Leverage in the system 2004

by Ashik Shah on 30 April 2004

The last quarter has been volatile and markets have experienced a general downward trend. In this same period, Kurm Investments has risen in value, as the table below shows. However, it is very important to note that short-term performance is not the goal. Value investment is a long-term strategy and long-term performance is of far more importance to your wealth.

The increased volatility has produced problems for many, and investors, including Hedge Funds, have found it very difficult. There is a great deal of borrowing in the financial system currently and volatility is very unpleasant for anyone with substantial gearing. Sometimes, such gearing forces the hand, and the investor is compelled to exit an investment which might otherwise be profitable in the long-run. Kurm is currently not geared at all and is in a position to take advantage of any adverse movements in the market. Indeed, as has often been said, volatility is the friend of the long-term investor.

Those with gearing also face the prospect of a general rise in interest rates. Many investors, again including Hedge Funds, have been able to simply make money by borrowing at the short-end of the yield curve and lending or investing in higher maturity assets, “the carry trade.” As interest rates rise, this benign situation will come to an end. With the combination of gearing and volatility, it is likely that many such funds will face problems in the near future. This is unfortunate at a time when the latest fashion amongst many investors is to invest in “Hedge Funds” and “Funds of Funds.”

Investors in Kurm have found that being unfashionable can be quite profitable. Kurm avoided the excesses of the telecom bubble. However, now, some of the same companies which were once every analysts’ darlings and were once trading at huge valuations, are now available at prices which offer the long-term investor considerable upside. Kurm is already indirectly exposed to telecoms now, but in companies with real cash flows and little debt. As Kurm’s advisor, I am on the look-out for further such opportunities.

Kurm has agreed to participate in a number of private transactions. In these investments, a daily quotation is not available. However, the manager or partners with whom Kurm has invested or will invest have excellent long-terms records, follow a conservative investment approach, and have a large part of their own wealth invested so that they “eat their own cooking.”

The world today still faces substantial amounts of risk. In addition, the huge amount of borrowing in the system, by the US Government, by consumers, and financial institutions and Hedge Funds, compounds any inherent problems. Investors face the additional risk of fraud, basic greed and dishonesty amongst company managements.

I believe that a strategy of patient long-term investment in companies with capable, honest management who thinks like owners, and which have compelling business economics, and which are bought at the right price, will provide a great deal of comfort and security for the families of investors, and will enable them to build wealth over the long-run.

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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.

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