To finish first, you must first finish in 2008

The quarter ended 31^st January 2008 witnessed heavy losses in the markets and the repercussions of the current financial crisis, with the sub-prime mortgage debacle and the ensuing credit crunch have impacted some of the best-known institutions in the world.  When the market panics, most stock are impacted at least a little.  However, there is a key distinction which an investor must make, which is the difference between quotational fluctuations, as share prices move, and permanent destruction of value, when the actual business fundamentals are damaged.  The recent movement in Kurm’s underlying investments and thus in its NAV per share are essentially due to stock price movements alone.  None of the businesses in which Kurm has invested have actually been fundamentally damaged by recent events.

In fact, many of the companies in which Kurm has invested, such as Berkshire Hathaway, will do very well in these circumstances.  With strong balance sheets, sustainable competitive advantages and an eye for long-term value, such companies will be able to take tremendous advantage of the market’s fears.  Indeed, Berkshire Hathaway announced a good deal of activity in the last few months, just when almost everyone else became paralysed in panic.  The investments of Kurm – the companies, funds, managers and advisers -  are all chosen because of these characteristics.  In the short-term volatility, long-term opportunities are there for the taking.  For example, at the time of writing, two of the UK banks have dividend yields of around 11%.  The markets do not know how to value them as they are uncertain about any future bad news that may be lurking on the balance sheet.  Research and patience will provide the answers.  Please note that this is not a tip.

Investors’ key concerns at the moment include the fallout from the credit crunch, which has caused suffering in virtually every major financial institution.  The affairs surrounding Northern Rock in the UK, Société Generale in France, and Bear Sterns in the USA, amongst others, have caused a great deal of worry.  However, they are merely symptoms of the same issues that we have been discussing in my letters to you for the last few years.  With excess liquidity in the markets, institutions felt a pressure to invest funds in order to seek better yields, but, in the process, forgot the most basic notions of risk managements.  Instead of being paid properly for risk, they simply sought higher yield, with an under-emphasis on the down-side simply so as to maximise returns.  However, they have forgotten the rule:  “To finish first, you must first finish.”

The last quarter was one of very poor performance.  It is an unfortunate way in which to end the 10 years in which people have been invested in Kurm Investments.  However, over the long-run, Kurm has outperformed, and created value where others have destroyed it.  In the last few years, I have written about the excessive confidence and overheating of certain markets and asset classes.  While there may still be further bad news, and some further corrections, this is time for the investor to be confident and opportunistic, of course, making sure that the research is done and being well informed.  Investors will be well served by remembering Buffett: “Be fearful when others are greedy and greedy when others are fearful.”