More than a decade ago, shortly before the crash of 2008, the manager of the Hedge Funds Mark Sellers of Sellers Capital gave a great speech to a group of Harvard MBA students entitled «So you want to be the next Warren Buffett? What does your writing look like?» Sellers pulled no punches when he talked about the difficulty of becoming a great investor who can earn returns at 20% compounded annually saying: «I know everyone in this room is extremely smart and has worked hard to get to where they are. They are the brightest of the bright. However, there is one thing you should remember from my talk: You have almost no chance of being a great investor. You have a very, very low chance, like 2% or less».
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Here is an extract from that speech:
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One thing I will tell you up front: I am not here to teach you how to be a great investor. On the contrary, I am here to tell you why very few of you can expect to achieve this status.
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If you spend enough time studying investors like Charlie Munger, Warren Buffett, Bill Miller, Eddie Lampert, Bill Ackman and others who have had similar success in the investment world, you will understand what I mean.
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I know that everyone in this room is extremely intelligent and has worked hard to get to where you are. You are the brightest of the bright. And yet, there is one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor. You have a very, very low chance, like 2% or less.
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And I'm pondering the fact that you all have high IQs and are hard workers and will soon have an MBA from one of the best business schools in the country. If this audience were a random sample of the general population, the probability of anyone here becoming a great investor later on would be even lower, like 1/50th of 1% or something. You all have a lot of advantages over Joe Investor (the everyday investor), yet you have almost no chance of standing out from the crowd in the long run.
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And the reason is that it doesn't matter much what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that a lot of people have, and yet almost none of them end up making 20% or 25% in the course of their career.
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I know this is controversial and I don't want to offend anyone in the public. I'm not pointing to anyone in particular and saying: «You have almost no chance of making it big». There are probably one or two people in this room who will end up making money at 20% during their career, but it's impossible to know in advance who they will be without knowing each of you personally.
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On the bright side, although most of you will not be able to compound money at 20% for your entire career, many of you will turn out to be good, above-average investors, because you are a biased sample, Harvard MBAs. A person can learn to be an above average investor. He can learn to do well enough, if he is smart, hard-working and educated, to keep a good, well-paying job in the investment business throughout his career.
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You can make millions without being a great investor. You can learn to beat the averages by a couple of points a year through hard work and an above-average IQ and a lot of study. So there is no reason to be discouraged by what I am saying today. You can have a really successful and lucrative career even if you are not the next Warren Buffett.
But you can't accumulate money at 20% forever, unless you have it engraved in your brain from the age of 10, 11 or 12. I'm not sure if it's by nature or by education, but when you're a teenager, if you don't have it, you can't get it anymore. By the time your brain is developed, you either have the ability to run circles around other investors, or you don't.
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Going to Harvard or other high-level public and private universities will not change that and reading all the books that have been written about investing will not change that either. Neither will years of experience. All these things are necessary if you want to become a great investor, but in themselves are not enough because they can all be copied by competitors.
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7 traits of highly successful investors:
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In my view, there are at least seven traits that great investors share that are true competitive advantages because once a person reaches adulthood they can no longer be learned. In fact, some of these traits cannot be learned at all; you are either born with them or you don't have them.
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1. The ability to buy shares while others panic and sell shares while others are euphoric. Very easy to say but almost impossible to apply when the time comes when the world is sinking and there are a thousand reasons to think that this time it is different.
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2. The second character trait of a great investor is that he is obsessive. They get up in the morning and go to bed at night thinking about companies, share prices, economic and financial data, and they want to win and win.
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3. A third trait is the willingness to learn from past mistakes. There is little point in not doing so as it will not inoculate us from making the same or similar mistakes in the future.
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4. A fourth trait is an inherent sense of risk based on common sense. It is as simple as that. No matter what the computers and calculations of probability of success say. Common sense must never be abandoned, and it will become our best ally and protector from disaster.
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5. Great investors are confident in their own convictions and stick to them, even when faced with criticism. This is also easy to say but very difficult to do, when you see that everyone around you thinks just the opposite.
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6. It is important to have both sides of the brain working, not just the left (the one that is good at mathematics and organisation). This is why many great investors are also able to write very well. The right side of the brain is able to detect subtleties that are very important for investment success, such as the character or behaviour of managers, and not just the business figures that their teams publish.
