In the last letter that I wrote to you, I quoted Warren Buffett. He said: “The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.” This is the time to be patient.
As you will see from the Investment Manager’s letter to you, the quarter ended October 31st was a disastrous quarter for investors in Kurm Investments, Inc., myself included. For many years, we have taken great comfort in avoiding any speculative positions and not getting carried away with investment fads and fashions. Over the last few years, Kurm Investments has avoided any serious exposure to financial companies and has been directly impacted by issues with neither subprime credit nor credit default swaps, and even had a significant amount of cash at the beginning of the year. However, I regret to report to investors that the current events have totally caught me by surprise and I both sympathise with, more importantly apologise for any losses experienced by the investors. Virtually all of my liquid net worth is invested in Kurm and so I share the gains and, more importantly, the losses with you.
Now, I would like to clarify that it was very clear that the excess leverage, speculative lending and investment in most asset classes, and the total mispricing of risk had been very apparent for the last few years, which is why Kurm had been directed away from stocks of financial services businesses as well as holding significant cash at the beginning of the year.
However, the panic experienced after the collapse of Lehman brothers and the process of deleveraging in the midst of this panic, together with the shutting down of wholesale credit markets, has impacted assets in all corners of the world, from Dubai property to commodities to plain vanilla bonds and stocks. Emerging markets have fallen too, rather than decoupling, despite the tremendous growth all can rationally expect from nations such as India and China. This panic, develeraging, margin calls and then withdrawals from hedge funds have been part of a vicious circle. Often, good assets have been sold simply because others assets have become worthless, so forcing down the good with the bad.
While at the moment this seems difficult to digest, Kurm was established to help families with a long-term horizon preserve and grow their capital. The strategy adopted has always been value investment, which has served many great investors over the years and decades. Thus Kurm invests on a long-term basis, predominantly in businesses, largely in public markets and more recently in private equity, all on a value basis. Investing on a value basis has ensured that none of the business in which Kurm has invested have seriously been damaged fundamentally by the recent turmoil, even though their share prices have been marked down.
This is an explanation of the regrettable state of your investment’s recent performance. However, having reviewed the recent past, I would like to focus on the future. I have no crystal ball, but am certainly able to tell you that in a few years’ time, the businesses which can survive this period of uncertainty and economic difficulty will be stronger and performing very well, with less competition and more consolidation. In addition, when (not if, but when) markets price these businesses more rationally, many of today’s share prices will be at significantly higher levels than today.
The year ahead will be choppy, and markets might panic, but this is not the time for the investor to panic. Current market prices offer tremendous opportunity to build long-term value for any individual or family, able to focus on the fundamentals and to think beyond the gyrations caused by panic.
Regular surveys of the markets and opportunities in North America, Asia and the UK show that there are some truly outstanding bargains out there. Tremendous businesses with wonderful long-term economics and good business models are available at very cheap prices compared to their earnings potential, cash flows and balance sheets. This is certainly not the time to panic, and is a time of potential opportunity for anyone willing to invest and to put more capital to work. As I have often repeated in letters to you: “Be fearful when others are greedy and greedy when others are fearful.â€
The views expressed and comments made on this website are not personal advice based on your circumstances. The purpose of this website is to provide information and analysis to help you make your own informed investment decisions. If you are not confident making your own investment decisions you should contact a firm which is authorised and regulated by the Financial Conduct Authority (such as Ashik Shah & Co. Ltd.) so that a qualified financial adviser, after considering your personal circumstances and investment objectives, can make personal recommendations of investments which are suitable for you. Whether you make your own investment decisions or prefer to follow the recommendations of a financial adviser you should always remember that your capital will be at risk and that investments can go down in value as well as up.