Excerpt 2021 annual letter

“Maintain an army for a thousand days, use it for a moment.” [Chinese proverb]


When I started writing this letter, I wanted to talk about the long overdue crash of many overly hyped but poorly understood technology stocks, or the collapse of outrageous financial schemes such as the SPAC mania. For a while, companies with compelling narratives but little substance had seen a stratospheric rise while solid, highly cash generative and often strategic companies were bid down; now, I thought, the tide had finally turned.


But on February 24, the unimaginable happened and Vladimir Putin launched an unprovoked attack on Ukraine that quickly turned into the largest military conflict in Europe since World War II. In an equally unexpected move, Western nations countered the brutal and senseless aggression with unprecedented unity and harsh sanctions that crippled the Russian economy within days.


My heart is with the people of Ukraine and Russia, who have been dragged into a horrific conflict, and whose lives and livelihoods are being destroyed at an unimaginable scale while I am writing this.


The impact of the West’s unwinding from Russia should not be underestimated. Together, Russia and Ukraine supply up to 50% of Europe’s energy and metal needs, and account for 25% of global grain exports. Whether beer cans, glass bottles, car parts, semiconductor components or bread buns – without a steady supply of affordable Russian- and Ukrainian-sourced commodities, the world will struggle. Sharply higher fertilizer prices (essentially converted gas) will make food shortages even more acute.


Nobody knows how the situation will progress from here on, and anything I write about the road ahead would be outdated in a matter of hours. Instead, I want to share my thoughts on the portfolio in light of the war and ensuing sanctions, in the hope it gives you insight into the thinking of your capital’s steward.


Crisis assessment


The effectiveness of sanctions remains a hotly debated topic. Iran has been sanctioned for decades, yet its oil kept flowing, out of the public eye and without the intended effect on the sanctioned parties. Sadly, Western trade restrictions (including voluntary ones), while necessary, may turn out to be an economic and geopolitical shot in the foot if they are not waterproof and fail to trigger the desired outcome in due time.


Many commodities were excluded from the sanctions on Russia given their strategic importance to European (and, to a lesser extent, American) economies. Countries such as China, India and Turkey (a NATO member) continued to trade freely with Russia, now purchasing commodities at a steep discount to common benchmarks. On the other hand, numerous unsanctioned companies voluntarily stopped purchasing Russian commodities and shut down Russian subsidiaries given headline risk and financing issues caused by the sanctions.


Governments are trying to mitigate price rises with handouts, but risk escalating monetary problems. Particularly after Covid-spending excesses and rising inflation, overindebted governments should tighten fiscal and monetary supply, but can they, amid yet another crisis? Central banks and their governments walk a tightrope between running huge fiscal deficits to support consumers and industries on the one hand, and running up even higher deficits to respond to further inflationary pressures and finance extraordinary defense budgets on the other.


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