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7. And finally, the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people; when the going gets tough, they have a hard time not selling their stocks at a loss. You have to distinguish between volatility and risk, and this is something that much of the industry - not just ordinary investors - confuse and condemns them to mediocrity at best (I recommend reading «Why do they call it Risk when they mean Volatility? The Fable of the 3 Neighbours«)
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I would argue that none of these traits can be learned once a person reaches adulthood. At that point, their potential to be an outstanding investor in the future is already determined. It can be honed, but it cannot be developed from scratch because it has to do mostly with the way your brain is wired and the experiences you have as a child. That doesn't mean that financial education and experience in reading and investing are not important. They are fundamental to getting into the game and staying in the game. But those things can be copied by anyone. The seven traits above cannot be.
After listening to and reading many Western and Eastern analyses of the Chinese government's move in its financial markets, and largely agreeing with the analysis of Gavekal, What is clear to us is that these are decisions that will benefit China's interests in the medium and long term, entrenching its imminent global dominance. As with gambits in chess, which sacrifice a pawn or other piece at the outset to gain an advantage later, Xi Jinping's government is sacrificing certain sectors and the size of certain companies in a surgical manner, although the collateral effects of such policy decisions may be noticeable in the short term, and especially amplified in the Western media.
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The exact reasons why Xi has targeted sectors such as technology, online education and the financing of Chinese companies in the US market are known only to his closest and most loyal political circle. But we will now explain 7 reasons that could well be behind the Beijing government's moves.
An exhibition of power, a warning to all, anyone who moves will not be in the photo, a punch on the table or whatever we want to call it. In short, the government is marking its territory with these actions, demonstrating that Xi's pulse is not trembling to lead the flock towards more and better pastures for the common good (of the party and the state). Growth and global economic dominance, yes, but without the government letting go of the reins at all. An empirical demonstration that Capital will not weaken the foundations of the party.
Pre-emptive action in the face of escalating US measures against China. What better strategy than to sacrifice in advance companies dependent on US financing, thus discouraging the potential pressure that Washington could exert on Beijing if it threatened to turn off the tap on Wall Street. China will now be less dependent on US investment, knowing that investment in Chinese companies today already comes from many other countries that are increasingly allied with and dependent on China. There is life (investors) beyond Wall Street, and more and more of it every day.
As for the online education sector, which has been hammered in the markets by measures that would force its companies to become non-profit entities, they seem to be the scapegoats for the extraordinary rise in the cost of education in China. And private education, as widespread as online education can be, could easily escape government control and supervision. In other words, the move will lead to cheaper education (even at the risk of temporarily less access to education as a whole) and greater control, not only of educational content and systems but also of the shareholders in this sector of business.
Another sector crunched by the government's measures is the food and home delivery business. But despite the bombastic headlines warning of the sector's collapse, the measures taken by Xi's government seem entirely reasonable. The main measure he has ordered is none other than the obligation for the wage and working conditions of the riders or delivery drivers to be equal to those of any other wage-earner who reaches the legally established minimum. This is clearly also in the medium and long term interests of the Chinese economy.
Back to industry: The measures that are shrinking the size and influence of some technology and internet-related companies can be read as a return to industry. But that would probably be too simplistic a reading because China is not going to give up on technology companies that lead to progress in R&D - quite the contrary. What seems to be targeted are technology companies that only cater to sterile leisure, i.e. video games and social networks, for example. In other words, companies that encourage distraction and the dedication of hours by users to non-productive activities. That is nothing.
Derived from this concept of back to industry (& back to R+D) we can also sense an intention that reminds us of the Manhattan Project. In other words, China wants its technological talents to focus on research and development of new technologies, such as semiconductors, in order to alleviate the current and future shortages that we are going to have all over the world. They encourage the potential for technological growth to go in the strategic direction that suits China's future, rather than in other directions that would only distract the population from the collective productive objective that Xi has designed and that is leading China to global economic leadership.
Because at the moment China can not only afford to see outflows of foreign investment, but this outflow is also a perfect escape valve for the unwanted appreciation of the Renminbi (RMB). Let us not forget that China has a trade surplus of $50 billion per month and that its currency also supports flows of another $20 billion in the purchase of Chinese debt by investors from all over the world. And that puts upward pressure on the RMB that is difficult to manage. These controlled, surgically designed investment outflows therefore make perfect sense from the point of view of China's strategic interests.
Some will probably say that the radical movements in share prices in some cases, such as Tencent or BABA, generated by politburo decisions, are madness and undermine the confidence of international investors. Others will say that it is Xi Jinping himself who has gone mad, damaging his own companies and sectors, in a fit of anti-capitalist communism in the purest podemite style. But even if that were the case, let us not forget that in the West we are not very sane either, With the hangover from Hurricane Trump and central banks keeping more and more zombies (companies and states) too big to fail. But nothing could be further from the truth. Xi's modern China does not miss a beat, and always governs with horizons that go far beyond a measly Western democratic legislature.
