Vincent’s blog | Full Year 2018 Update

i-Cthru’s consolidated time weighted return for the Full Year 2018 is USD -12.6%; EUR -8.0%. This result is net of all trading costs, fees, dividend withholding tax for non-US clients and cost of protection of individual portfolio holdings.

Do you know Australopithecus? Well, she is maybe not in your Instagram family/ friend circle or on WhatsApp, but you should look her up because she is likely your cousin albeit a very distant one. Australopithecus is very important to us because she carried the gene SGRAP2, which increases the length and abilities of neurons in the brain. During the last 3.5 million years, SGRAP2 copied itself over and over into the next generations, growing our brains’ volume from 500 cubic centimeters (cc) to today’s average of about 1,400 cc. This is one of the most rapid changes seen by any evolutionary standard. This translates roughly to an average growth rate of one hundredth of a cc per generation i.e. every new generation has been, on average, 0.01 brainier than their parents (Dawkins Richard, The Blind Watchmaker).

So, we are getting smarter and tripled our brain volume. This is awesome news, but the process has been a very slow one compared to a lifetime and hardly noticeable as proven by every day’s headlines and financial markets’ volatility. Maybe we should all go to China and use new gene editing technologies to accelerate or even skip all the small steps of evolution in order to create a Super Homo Sapiens with XXXL brains and cut out any genes reported to be responsible for bad investment behavior while we are at it.

Oh well. I am getting ahead of myself. We are just reporting on one year of financial data and not 3 million years of evolution.

You see, there is something remarkable about genes, especially the ones that hardly mutate and survive copying without fault over millions of years. Good timeless genes in investing exist as well, albeit in the timeframe of evolution we are just at the stage of Australopithecus. We find copies of great genes (practices) in today’s investors from early legendary traders like Jesse Livermore, who inspired the 1923 book Reminiscences of a Stock Operator, to John M. Keynes, a brilliant economist who made a fortune as an investor, but also to Benjamin Graham, the father of value investing (The Intelligent Investor). Investors like Stan Druckenmiller, James Simons, Warren Buffett, Charlie Munger and Ray Dalio have all copied best practices from these former legends and are now legends in their own right. Good investment genes seem to be spreading and now live also in many algorithms, like the ones we use at i-Cthru. This competition pushes us to always check and improve our thinking but like evolution you have to let time and compounding do its work. The results will follow.

Our brain’s volume may not change in three months, but it surely feels like a lot is changing in the financial markets and the world at large. The amount of data our brains process on a daily basis is ridiculous. There is no way we can, with just 1,400 cc of brain volume, make sense of all the things we read and hear without filtering out the noise and look for true signals that may indicate an important fact or trend.

So, let’s focus on what we think are two important signals we picked up:

  1. Remember 2008, when we all ran for the hills on the back of a colossal mortgage backed credit crisis with the S&P500 initially falling 30% before drawing down a whopping 60%. In order to not let the total financial system fail, the Federal Reserve (FED) increased liquidity dramatically and slashed interest rates to 0%. Over the course of 9 years the FED increased its balance sheet from $800B to $4.4T, thus creating $3.6T in extra liquidity.

The financial markets love 0% rates and extra liquidity. All assets, emerging markets, housing, corporate debt and discretionary consumer spending increased in value because of this. The S&P500 rose some 200% from February 2009 to its highest point in September 2018. But, last November the FED reversed quantitative easing into quantitative tightening. This December, quantitative tightening already reached Terminal Velocity, the maximum allowed monthly $50B balance sheet reduction.

This substantial tightening of liquidity plus higher interest rates has already started to impact dollar-denominated assets and dollar credit globally. In the future, not only will there be less credit available but it will also become more expensive to service (higher rates), taking away free cash flow and discretionary income from companies and consumers.

  1. We picked up the second signal from individual companies, which are highly sensitive to global trade as well as consumers’ discretionary income and are part of these sectors: housing, automotive, retail, entertainment, logistics and semi-conductors. Many companies in these sectors have already lost 40% of their value in 2018 and this might signal a significant downturn in discretionary spending in 2019.

The markets remain fluid and bi-polar by definition and we keep an open mind as to changes in the signals we read. At i-Cthru, we drive carefully through the sharp bends and rather err on the side of caution, especially when we get signals like the ones we think we see.

2018 was a tough year for us with exposure to China and Facebook as two investments, which significantly hurt our performance. Headwind will likely be against us and accordingly, we already adjusted our clients’ cash positions. Capital preservation is paramount, but at the same time, we are confident that we will continue to find great companies to invest in. Over the long term the current high and lows are just mere ripples, so we keep our focus on improving our investment genes for the long term.

Thank you for your trust and we wish you a super healthy and happy New Year!