I don't remember exactly when and how I first came across a prospectus for the "Reichmuth Matterhorn" fund, the predecessor of the "Reichmuth Matterhorn +". At the time, after the lesson I had learned with Internet stocks, I was looking for an investment that offered good returns with minimal volatility. This fund showed very good performance in all circumstances. Just like its successor, it was considered low risk. The price chart was a nice, fairly steep straight line. I loved it. The Lucerne private bank Reichmuth & Co was the issuer of the fund. All this seemed like a highly serious matter to me. The main characteristic of the "Matterhorn" was that it was a fund of hedge funds, which allowed even ordinary individuals to access these alternative investments that were usually reserved for institutions.
It went relatively well at first. Then came the subprime crisis. It was the dawn of 2008. Unlike when I started, when I was quite slow to react, I immediately liquidated all my shares in Matterhorn. I was pleased with myself because this time I had learned the lessons of the past and the fund had hardly had time to fall. My joy was however very short-lived. After several days of waiting, my order was still pending. That's how it is with funds, you depend on the issuer. The days went by, the financial debacle grew and the Madoff affair broke out. Surprise, the very serious private bank in Lucerne was affected. Oops. The Matterhorn in the crosshairs. Among the funds in which it was invested, four were placed with the American crook. Well done! At the time they were talking about 10% of the value of the fund that was impacted.
In reality, it was a bit more complicated than that. The bank reimbursed me 50% of my investment some time later. Everything else was going into liquidation. I had to wait about ten years to receive the last ridiculous payments. I don't know in the end how much I left exactly in the story because the procedure was so complicated and long. Of course, I lost less than with Swissair or JDS Uniphase, but a large part of my investment remained unusable for several years.
Why I bought it
The Matterhorn seemed like a risk-free investment. A sort of short-term government super bond with stock-like performance.
My mistakes
- Forgetting that we depend on the issuer of the fund to resell it
- Having confused the absence of volatility with the absence of risks
- Having trusted a Swiss bank too much
What I learned in the moment
You can never be better served than by yourself. Funds are expensive in management fees and above all, you don't know exactly what's going on. You have to be wary of promises of risk-free or almost risk-free investments, even when a reputable Swiss bank is in the background.
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"The funds are expensive in management fees and, above all, we don't know exactly what's going on in them."
Right, usually they use part of the management fees to cover their asses.
This is why I prefer ETFs and direct stocks. These investments also have their flaws but have the advantage of transparency!
Thank you Jérôme for this series of articles devoted to positions that "have worked less well". I appreciate it. It is always instructive and full of lessons. And it brings back some -not very good- memories to some, including me...
I have observed, however, that the lessons of the past, while valuable, are unfortunately not sufficient, because as we move forward we always have new experiences, good or bad, and we always receive blows that we did not see coming.
The current situation related to Covid-19 being unprecedented, it undoubtedly contains good opportunities, but also major risks, not necessarily clearly identifiable, neither by the study of the past, nor by an exercise in "futurology". For me, we are at a pivotal moment in History (as there have been before), and we are still entering an equation with several unknowns (even if some parameters will not change).
Finally, I am astounded by the rise in the markets after the crash in the second half of March 2020. In the real economy, I do not see any justification for this rise. Basically, I think that stocks are still generally overvalued if we analyze balance sheets and accounts and take into account the outlook. I think that the market is once again boosted by announcements of the rain of billions that are or will be injected, which has an artificial side, at least in part, and causes inflation (as it stands confined to certain areas, including the stock markets). My feeling is that central banks are distorting reality (that said, I am not saying that these central banks are necessarily wrong to do what they are doing; I don't know what to think about it to tell the truth and there are always two sides to every coin).
Perhaps we have truly changed the paradigm and the valuation of a company "in the old way" no longer has the same meaning as before... when I see the markets supported by billions since 2008 and very strongly for more than a month, I have a doubt, which I cannot dispel. In these conditions, if the value of a share is decorrelated from its yield (and/or its future prospects), should we not now ignore this value and therefore the notion of yield to concentrate on the income (dividend) in absolute value? I know, it is a little iconoclastic and provocative, even insane, but, precisely, I have difficulty finding meaning in the market's behavior.
I don't think we've changed the paradigm. There have always been long cycles of this type. I don't believe in the prophets who say that "this time it's different". There is nothing different, just economic, financial and budgetary conditions that evolve over time, over the long term. Yes, easy money has become the norm for many years, central banks save everything they can, almost indiscriminately. That being said, they do it: 1) because it was necessary (at least to a certain extent) to do so; 2) because they had the means to do so (no risk of price increases, quite the contrary). The world has already experienced a similar situation in the middle of the last century, then interest rates took an upward tangent for many years.
There is no point in trying to make plans for the future. On the other hand, we must anticipate the risks. One of them is certainly the planned return of inflation. Not right away, of course, since oil is collapsing at the same time as demand in general. But in the fairly near future, when the Chinese virus episode is over, the gigantic injections of liquidity from all central banks and the endless government spending are likely to have a significant impact on prices.