According to the World Bank, an income of less than $1.90 per day means that a person is statistically and officially poor by global standards. Xi Jinping's government, on the other hand, raises the bar to $2.30 per day, i.e. below this income, China's population is officially considered to be poor. Even so, the Chinese government has achieved the goal set in 2012 of lifting 100 million people out of the poverty line in the last decade.
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As you can see from the BBC graph below, according to the World Bank the number of poor people in China, mostly rural, was over 750 million in 1990. In just 20 years, up to 2010, that figure fell to just over 100 million. And in the last decade, the number of poor people in China below the poverty line has fallen to just 5 million. In other words, in the last 30 years China's planned capitalism has lifted 745 million people out of extreme poverty.
Other countries such as Vietnam have also dramatically reduced their poor population, yet India still maintains levels of close to 20% of the population below the World Bank's threshold of $1.90 per day.
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But of course, the consideration of extreme poverty must increase as the economy also grows, and by the standards of developed countries such as Spain, the extreme poverty line is severe poverty 11.83 euros per day or in some statistics at 40% of the average citizen's income. Therefore, in Spain we have 2.2 million people at risk of severe poverty (4.7% of the population), and what is even worse is that this figure is rising instead of falling as it is in China.
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Some would argue, and rightly so, that the extreme poverty line in China today should not be set at $1.90 or $2.30, as its economy has grown enormously. Internationally, the World Bank sets $5.50 per day as the poverty line for upper-middle (not high) income countries. And in this category of countries we should already consider China as a whole, both in its urban and rural areas, if we want to be fair with the assessment of its poverty reduction. Well, in 17 years, from 1999 to 2016, according to the latest data published by the World Bank, poverty in terms of upper-middle income economies has also been reduced by almost 800 million people in China.
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This can be clearly seen in the graph below, and projecting its economic growth over the last 5 years, there are probably no more than 150 million people in China today below this threshold, i.e. barely 10% of its total population. At these levels, China's income growth would already clearly exceed that of countries such as Brazil. Y the pandemic points the way because it is obviously further accelerating the comparative growth process between China and the rest of the emerging or already emerging countries.
Another thing is the economic inequality, China is invading the lists of billionaires at the same time as it lifts hundreds of millions of people from the poverty line. But this may be the necessary evil, the toll that growing economies must pay in order to lift millions upon millions of people out of severe poverty. Contrary to what many believe, the most realistic and efficient way to reduce poverty in the medium and long term is probably not through a utopian, more equitable distribution of existing wealth, but through greater wealth creation. In other words, powerful economic growth, even if it leads to greater economic inequality among the population.
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If, in addition, the state, with extreme care and subtlety, combines social measures to help the most disadvantaged, while at the same time maintaining or even improving the conditions for the rich to continue expanding their fortunes within the domestic economy, we may be looking at solid and sustainable economic growth for decades to come. For inequality is necessarily bad only in the absence of economic growth, but need not be bad when more and more wealth is created in the aggregate.
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Economies, like companies, get better or worse, but they hardly stay the same. And the same is true of economic policies, they equalise or unequalise, but hardly maintain the differences in wealth among their population. In short, there are four ways of dealing with economic differences in population through the application of economic and fiscal measures: equalising upwards, equalising downwards, inequalising upwards or inequalising downwards.
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There is little point in reducing inequalities (equalising) if we thereby kill economic growth by raising taxes out of all proportion and demonising our rich until they leave for other countries with smarter governments that welcome them with open arms - and open taxes. It is preferable that our rich get richer and richer every day so that, along with them, our economy grows and our poor are lifted out of poverty, otherwise we will run out of rich people and become poorer across the board. In other words, upward unevenness is preferable to downward equalisation. Because equalising downwards through unsustainable public spending, involving tax extraction and confiscation, has historically been shown to undermine incentive, productivity and economic growth, plunging the poor who were intended to be kept afloat in the short term into misery in the medium and long term.
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Finally, downward disparity This is what African dictatorships and other banana republics do, and therefore it is obviously of no use either. The ideal, of course, would be to be able to equalise upwards, But that is only a chimera that capitalism (and certainly not socialism) has never achieved, not even with China's planning and not even with American efficiency. In short, welcome the growing inequalities that lift millions of people out of poverty.
Value Parters (VP) is a Hong Kong-based fund manager that we have known very well for many years. We have visited them personally on several occasions and have been investing in some of their funds for years. VP is the only Chinese fund manager listed on the Board of the Hong Kong Stock Exchange. We will now translate and comment on the reflections of its Co-Chairman, Louis So, The report on the economic effects of the pandemic in China a few months ago.
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It would not be an exaggeration to say that the onset of the COVID-19 pandemic has led to the worst global economic crisis since the Great Depression of the 1930s. The combination of a demand shock, a supply-side shock, a financial shock and political upheaval has sent markets around the world reeling.
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While no one can predict how the world's economies will emerge from the crisis, some experts are making educated guesses based on current economic data. Whatever happens, a post-COVID-19 environment is going to be very different from anything in the past. China will certainly outperform other markets, although it may not sufficiently boost the growth of the global economy.
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Therefore, there will be a higher degree of government intervention, more money printing, very low interest rates and a much bigger asset bubble. This asset bubble will in turn widen the gap between rich and poor, and this will lead to social instability.
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At some point, this system will collapse. In the future, politically speaking, left-wing politicians will gain popularity and gain support. Then we think that some redistribution of wealth will occur.
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While the last 50-70 years have seen a period of global wealth accumulation, there were also periods when wealth was distributed. Such events occurred because of wars, or because governments allocated resources differently. That is something we can expect to happen in the world over the next five to ten years.
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On the consumer side, there will be a contactless economy, consisting of a boom in e-commerce and online entertainment. VP has positioned its portfolios to benefit from this trend.
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Companies will have to rethink their business models. In the past, just-in-time inventory management was the norm. But now companies will have to think about whether they need to build up cash reserves for inventory and supply chain management. That will also change the mindset of business leaders.
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COVID-19 could escalate a potential crisis of capitalism and the free market. The challenges may cause capitalism to falter. Providing a much better social welfare system could be a potential solution. Although it may affect the economic growth of countries, it will create a much happier environment for society.
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This pandemic has not changed VP's strategy much. The company is still tapping into what could eventually be the world's largest market: China. Savings are high in this country. We need to participate in this market as investors if we want good returns.
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The relationship between China and the US will get worse before it gets better. China is not dependent on exports and does not rely on other countries to grow its economy as it used to. This will drive China into isolation for a while. But China and the United States will have no choice but to become friends, partners and allies again. Perhaps the Trump-Biden swap will bring this about.
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China will come out ahead. And it will emerge from the pandemic ahead of other markets.. The predictions are based on recent economic data from China showing a V-shaped recovery trend at both the macro and consumer levels. It is highly likely that China will take advantage of the pandemic to accelerate its growth spurt and economic leadership of the world.
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With data available just after the March crash, year-on-year figures showed that fixed asset investment fell 9.4 per cent in March, but increased to a 3.9 per cent positive gain in May. Retail sales were down 15.8 per cent in March, but only down 2.8 per cent in May.
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Even a business like electricity production showed a year-on-year decline of 4.6 per cent for the month of March, but returned to 4.3 per cent growth in May. The same pattern can be seen on the consumer side. Products such as cosmetics, furniture, automobiles, tobacco and alcohol experienced a similar V-shaped recovery.
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The data show an economy that is steadily recovering from the pandemic. So there is every reason to be optimistic. China is in a much better position to cope with this crisis than the West, and the FIFO rule is being met because of good virus control. China is benefiting from a large middle class that has one of the highest savings rates in the world. The country had a savings rate of 47% in 2017 and ranked third out of 170 countries monitored by the World Bank.
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So China is now a fairly self-sufficient economy, and this has helped it to cope with the pandemic. China has innovation, production, distribution and also the end consumer within its borders. Therefore, the country is experiencing less supply-side trauma than other countries.
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China also has a much more modest stimulus programme than other countries. While the US is pumping out a huge stimulus programme consisting of about 18 per cent of its GDP and rising, China's stimulus package is less than 5 per cent of its GDP.
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We are quite optimistic about China. It is still on track to become the world's largest economy by 2030 or sooner. Therefore, several investment themes will be the main drivers of growth, including consumer upgrades, a growing number of high-net-worth individuals, technology and the explosion of 5G. There will also be more individuals seeking higher education, along with the development of online service platforms and a growing healthcare sector.
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China is too big to ignore at the moment. It accounts for 16 per cent of global GDP, which means we can look at it as an asset class in its own right.
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So do not expect China to slow down any time soon.. There are many factors to consider, such as the relationship between China and the US, and a possible resurgence of the virus. Only time will tell. But things looked much better in the second half of 2020 and so far also look much better for 2021 than in the other economic powers.
The well-known Bloomberg editor Tracy Alloway explains in an article published this week what has happened in the markets with the price of the famous company GameStop and its chain of -obsolete?- physical videogame shops. Below we summarise Alloway's reflections and add some more from our point of view.
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It seems inevitable that the democratisation or populisation brought about by technology will also reach the financial markets. But the impact of trading by small speculators through platforms such as Robinhood Markets is causing a real earthquake in which the strong hands of the markets are immersed without knowing or being able to do anything about it. Organised through various social networks, amateur investors/speculators have been able to make the share prices of meme stocks such as GameStop take off, while large hedge funds are suffering the consequences of having analysed these companies in more depth and betting against them.
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Some fear that this war of money flows between small amateurs and big professionals, which generates infinite and further increases in the share prices of mediocre businesses, will collapse the system at some point. It may not go that far, but what is undeniable is that it takes away one of the basic premises of capital markets: the efficient allocation of capital.
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What happened to GameStop and how did it all start? The online broker RobinhoodMarkets, along with other similar platforms, have flooded the market with new amateurs. Many of them from their own homes, some of them unemployed, some of them studying and all with a lot of time on their hands because of the pandemic. It seems as if financial investment has become just another video game for this already gigantic niche. Tremendously crowded forums have sprung up, such as Reddit's WallStreetBets, whose slogan reads something like «Making money and having fun while doing it». These forums have made it their goal to exploit a financial system they have historically been unable to access. And the traditional market players, the establishment, are horrified at how they are managing to bend the system in their favour.
How are they changing the way the market works? Traditionally Value investing has looked for undervalued companies to buy at a relatively cheap price in the expectation that it will go up. For the new amateur traders on such platforms, Value is not nearly as important. Some of the stocks these traders have their eye on are far from profitable or attractive to a traditional investor. But once the price starts to rise, the collective magnet is activated and the attraction of more and more interconnected traders on r/wallstreetbets begins. So far so good, since traditionally a company's share price can rise to a point where, relative to its earnings multiple, book value, etc., it is no longer attractive to investors. As a result, demand begins to be outstripped by supply and the share price moderates to more or less reasonable levels. But with the massive irruption of these new small speculators, prices can go far beyond what pseudo-fundamental or even technical analysis has historically tolerated.
Why? Because flows dominate over professionals. The flows of money in and out are more important in this segment than the fundamentals themselves. And small traders have more capacity to detect and take advantage of the flows in and out of shares, with tools such as forums and the detection of the majority opinion of their colleagues in the purest social network style, than the professionals trying to properly delimit the value of these businesses. Paradoxically, professionals, at least in the stock segments targeted by these crowded platforms, are being relegated to the crumbs that retail investors used to have, and are sailing small boats at the mercy of the storms and big swells generated by the huge mass of amateur traders. The world upside down (finally?).
Who were the professionals in the GameStop case? Short sellers, i.e. funds that borrow shares to sell them, hoping that their price will fall before they have to buy them back and return them to those who lent them to them for a small rental fee. These funds used to publicise their bearish bets and negative fundamental analysis on a company in order to convince the rest of the market that it is bad business to hold the stock and generate sales to drive the price down. But that strategy of professional investors going public with a short sale may now be history, because these days what this news generates is unbridled bullish interest from the unconditional mass of r/wallstreetbets. It is like a red alert that throws amateur traders into buying options on these stocks en masse, turning the traditional predators, the big funds and hedge funds, into prey.
What is the strategy? The guys at r/wallstreetbets usually pick stocks that have weaknesses they can exploit. For example, some have taken to buying options on stocks to force their prices up. As many of you already know, options are contracts that give the holder the right to buy or sell the underlying stock at a certain price within a certain period of time. And new commission-free trading platforms, such as Robinhood, have made options trading much easier. The key idea is that buying options en masse forces market-makers to hedge their own exposures by buying shares of the underlying company. That dynamic can be enough to drive the price up, which generates more buy orders, feeding back more and more of the dynamic: The stock goes up, the short sellers give up and have to buy back the shares they need to return, and those forced purchases drive the price even higher.
Can the small speculators really beat the big whales of Wall Street? What we should be looking at is not the amount of money retail speculators spend, but the amount of leverage inherent in those bets. Let's take an example:
Pol has a Robinhood account. He bought a call option strike $3,250 on Amazon on 14 August for $1,500. That option is crossed by a market-maker, let's say her name is Lola, who works at a large bank. But Lola does not want to take on the risk as Pol's counterparty; she wants to be merely a neutral facilitator. Her job is to facilitate trades in the market, not to bet on it, so she wants to hedge her position. She does this by buying Amazon shares, calculating what is called the delta of her position. The delta is how much the value of the option will change based on the price of the underlying stock. In this case she calculates that she must buy $66,100 worth of Amazon stock to maintain her neutral position. If Amazon's share price rises, she would have to pay for the option sold to Pol, but at least she would be compensated by the profit she would make on her Amazon shares.
A few days later, Amazon shares do indeed rise, and do so by 5%, so Lola needs to rebalance her books to maintain her neutral position. This time, because Lola's delta has increased, she will need to buy even more underlying shares. In fact, she will need to buy $230,000 worth of Amazon shares already. Et voilà! Pol's small bet has resulted in a purchase of $230,000 worth of Amazon shares.
By targeting broker exposure in a coordinated and massive way, retail traders are taking advantage of what is known as the «gamma squeeze». That is, as Amazon's share price approaches the strike price of the option, brokers and counterparties who want to remain neutral must buy more and more of the company's shares.
What about hedge fund shorts? Gamma squeezes can be most effective when short squeezes of the company's shares are added. Traders at r/wallstreetbets have often identified companies with a lot of short interest and a small number of shares listed on the market. This further complicates matters when short sellers must buy back shares to close out their short positions. This dynamic also contributes to the rising price of outstanding shares as supply is scarce and demand, although forced, is more and more increasing. Hedge fund Melvin Capital announced on 25 January that it had accepted a $2.74 billion injection from competitors Citadel and Point72 Asset Management after its short positions generated a 30% loss for the year.
Is this phenomenon a simple game? We might call it a simple gambling game were it not for the fact that these dynamics affect real companies, with real managers and real employees. Shares in GameStop, after all a retail software business, have soared exponentially this year. And the current price is such a cash injection that ideas have begun to emerge of what GameStop's management could do with all that capital raining down from the sky. Think of the strategic acquisitions, expansions and diversification of the business that are now within their reach. So these arbitrary flows also end up affecting the fundamentals of companies. AMC Entertainment Holdings, another meme stock whose main business is cinemas and theatres, avoided the bankruptcy to which the pandemic seemed to have condemned them at the end of January, by capitalising on the rise in its shares promoted mainly by retail traders. And in turn, some hedge funds may be selling some clearly bullish stocks to cover their losses, which will work against their returns.
How long can this last? No one knows. It is difficult for the US regulator to fight comments on forums that generate such large movements because it is difficult to prove that such posts are part of an illegal orchestration to manipulate the market. In December the Massachusetts regulator made a formal complaint against Robinhood alleging that they had aggressively advertised their platform to attract novice investors and had not taken sufficient safeguards to protect them. Not very consistent, but that's all the regulator could do.
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Big market squeezes tend to end abruptly and dramatically, and that will probably be GameStop's ultimate fate. But when that time comes, most fans of r/wallstreetbets will take their huge cash flows to their next target.
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But we must not forget that amateur traders, most of them young people with or without university careers, who are causing these financial earthquakes are merely playing by the same rules of the game as the other players. The consequences of their flows are as morally reprehensible or irreproachable as the consequences of the flows of traditional strong hands. They have not invented anything, except that their strategic decisions do not stem from an investment committee or the Machiavellian complicity of several of them, but from investment trends or fashions that are transmitted through what we might call socio-economic networks, and whose execution is as atomised as it is massive and disciplined.
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The big loser in this game is the efficient allocation of capital. Because although the rise in share prices can save companies from bankruptcy or provide businesses with money that, if well used, can make them take off in profits and improve their fundamentals, let us not forget that capital is being showered on those who do not deserve it. Companies that over the years have not been able to attract the capital of investors seeking value do not know how to generate it. And probably, the fact of providing them with capital that does not seek Value but rather to take advantage of inefficiencies in the system (not in the market), will not only perpetuate mediocre managers in their posts but will also give them, at least temporarily, more power.
An INefficient allocation of capital that comes on top of what we have been suffering since 2008, with state interventions to keep zombie companies and managers alive with free debt at negative rates, and against which it is very difficult to navigate. Therefore, although it is perhaps fairer that not only the strong hands take advantage of the failures of the system (don't miss the video-analysis by Tucker Carlson above), the market must increasingly handle more and more players who do not seek efficiency in the placement of their capital but other things. And that makes the market more inefficient and for longer, which is not necessarily as bad as it seems for those who navigate it with the search for value as their only compass.
