourage you to send me your feedback and/or questions 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.
Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Interview with Mr. Andreas Haeberli, CIO of Profond

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

As announced two weeks ago I was able to interview Mr. Andreas Haeberli, CIO of Profond Collective Foundation. Please find my questions with Andy’s answers for your convenience:

1) What is Profond’s investment goal?
We want to offer sustainably high benefits to our policy holders. When we invest, we therefore focus primarily on real values, i.e. equities and real estate. These asset classes enable us to generate above-average returns in the long term. With optimal diversification, we take risk parameters and financial stability into account.
2) What is your investment horizon?
Pension fund assets are invested over a very long period of around 60 years (40 years of gainful employment and around 20 years of pension entitlement). As a result, short- and medium-term financial markets fluctuations balance each other out well. Therefore, we are not influenced by short-term movements and short-term events in financial markets. We do not engage in any tactical investments or hedges. However, we generally hedge foreign currency risks for nominal values, real estate and infrastructure investments.
2) Where do you see the biggest challenge for a Swiss based pension fund manager today?
The current low level of interest rates presents major challenges to investors. Bonds are traded with a maturity yield of zero and negative interest must be paid on cash holdings. This leads to ever lower investment returns on investment funds. This low compound interest effect has a noticeable negative effect on fixed income investments in the long run.
3) hat are your favourite investments and why?
Long term, equities yield higher returns than bonds. This is shown, among other things, by a much-quoted study by Pictet. That is why we focus on equities and not on bonds. We also invest an above-average proportion in real estate. They are not directly dependent on stock market fluctuations and diversify our overall portfolio well. We also benefit from regular income (rental income). Thanks to these asset classes, we achieve a cash flow return of around 2.5% on the overall portfolio.
4) Are you working with consultants and if, why and if not, why not?
On a case-by-case basis, we draw on the knowledge of advisors in the selection of asset managers. We also call in pension fund experts for certain tasks. 
5) How are you investing your private money?

Basically, my private investment activity does not differ from my professional one. The only difference is that I invest a small part of my personal wealh on a short-term basis.

Many thanks, Andy, for your time and the insight!

As always, I encourage you to send me your feedback and/or questions 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.
Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG