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T&V Commentary | Q3 2022

Updated: Jun 9, 2023

Statistically, the ideal time for a long-term investment is always now

Global markets continue to suffer from excessively high inflation figures and the accompanying interest rate hikes. In this newsletter, we would like to take a closer look at two inflation drivers and show why perfection in investing is not always desirable.

Energy crisis causes electricity prices in Europe to explode, also in Switzerland

The energy crisis in Europe has also reached Switzerland. Private customers will have to reckon with average price increases of 30% next year. Households and smaller companies are so-called "tied customers". This means that they are forced to purchase electricity from their local supplier. The electricity tariff for "tied customers" is made up of the energy price, transport costs and various taxes and levies. The bill varies from municipality to municipality, depending on the level of local taxes and on the procurement strategy of the local electricity supplier. Some companies produce a large portion of the electricity themselves, while others purchase it. Some have contracts in place several years in advance, while others plan for the short term.

Companies in the free market that have not already purchased electricity through long-term contracts will likely be hit hard. For 2023, they will have to pay up to ten times more for their electricity than for the current year. This is because the Swiss market was partially liberalized in 2009: Companies with a consumption of more than 100,000 kWh per year are free to choose their electricity supplier. Rising electricity costs are likely to become a real burden for many companies, putting pressure on margins if higher prices cannot be passed on to customers.

This development is undoubtedly driving inflation.

Perfection in supply chains is not always desirable

Just-in-time manufacturing - where companies do not stock the parts they need to build their products, but rely on last-minute delivery of components - has been the epitome of efficient and cost-effective operations for the past 20 years. But through COVID, it turns out that this calculus isn't so simple after all. Super-efficient supply chains increase vulnerability to disruption, and a small disruption can cause immense damage. As a result, deliveries are delayed and prices skyrocket.

We are in the biggest consumption boom of the post-war period, and companies are stopping production because they lack certain parts for further processing.

This development is undoubtedly driving inflation.

Even with investments, perfection is not necessarily desirable

Perfection can also be a disadvantage in investing: Cash is an inefficient drag in bull markets and as valuable as oxygen in bear markets, either because you need it to ride out a recession or because it's the raw material for new opportunities. Credit financing is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a business capable of generating returns. If you're honest with yourself, you'll find that a little inefficiency is the ideal place to be.

As with evolution, the key is to realize that the more you try to become perfect, the more vulnerable you are.

Stock markets regularly experience significant setbacks or even "crashes." This is what happened during the dotcom era after the turn of the millennium, during the financial crisis in 2008 or after the outbreak of the Corona pandemic. The broad mass of investors then falls into a kind of shock paralysis and stays away from the markets. A phenomenon that can also be observed this year with the Ukraine war and the interest rate turnaround. Trading volumes are currently around 40% below last year's levels. An ideal entry point is waited for in order not to suffer losses. The behavior of major investors and so-called stock market gurus in such situations is different. They take bold action. They have time and make their purchases with a view to the next ten or 20 years. And they also know very well that even they, as stock market professionals, cannot catch the bottom. But their liberation from shock pays off in the long term. Because statistically speaking, the ideal time for a long-term investment is always now.

The cold wind isn't coming, it's already blowing in your face. A groundhog strategy helps to keep emotions in check: get down in the hole and wait. Be patient. Times will get better again. The facts can change rapidly, because stock markets are forward-looking.

We are “imperfectly” positioned at the moment: increased cash ratio, no credit financing & broadly diversified

As always, thank you for entrusting your capital with us!

T&V Commentary Q3 2022
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