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Excerpt 2021 semi-annual letter

“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.” [George Soros]

The wild and erratic market swings we saw last year carried over into the first half of 2021. In just 15 months, we saw one of the fastest and most severe market crashes in history followed by a breathtaking rally in technology stocks that came to an abrupt halt in February, a boom and bust of blank-check companies, many record-breaking initial public offerings, a boom and (somewhat of) a bust of crypto-currencies, a rally of small caps and traditional industries, as well as a historic social media-driven short squeeze that threatened the stability of the banking system.

The driving force behind all of this is a global liquidity bubble caused by massive liquidity injections and zero percent interest rates, which inflates first one corner of the market, then the next. While the enormous pull of central banks’ purchases has weakened, markets continue to be propped up by fiscal and monetary intervention.

Given the wild and exuberant environment, there is no shortage of doomsayers warning of the next crash, and they have found large audiences. But how can markets crash on a broad basis if central banks act as the largest buyers in the market? Is it possible that equities are still attractively priced, given the structural dependency on continued support to prevent the collapse of political unions, governments, pension funds and financial institutions?

Thankfully, Western governments are finally directing an increasing share of printed money into infrastructure projects, education and scientific advances. This will help build the foundation for growth and a greener future. I certainly hope for more visionary government investment into real assets. Employing people and thus training and occupying them in value-creating professions such as engineering helps strengthen our economies and unite rather than further divide.

An interesting outcome of the crisis is that many companies and individuals will emerge stronger due to government support, even though they suffered tremendously. Generous furlough payments allowed consumers to pay down debt and accumulate savings. These, along with zero percent interest rates and generous subsidies, allowed many companies not just to survive but also to clean house. For example, United Airlines, a carrier with an aged fleet, was able to order hundreds of new airplanes at very favorable terms, financed with cheap credit not available before the crisis. I have seen many companies use the opportunity to close pension deficits, cut fat, and catch up on neglected capital expenditure. Here is a warning, though. The flood of cash has lifted the market in very undifferentiated ways. As the old saying goes: “A rising tide lifts all boats.” Many companies will emerge from the crisis with record loads of debt and/or record valuations. This leaves them vulnerable to higher interest rates and a cooling of the markets. While most stocks appear to be winners now, it may not stay that way, as the recent spate of sector boom-and-busts has shown. Indeed, we are facing a very uneven recovery and some sectors were still struggling badly at the time of writing, so it is important to remain vigilant. And in case FOMO (fear of missing out) is troubling you: always remember that although friends tell you about their winners, you do not often hear about their losers.

As I am writing this, about half the adult population of the Western world is fully vaccinated against Covid-19, a great accomplishment that certainly exceeded my expectations, considering the botched start of the inoculation campaign in many countries. Our health care systems are far from being overstretched. Yet fear remains widespread, and property and freedom rights remain severely restricted in many places.

In other parts of the world, the story is different. Some countries that managed to restrict the spread of the virus early on are now slow to vaccinate their people, while vaccines used widely in Asia and Latin America turned out to be somewhat ineffective. In many emerging countries, the virus is still spreading unhindered, but in some, the surge has begun to taper off. The devastating second wave in India is receding – not because of vaccinations or social distancing measures, but because the virus has ripped its way through a significant share of the population. Given strong anecdotal evidence, the official numbers seem to vastly understate the massive toll of the second wave. I also assume that the number of recovered (and therefore naturally immune) people in Latin America and Africa are much higher than official numbers suggest.

As a society, we need to realize that Covid-19 will never fully go away, given the nature of the beast. We need to learn to live with it and take a holistic view when fighting it. We cannot ignore the cost (health, social and economic) to shutting schools and businesses for months at a stretch.

There will probably be further waves amongst those not vaccinated and those vaccinated with less effective vaccines. Eventually, we will see the emergence of mutations where even today’s highly effective mRNA vaccines lose potency. Thankfully, mRNA vaccines can easily be adjusted to combat future alterations of the virus. We now have sufficient production capacity and processes in place to protect the world’s citizens against harmful variants if need be. And, as a freedom-embracing society, we may also need to accept that not everybody is willing to get vaccinated - at his or her own personal risk. If hospitalizations are at acceptable levels (and any such number must be larger than 0), there should be no reason to extend overly restrictive and undifferentiated emergency measures for whole countries and populations. Singapore and the United Kingdom are two countries that have announced they will treat Covid-19 like any other endemic disease from July onwards.

The last year has certainly shown the best and worst of us. As a society, we cared, we learned, we improvised, and we supported each other in our shared suffering. It is astonishing what humanity is capable of when there is an urgent need and willingness to act. But we also witnessed a wave of panic, followed by a frantic research mission that gave rise to many unexpected plot twists and some absurd but widely accepted conspiracy theories, material curtailment of constitutional rights, followed by a wave of collective fatigue and depression caused by it all.

One thing that certainly worries me is the increasing polarization of society. We are drifting into a world of black-and-white thought where a few loud and very aggressive headlines dictate opinions and policies, driven by the vicious echo-chamber of social media and the constant bombardment with clickbait. Economic and social uncertainty in a changing world give rise to fear and anxiety, leading people to unload responsibility by demanding authoritative actions and blaming others for their own suffering. Frustration caused by unfulfilled high expectations of what life should offer, raised by the ever-glamorous world of social media, may play a role as well. In any case, it has certainly become difficult to have a deep, differentiated, and nuanced public discussion; common sense is often drowned out by those that scream the loudest or with the greatest confidence, who increasingly dictate mainstream thought, shaping public policy in an autocratic way.

As the world is getting more entrenched in set opinions, we should strive to revive old virtues: the quest for truth and rationality, and the openness to change one’s mind. Nowadays, there is a lot of prestige around sticking to your guns. If we change our views, we risk looking weak, indecisive, and lacking in character. But seeing how complex the world is and how imperfect our fragile minds are, it is very unlikely that all our current convictions are right. This suggests that we should learn to be open to, and tolerant towards, the option of changing our minds.

George Soros found success where others failed by remaining acutely aware of his own fallibility. As he said: “On every trade, every project, every advice – know that you are likely to be wrong. Try to find people with the opposite view and try to think about how you could be wrong.” We should beware the narrative fallacy. By blindly following compelling stories, or those put forward in a forceful and confident way, we risk believing the story more than the data.

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