Greed & Fear – Casual Conversation with John

Good Morning Ladies and Gentlemen

I sometimes get the impression that I am always reading/watching the same narratives. Now, I understand journalism is, by definition, cherry-picking. It reports on rare events, such as wars, epidemics or catastrophes, not on everyday life, i.e. peace, health and security. This tendency towards negativity is exacerbated because journalists fight for clicks and, as moral preachers, want to jolt their audience out of its complacency. The satirical magazine “The Onion” sneered: “CNN holds morning meetings to decide why viewers should panic all day long.” While this may seem funny, it is not; it is dangerous. Think about it.

Conversation with John

Anyway, the other day I had a long conversation with John, and I would like to share some of the thoughts that came up during our conversation. I will concentrate on John’s thoughts; they are much more interesting than mine.

Financial markets may fool participants (Stefan)

Many people make money in a bull trend in whatever asset class and believe it was because of their fantastic judgement. So if they feel happy about it, that is just fine. However, such situations may lead to sorrow once the market trend changes and the investment mood swings from greed to fear. There was so much hot air in the markets at the beginning of this year. Cashflows were unimportant; multiples did not count; the crazier, the better and the faster it went up. A correction was overdue; pitty that even quality companies lose a lot in such an environment. As long as asset managers stick to their investment principles and do not panic, I think they are fine.

Though experiences are necessary (John)

There is a saying that the youth is wasted on the young. Massive losses are how people gain investment wisdom. It is necessary to gain experience to understand that bull trends do not last forever, and neither do bear markets. Experience via direct exposure is the best teacher, not via arguments. A disciplined approach geared towards cash flows is more enduring, but that has limited appeal when new-era companies dominate the landscape.

Predicting the future (John)

The future is hard to predict, yet the Federal Reserve makes so many decisions that deconstruct economics and the future into math models. Words and numbers are insufficient to capture the rich reality we experience via our five senses.  Yikes on the Fed. So many unintended consequences can result, which lead to further variations in the future. My former boss said everyone is right in their prediction of the market. There will be bubbles, crashes, investment fads, cyclical phenomena, inflation, and deflation in a long enough time frame. Timeframes are important. Is one right if the gold bull market will occur 20 years down the line? One can say that he/she is correct every year for the next 20 years and will be proven right due to the fickle nature of markets. When people think of the future, they extrapolate the performance of the recent past. Observing history, most things are cyclical.

Next cycle’s winners (John)

Current cycle winners become the next cycle losers. Prior cycle losers become the following cycle winners. Having an understanding of cycles can make predictions of the future more accurate. Yet, the future is unwritten. However, the key to understanding the future is to understand the environment that the past has created. Unfortunately, too many people think linearly in a nonlinear world.
Did you ever notice how every cycle change needs to have a crash? It resets the allocation of capital and redoes the investment narrative. Trends in motion stay in motion until there is a break in the narrative. For example, a key to the start of a bull market cycle (a focus on arithmetic which is a reality play) is to figure out what industry has started to pay down debt, consolidate, and focus on profitability/dividends instead of dense growth. In contrast, the start of a bear market involves new entrants, loads of debt, and overproduction. Increased competition will threaten profitability (think of pot companies and electric cars).

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li
Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and above all and still, peace!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG – we love managing assets

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