“The truth is that life is by nature harsh and competitive. No matter how much money or resources you have accumulated, someone will try to take them from you, or unexpected changes in the world will push you backward. These are not adverse circumstances but merely life as it is. [...]
Those who are not afraid of change or chaos; they embrace it by being as fluid as possible. They move with the flow of events and then gently channel them in the direction of their choice, exploiting the moment. Through their mind-set, they convert a negative (unexpected events) into a positive (an opportunity).”
50 Cent, The 50th Law
Those of us who had hoped for a quiet start during the first quarter of 2021 have to deal with a bitter disillusion. Oxytocin chemicals have been quickly replaced with Cortisol in our collective brains as the financial markets moved on to new pastures where the talk of the town is not the next recent hot company IPO but huge debt, rising bond yields, inflation, cryptocurrencies, NFT’s, an imploding highly leveraged hedge fund and the looming economic, military and technical challenge of China to the rest of the world.
All this while we scarcely had time to digest the severe impact the global pandemic has had on our personal and economic lives.
It should be clear to all of us that stories or narratives act like pandemics. Narratives can go viral, often with the help of a few super spreaders. Viral narratives influence our sentiments, and sentiment affects the mood of the financial markets with “optimism” going to “fear” in zero seconds flat. We know this very well from our many humbling experiences in the stock market. But we should not despair – change and fast-moving events are an integral part of our investment environment. We accept this as we also accept that we don’t control them. What we do control is our investment strategies and processes, and those remain unchanged.
For us, as investors, meaningful changes in interest rates are significant because they will impact (equity) valuations. It is clear that creating huge debt with newly printed money, together with vast government stimuli, must at one point have an economic consequence either in the form of lower currency values or in the form of higher inflation. Someone (we or future generations) will have to repay debt or take a haircut; it is just the way this works. Only higher productivity (output per hour worked) has a positive counter (deflationary) effect. We are under the impression that higher productivity is underestimated due to advances in work process flows, big data algorithms, robotization, and things like Zoom, DocuSign, Google Maps, and Work From Home (WFH). We believe the above have a substantial positive impact on productivity but are not measured in the traditional inflation baskets that track inflation.
However, lower currency values or inflation will lower buying power for products and services in the future. We can observe the consequences of that in the many corrected high-valuations in the stock market. For our qualitative portfolio, this means that some of the frothy valuations created during 2020 have been given back and might have corrected even too much. Currently, we see an opportunity to buy more of the same at lower prices since we are far from selling our positions and are even considering new investments for some clients. One of these is Farfetch. We look forward to observing the continued growth of the companies we selected over the next decade.
Our positive long-term expectations for our Chinese holdings remain the same. Some of our Chinese holdings, like Baidu and Tencent, were severely impacted by the blow-up of Archegos. This hedge fund used derivatives to build extravagant positions with colossal leverage and was squeezed into a margin call. Greed is definitely at the root of this blow-up, leading lenders to shut their eyes to the extreme risks involved. The fallout is fluid, and we surely have not heard the last of it. We think valuations in Baidu and Tencent will bounce back after the firestorm-selling is over, and maybe we even have a chance to increase our holdings slightly.
We understand that our growth path and increasing our purchasing power will not be a smooth line. There will undoubtedly be some painful moments where we have to travel through the valley of regrets. This imaginary place in our minds tells us, “we should have; we could have….”. However, the long run will prove us undoubtedly correct, as it has done so many times in the past. Unfortunately for us all, 50% corrections in stock values frequently happen, especially when high-growth companies are involved, which creates double the pain compared to the joy for a gain. Amazon’s stock went through three 50% corrections. Yet, its long-term growth trend remained intact through these corrections and is most likely far from over. Amazon’s stock price history is a valuable lesson not to sell too early. We are prepared for the ups and downs despite the rollercoaster emotions it produces, and we choose the long road home.
We see long runways for the companies we selected in our qualitative portfolio, and patience remains a substantial competitive advantage.
Independent stores of value like Gold and crypto-currencies, paired with the fear of inflation, are some of the reasons we see assets flowing into Bitcoin. This meaningful flow of assets by itself could become an issue for governments as they aim to keep control over capital flows and might be tempted to put a brake on alternative stores of value. Examples abound of government intervention in financial history. Therefore, a certain degree of caution is warranted. We have opted for a small position in Gold as our independent store of value, although we are fully aware that its value, just like Bitcoin, solely rests on investors’ sentiment.
We hope you, as our partners, are similarly optimistic about the long term. There are so many exciting new developments taking place. We imagine it to be like living in the Renaissance with numerous discoveries, social change, increased productivity, new belief systems, and sustained growth. Like during the Renaissance, controversy will be the norm, but ultimately progress will prevail. It always does. We think it is a great time to be a long-term investor.
A quick word on Brexit. Financial Services were not part of the Brexit deal with the European Union. We have been very busy and successfully transferred all EU-based clients from IB UK to IB Ireland. However, the Irish regulator has not allowed for the same exemption for Third-Party Advisors as we had in the UK. Consequently, we, i-Cthru Inc. (USA), are now in the final stages of setting up an i-Cthru subadvisor account with an advisor in the Netherlands to manage all our EU-based clients through IB Ireland. For those concerned, we will inform you in more detail shortly.
As always, we thank you for your trust in us. It is an enormous responsibility, and we will try our utmost best not to disappoint you. Be safe, be patient, salute our heroes, read good books, and be optimistic: it pays!