Investing like Entrepreneurs

Good Morning Ladies and Gentlemen

Last week I did send you a quote from Burkhard Varnholt. The quote was, «Stamina is the hidden secret of successful long-term investors».

18% of Germans wear bicycle helmets

Investment Principle

I speak to investors a lot, which is what I appreciate most about my job. Because investors often show me different perspectives, which teaches me to respect their views and not underestimate their emotions, and quite frankly, they are forcing me to question our investment styles and stay reasonably humble. However, because complex systems (financial markets are complex systems) behave non-linearly, counterintuitively and are difficult to control, some investors tend to throw their initial investment principles overboard in situations of stress. This amazes me because it is far from being rational.

Psychology

Our brain resolves an inner contradiction by somehow convincing ourselves out of the unpleasant situation. This is a protective measure because we do not like to see ourselves as idiots. Nevertheless, this is unfortunately not always the best solution. For this reason, many smart people use coaches, consultants and investment advisors (yesssss, Ladies and Gentlemen like us), i.e. people they trust, people offering comfort and help during challenging moments.

91% of Germans use a protective cover for their mobile phone

Heads versus mobile phones

If 18% of Germans wear helmets while riding a bicycle but 91% of Germans use protection for their mobile phones, one could argue that mobile phones are more important to the German population than their brains. I know this is bold, but it also shows that people do not always behave rationally. I like to think of my partners and myself belonging to both cohorts, the ones wearing a helmet on the bicycle and seeking protection for their mobile phones. I am convinced many of the non-helmet-wearing cyclists would change their behaviour if they knew about this comparison. (By the way, the behaviour is probably the norm also in other Central European societies. As it happens, I just had the statistical data for Germany at hand).

Strategy; a piece of advice or two

Now, when you follow a strategy, especially if it is someone else’s strategy, i.e. your coaches‘, consultants‘ and investment advisors‘, ensure you thoroughly understand it. If markets move in the right direction and the strategy works, start questioning it (ex-ante), imagining a potential turn in the market and how your strategy would work long-term. If you feel uncomfortable with it after that, you may want to change it. Most people start questioning their investment strategy once the market has already moved against them for some time (ex-post). If you think about changing the strategy, once the market has moved against you, you have probably already paid the price. At that moment, you would rather have to think about a potential rebound; you may, of course, still want to ask yourself if your strategy is the right one to take advantage of a rebound.

Critical success factors

So what are the critical success factors, you may ask? There are probably many; however, at Incrementum, we only offer one type of mandate for our private clients. We are entirely geared to cashflows. You know, Ladies and Gentlemen, if you ask successful entrepreneurs and private investors about their secrets of success, they will all mention at some point that they look very closely at net free cashflows, which is precisely the principle we follow with our private clients. Short-term volatility is much less critical and scary if the portfolio yields regular cashflows that can be reinvested, regardless of the performance of the underlying stocks. Warren Buffett loves value and cashflows. This may be boring but very effective in the long run. Why would anyone choose a different strategy since it has proven to be successful for such a long time? Anyway, besides finding the right companies to invest in, investors must stay invested. Because If one is not invested, one is, of course, not subject to short-term volatility, but this comes at the price of not receiving any cashflows and not taking advantage of any potential price appreciation.

Yes, Ladies and Gentlemen, investing needs a small quantity of stamina.

Please feel free to share your ideas and thoughts 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 wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of 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