Mispricing risk, subprime and liquidity in 2007

by Ashik Shah on 31 January 2007

In the twelve months to 31st January 2007, the public markets had performed well.  Some of the developed markets reached all time highs and the emerging markets continued on their fantastic rise.  Private equity also continued to grab attention with ever-more leverage for ever-bigger deals.

Then came February 27th.  The Chinese market fell by almost 9% on that one day, and since then markets the world over have been in turmoil.  Current estimates of Kurm Investments valuations show that, despite the turmoil, Kurm has maintained its value up to the end of February and beyond.  The investment world has begun to awaken to some of the errors of its recent excesses.  If you examine the letters of the last six months you will see a consistent and repetitive emphasis of the same facts and fears about the impact of excessive liquidity, overvaluation, and the mis-pricing of risk, as well as the precarious nature of the yen-based “carry trade.”  In addition, there is weakness in both the US housing and US sub-prime credit markets.

Kurm has remained focused on the same principles of investing in businesses with outstanding economics, run by honest managers, and at a price which includes a margin of safety so that principal is protected and investors gain.  In addition to managed accounts and limited participations in the US, Kurm has developed a portfolio of UK public market investments, and added another private equity fund in the UK.  A number of potential ideas has also been generated in Asia, but Kurm needs to proceed in the same measured, calculated way it has approached investments over the last 9 years.

It is at times like these that wonderful opportunities sometimes appear.  Just as markets overreact to optimism, they also over-react to pessimism.  As we have often repeated before it pays to be “fearful when others are greedy and greedy when others are fearful.”

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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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