We have been saying it backwards and forwards, China is already the centre of the world and its leadership will dangerously relegate investors who remain focused on the West and fearful of the badly named emerging markets (since many are already emerging and most of the West has not yet realised it). Check if not the pre- and post-pandemic economic growth data and projections.
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This time it is a scientific rather than an economic publication that alerts us to China's hegemony. Below we translate, summarise and comment on the magazine's article. Science by Jon Cohen, which analyses China's progress in the field of vaccination against Covid19 and the dreaded SARS-CoV-2 coronavirus. And above all, it highlights the bio-economic influence that China is achieving across the globe, as always in a stealthy, intelligent and unstoppable manner:
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The first people in the world to receive the COVID-19 vaccine were not part of a clinical trial. No television networks or newspapers covered the historic event. No company issued a statement.
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On 29 February 2020, less than 2 months after the world awoke to the threat of the new disease, virologist Chen Wei, a major general in the Chinese army, and six military scientists on her team squared themselves in front of a Chinese Communist Party flag and received injections of an experimental COVID-19 vaccine. Chen, a national hero for her work on Ebola vaccines, had come to the pandemic's ground zero, Wuhan, with her group from the Academy of Military Medical Sciences, in part to help create the candidate vaccine with a commercial company, CanSino Biologics. Commentators inside and outside China later questioned whether the event, which was widely reported on social media, was real. No less than the People's Daily, the Communist Party's main newspaper, labelled a photo of Chen receiving the vaccine as «#FAKENEWS». But Hou Li-Hua, a researcher at the academy working on the vaccine project, says it was «real news», an attempt to protect the hard-hit city's scientists.
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In the US, the Trump administration's $10.8 billion Operation Warp Speed has accelerated vaccine research and development specifically for the US population, and is doing so faster than many researchers thought possible. But an equally massive effort is underway in China. CanSino and two other Chinese companies - one government-owned and the other working closely with its regulatory agency - are investing substantial resources, testing four candidates in tens of thousands of volunteers worldwide, and are likely to be just days or weeks away from announcing efficacy results from the trials, on the heels of encouraging results announced over the past month by Pfizer and BioNTech, Moderna, AstraZeneca and Oxford University, and Russia's Gamaleya Research Institute of Epidemiology and Microbiology.
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But the low profile of those historic first injections, the military's collaboration with a «private» company and the ethically fraught decision to begin vaccinations outside of a clinical trial telegraphed that, apart from similar scale and speed, China's vaccine effort is following a very different course from that of the United States and Europe. Most major Western vaccines are based on attractive modern technologies such as genetically modified viral vectors, designer proteins and RNA fragments. By contrast, three of China's four leading vaccine candidates use a classic, tried and tested method: inactivated whole virus. An approach that dates back to the first successful influenza vaccine in the 1930s. And China's vaccine effort is weighed down by its radical success with aggressive public health measures to stop the spread of the SARS-CoV-2 coronavirus, as its measures have left China with virtually no virus on which to test vaccines, including forced isolation of cases and testing of entire cities. By contrast, the raging pandemic in the US has allowed trials there to quickly show signs of efficacy. «China crushed the coronavirus epidemic early, so they missed the opportunity to test the efficacy of their vaccines there,» says epidemiologist Ray Yip, who closely follows the development of the COVID-19 vaccine as an advisor to Bill Gates. «If they had had a lot of cases in China, they could have finished an efficacy trial earlier than other countries.
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So China's vaccine developers have gone abroad. Although the US has excluded them from Operation Warp Speed, they have negotiated with 15 other countries on five continents. They have mounted massive trials in the Arab world - and given candidate vaccines to senior government officials there, and also conveniently cajoled the radical Bolsonaro in Brazil, where the pandemic is raging, to test a vaccine and explore its production there.
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But China is not just looking for promising sites for clinical trials. It does not urgently need vaccines at home to combat a virus it has largely crushed, but is playing a global game by pledging to send any proven vaccines to countries that are conducting trials for its candidates, or to share the technologies behind them. «They know they don't need a vaccine to contain the epidemic in China,» says Yip. «They can take their time,» and take a much longer and more long-term view. strategic.
HUBEI, CHINA - APRIL 15: 220 volunteers from Wuhan are vaccinated during the phase II trial on 15 April 2020.
As seen in the photo above, Chinese company CanSino Biologics created the first COVID-19 vaccine to enter clinical trials, and by April it had advanced to a phase II study in Wuhan.
