Inertia

Dear Ladies and Gentlemen

Inertia is a tendency of doing nothing or remain unchanged. It can be synonymously used with words like inactivity, passivity or inaction. In most cases, inertia is terrible. We can find inertia everywhere also in the financial industry.

Inertia in the financial industry may lead to severely insufficient returns. I am very much convinced that increasing regulation favours inertia. Why may you ask? The reason is that regulation limits many participants in the financial industry and especially investment managers and analysts to speak out what they think is best. When investment managers, analysts or investment management firms risk their job or their license, they will tend not to do what they think is best for investors/clients but rather what is best to avoid complication with investors/clients or in other words they will do close to nothing and become inert. Today in any financial company, any new product and any new investment advice need to be checked by compliance and risk management before bringing it to the market. Not as you may think to prevent investors from losing money but to ensure that if an investor loses money, the investment manager, analyst or financial firm cannot be held reliable. In order not to risk any breach of the regulatory framework, potentially leading to sanctions, fines, etc. by the regulator, investment managers play it safe and do not act even if they would love to act.

Excessive regulation may lead to excessive risk aversion. However, in times of an adverse risk-free rate of return, negative interest rates on government bonds, positive return can only be achieved by embracing risk. My partner and old friend Dr Christian Schärer always says, there is no “good” or “bad” risk there is only well- or mispriced risk.

The concept of receiving return without taking a risk is unfortunately not available, especially not in a negative interest environment. It never really was available, even if the term “risk free return” in investment management theory is widely spread. The term is just a term and an essential pillar in theory itself, which the name suggests, is a theory. You know, Ladies and Gentlemen, in most periods over the past decades inflation was higher than the so-called risk-free (interest) return, which means in real terms investors would receive interest on their investment, true (and mostly be happy about it). However, they would give away more than that interest to inflation, without even noticing it and like this lose money (without noticing it) in real terms to the system, i.e. governments who were financing their debt, which in real terms became less and less. This happened mainly unnoticed by the general public.

Ladies and Gentlemen, I hope Brexit will lead to some deregulation of the U.K. financial industry, which then may affect other jurisdictions. This is a long shot, I am aware of that, but I am hopeful! Next week we will have a closer look at crude oil. I sense some misconception and am happy to share interesting information that was brought forward by my friend Robert.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li