We must also mention the Trump case. This guy manipulates the markets all by himself in an incredible and scandalous way. It is a known phenomenon that during the first and last presidential years the stock market outperformed. With him it took on a dimension never reached before. When he took office, he fired Janet Yellen and put Powell in. Even if he criticizes him constantly, and the latter sometimes returns a few digs at him, Powell always ends up going in Trump's direction. The image of the FED's independence is seriously tarnished. In addition, Trump relishfully activates tax measures and government spending to no end to stimulate Wall Street. As a result, between budgetary policies and Powell's aid, the stock market has been soaring since the beginning of Trump's term. When COVID comes to spoil the party, Trump and his puppet Powell bring out the big artillery to get the market back up as quickly as possible, just to ensure the re-election of the tall blond guy. Up to a certain point, for the moment, he has succeeded.
All this is obviously just a flash in the pan. Sooner or later the bill will have to be paid. In a way, I almost hope that Trump is re-elected, because it will be up to him to take responsibility for his excesses. We cannot constantly save all the companies. Low interest rates and government aid favor mediocrity. A normal and competitive market would imply that the weak perish and only the strong survive. This is natural selection. Of course, it is normal to help when the situation is temporary and exceptional. The problem is that this has become the norm since the beginning of this century.
For my part, I am very eager to see the quarterly results of several companies.
However, something I thought was forbidden to do, several of them are pushing back their disclosure date, limiting the damage temporarily!
So I wonder, at what point will they have to answer to us? Isn't it illegal to hide their real results?
Right now only companies that have profited from the pandemic are disclosing their results, such as grocery stores and pharmaceutical companies.
And when the official figures on GDP by country come out, it could be a big hit, right?
I continue to be patient. I play dead, after all I am greatly benefiting from this increase, but when it is time to draw, even the cowboys of the American Wild West will not see me coming!
Right now the thing that stresses me out the most is definitely not the sine wave market, but rather my girlfriend's good deed. She's a doctor and she volunteered to go help out in a nursing home where one in four people are infected... I'm proud of her and even if I catch the virus, I won't hold it against her. But it's still stressful.
Oh yeah indeed... Well look at the positive side, once you've picked it up, you're good for a little while 😉
I don't really believe in the medium-term (5 years) inflation scenario; it's not enough to inject (digital) liquidity; the planets need to align: overheating economy, increasing consumption and/or demographics, full employment, supply deficit on raw materials, etc.
In short, none of these boxes will be checked in the medium term IMHO, quite the opposite.
On the other hand, the inflation (the bubelization) of the financial and real estate markets is the consequence of the massive injection of liquidity as has already been the case since 2012 (especially in the US) ... the well-known refrain of the two-speed world.
As for Trump, he manipulates trading algorithms and their built-in "news sniffers" to move prices in his favor. He represents the politician we love to hate, ready to sacrifice everything on the altar of his re-election.
Thank you for your feedback.
@Jérôme: when you write "Sooner or later the bill will have to be paid" (I share this opinion), how do you see things? How do you think this bill will be paid and by whom?
The bill will be paid as usual by the people, especially the middle class. First, because the massive injection of liquidity comes at the cost of a devaluation of the currency and therefore of purchasing power. This is the best way to tax people without them noticing.
Then, easy money, as I have already pointed out, is the encouragement of mediocrity. This avoids having to question ourselves and take corrective measures. The problem is that the measures that we do not take today, we will have to implement later, and the price to pay will be much higher, in every sense of the word. Let us think of what happened to Greece. Finally, certain financial assets will also have to come back down to earth, I am thinking in particular of Treasury bonds and the shares of certain large, highly indebted growth companies. Interest rates cannot remain low indefinitely. When they go up, it can be very painful.
For anyone interested in the financial system, an excellent interview with John Lipsky
https://www.youtube.com/watch?v=xOVDijzAw0U
The FED has set up unlimited swap lines with 14 countries => “Now the FED has assumed the role of the World Central Bank” (Lipsky 15'40” – 16'05”)
Thanks for the link. From a certain point of view she still has it in summer…
We'll take the money where it is, look at the history of American taxes after the depression and WWII:
https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx
The Depression
Congress raised taxes again in 1932 during the Great Depression from 25 percent to 63 percent on the top earners.
In 1944, the top rate peaked at 94 percent on taxable income over $200,000 ($2.5 million in today's dollars3).
Sorry it's in English but we forget that taxes can be stratospheric. The worst is that I think it's the least worst scenario (economically because in terms of health we can speculate much worse).
In this scenario, for some countries that do not have the adequate capital base to tax, we will surely see monetization of the debt. Come on, why stop when monetary policy is on such a good path?
The worst thing, in my humble opinion, would be to apply the economic theory of Sanders' advisor. https://www.businessinsider.com/modern-monetary-theory-mmt-explained-aoc-2019-3?r=US&IR=T
To keep it short, there is still something that fundamentally bothers me:
3mm of contagion cases? Come on let's be crazy let's say it's underestimated by a factor of 100.. ok 300mm? There are 7.5 billion of us on earth. This story is not over.
Final thought: expansive monetary policy followed by expansive fiscal policy. What's next? Currency war?
To Philippe's girlfriend: Huge respect and well done.
MMT (Modern Monetary Theory) is nothing other than the use of the monetary pillar as an adjustment variable and can work for dominant economies, the USA in the lead.
However, what about the EU which is not sovereign over its currency and what about countries which cannot impose their currency on their partner?