Wealth Takes Courage
T&V Letter Q3 2024
The wealth gap between Europe and the US is growing not only because of wages, taxes, or productivity. The way people save and invest also plays a decisive role. Anyone wanting to build long-term wealth needs not only discipline, but also the willingness to let capital work productively.
Insight
Anyone who wants to preserve and build wealth over the long term should not only save, but also invest.
Football fans love it when their team scores a goal from long range. Such goals are rare and exciting, but risky. The comparison to short-term investing is obvious: it feels good, but promises a low chance of success.
In his book "How to Win the Premier League", football analyst Ian Graham explains that only 4% of shots from outside the penalty area lead to goals, compared to 33% from inside the five-yard box. It is just as difficult to predict the market over short periods of time (e.g. 1 month or 1 year). Despite this, many try to bet on short-term trends – similar to fans demanding a long-range shot.
Why do we act this way anyway? Three reasons:
False memories: Long-range goals and successful predictions remain more prominent in our minds than the many failures.
Quick rewards: Short-term gains are more exciting than long-term patience.
Peer pressure: Many market participants push for short-term decisions, just as fans push for long-range shots.
Long-range shots in football and short-term speculations in investing are rarely sensible. The shorter the investment horizon, the higher the uncertainty. While football thrives on risk, investments should be long-term oriented.
NEWSLETTER
Dear Reader
Europe has long enjoyed high standards of living, characterized by more vacation days, lower crime rates, a healthy diet, and pedestrian-friendly cities – factors that in turn contribute to a higher life expectancy. The average life expectancy in the European Union is estimated at 81.5 years, compared to about 77.5 years in the US. Although these hard-won achievements are remarkable, they could be at risk if no further measures are taken to increase productivity and prosperity. The prosperity gap between the US and Europe has widened: per capita GDP in the US is around 30% higher than in the eurozone.
Europe is increasingly starting to worry about the growing economic and technological gap with the US. Nicolai Tangen, head of Norway's sovereign wealth fund, said in an interview with the Financial Times that Americans work harder, while Europeans are less ambitious and more risk-averse. Peter Wennink, former CEO of Dutch chipmaker ASML, also warned last year that Europe is falling behind and must overcome its complacency.
However, keeping pace economically with the US is difficult for Europe, because a large part of the transatlantic gap in GDP levels can be explained by faster population growth and Washington's fiscal generosity (which may not be sustainable). The higher average level of wealth in the US should also not obscure the fact that this wealth is very unequally distributed; the median level of wealth in the US looks very different, as this chart shows:
Nevertheless, Americans are better off financially. A key reason for this lies in their approach to investing: they are much more likely to buy stocks, while Europeans hoard their savings in low-yielding bank deposits.
This willingness to take risks has paid off: in 2008, the market capitalization of the European Stoxx 600 in USD was roughly equivalent to that of the S&P 500; today the difference is enormous!
The lack of European tech champions and lower spending on research and development could further widen the prosperity gap. Europe must catch up to remain competitive globally – both through higher investment and more efficient use of capital.
If Europeans want to preserve their lifestyle, they must step up their efforts.
As always, thank you for your continued trust!
*This communication is for informational purposes only and does not constitute a personal recommendation or an independent financial analysis.
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