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Excerpt 2020 annual letter


The steep market correction in February and early March was followed by a wild rally in technology stocks, record breaking IPOs, many recapitalizations of distressed businesses at very favorable terms, and eventually a rather undifferentiated rebound of traditional industries as well.

What caused the markets’ strong rally were massive liquidity injections by central banks and zero percent interest rates on a global basis. Added to this was the unleashed purchasing power of retail investors with cash on hand but no opportunities to spend it on travel and leisure. The words of the day are FOMO (fear of missing out) and TINA (there is no alternative).

In 2020, most developed economies saw monetary injections of more than 40% of GDP, with fiscal deficits exceeding 20% in many cases. It certainly does feel like the last dam of fiscal and monetary restraint has broken, and there is a real threat that those standing on the sidelines holding cash will lose out. In the end, money is a distribution mechanism: it resembles claim checks on society. If the number of checks in circulation increases without a corresponding increase in productivity, the barter value of each check loses value on a relative basis.

Experiencing a raging, casino-like bull market in an otherwise terrible economic environment is certainly something to behold. To give you a flavor: the five FAAMG stocks now have a value equal to almost all the publicly listed companies in Europe, and Tesla (0.6% of global output) is valued much higher than the top 10 automakers combined (80% of global output). Furloughed dads on government grants are sharing trading strategies. Young kids with just a few thousand dollars to spare and without any valuation experience are promoting widely followed “investment advice” on YouTube and TikTok.

Perhaps this is a good time to remember the dynamics of market cycles and the difference between investing and speculation. At the beginning of every bull market, valuations are based on conservative assumptions regarding companies’ future cash flows. Eventually, after a period of healthy returns, higher valuations are increasingly justified with growth prospects, compelling narratives, and hard-to-measure qualitative factors. Towards the peak, a stock’s narrative and a rosy-eyed look into the distant future become the only market drivers, and traditional valuation metrics are declared “dead”. Sadly, many otherwise rational professional managers are forced to ride the market’s exuberance to stay in business, thus fueling and lending credibility to irrational behavior. As Jeremy Grantham pointedly stated about this last stage: “Every career incentive in the financial industry and every fault of individual human psychology will work toward sucking investors in.” It is a state of self-reinforcing dynamics: exuberance drives performance, which attracts assets, which drives performance.


How long can the bullish market momentum last?

With zero percent interest rates and extremely inflationary policies around the world, markets may continue to rise higher and for longer than most rational minds may stand to bear or can afford. The momentum is very strong and reminiscent of 1999. In addition, a quick and successful vaccination rollout could lead to a strong recovery of the real economy in the second half of the year. Yet many economic sectors are bleeding badly as I am writing this and will likely struggle for years to come.

I consider it futile to make any market predictions. While there are many reasons to believe the rally will go on for longer, we should not forget that market corrections tend to occur when participants feel most complacent. As Warren Buffett stated: “speculation is most dangerous when it looks easiest.”

When bubbles pop, fortunes can be eradicated in no time. The art of speculative investing is to participate in the run up, without losing too much in the inevitable bear market that will follow. That said, history has shown time and again that even the most intelligent and shrewd market participants are very bad at calling the market’s top, i.e. knowing when to step out of the herd before the herd runs over the cliff’s edge. This is because whatever caused them to participate in a speculative frenzy makes it difficult for them to step out in time as well.

My way to invest in the current environment is to accept volatility and to selectively buy stakes of what I consider good businesses run by good people at reasonable valuations in any stage of the market cycle.


For the real economy, I hope for more visionary government investment into real assets, rather than endless rounds of untargeted “printing”. Employing people and thus training and occupying them would help strengthen our economies and help to unite rather than further divide.


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