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Yanzhong Huang, a global health specialist at both Seton Hall University and the Council on Foreign Relations, says the country is «actually using the vaccine to promote the diplomacy of foreign policy objectives». This «vaccine diplomacy», he says, contrasts sharply with Warp Speed's «vaccine nationalism» and aims to «fill the vacuum left by the US».
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«It's a very carefully executed and thought-out strategy,» says Stephen Morrison, who directs the Center for Global Health Policy at the Center for Strategic and International Studies. «A strategic goal of the Chinese government is to achieve hegemonic influence in the next 10 years..»
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At home, too, attitudes toward vaccines contrast with those in the United States and Europe, where distrust is high, Morrison says. To the dismay of vaccine experts abroad, hundreds of thousands of people in China have already lined up to receive experimental vaccines, even before their value and safety have been proven. «There has not been a collapse of faith and trust in science and the state,» says Morrison. «There is less fear about where this is all going.» Paradoxically, it is the Westerners, the die-hard freedom advocates who question isolation measures, restrictions on movement and the reliability of testing, who have lost the most freedom as a result of their radical confinements and perimeter closures.
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In China, the speed with which Chen and his colleagues were able to get those first vaccines is all the more remarkable given that CanSino was arguably slow.
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Although some COVID-19 vaccinators launched their projects the day after the SARS-CoV-2 sequence was made public on 10 January, CanSino CEO Yu Xuefeng had reservations. «We started looking into it in mid-January, but there was a hesitation,» he says. COVID-19, Yu was concerned, might be a bluff, The disease, such as severe acute respiratory syndrome (SARS), another disease caused by a coronavirus, alarmed the world in 2003 but disappeared a year later, after companies and governments had devoted many resources to developing vaccines.
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Yu, who is originally from China, completed his PhD in microbiology at McGill University in Canada in 1997, and then stayed on, working on vaccines for almost 9 years at a Sanofi Pasteur branch there. He co-founded Canino in 2009. A team led by Chen in China helped develop his only previous product to receive approval: an Ebola vaccine based on a widespread and largely harmless virus known as adenovirus 5 (Ad5), into which they added a gene for the surface protein of the Ebola virus.
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Yu and his team considered making an anti-COVID-19 vaccine with messenger RNA (mRNA) for the coronavirus« novel surface protein, called spike, the innovative approach taken by Pfizer and its partner BioNTech, the »winner« of the race to report preliminary efficacy data. But CanSino decided to go with what it knew, using the Ad5 vector to carry the spike gene. »I thought it was the fastest and most mature way to develop a new vaccine," says Yu.
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Within a month, CanSino's candidate was ready for delivery to Chen and his team, and on 16 March the company launched the world's first COVID-19 vaccine trial in Wuhan to test its safety and ability to elicit immune responses. CanSino had beaten Moderna by eight hours, though a world paralysed by the vaccine race among Western companies paid little attention.
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Several US and European contenders, including AstraZeneca, have also adopted adenoviruses to carry the target protein, with some opting for an Ad5 vector similar to CanSino's, despite several concerns about the approach. In 2007, two disastrous efficacy trials of an Ad5-based AIDS vaccine found that, for reasons still unclear, it actually increased the risk of HIV infection. The other concern is that pre-existing immunity to Ad5 may attack the vaccine vector, which may explain why, in early trials, the CanSino vaccine elicited a weaker-than-expected antibody response. «We see that there is some impact,» Yu acknowledges, «but it's not black and white.» (Preliminary efficacy data for the AstraZeneca/Oxford vaccine suggest that immunity against its adenovirus vector may have compromised that candidate's performance as well, at least in double-full-load dosing.).
The other two Chinese players, Sinovac Biotech and China National Biotec Group (CNBG) - a subsidiary of one of the world's largest vaccine manufacturers, state-owned Sinopharm - are taking a different approach: vaccinating people with the whole, «killed» virus. This does not require sophisticated protein or RNA design or genetic engineering: Scientists simply inactivate the virus with a chemical (beta propiolactone) and mix it with an adjuvant that effectively puts the immune system on full alert. In theory, these vaccines can produce broader antibody and T-cell responses, because they contain the full set of viral proteins, rather than just one. And unlike mRNA vaccines, which have to be stored at sub-zero temperatures, inactivated viruses require no more than the ordinary refrigeration of any household fridge.
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But many scientists see inactivated virus vaccines as outdated, difficult to manufacture in large quantities and potentially dangerous. Warp Speed rejected the approach outright. «I don't think the inactivated vaccine is a good idea,» says Moncef Slaoui, chief scientist at Warp Speed.
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A major concern is that inactivated SARS-CoV-2 vaccines could trigger a more severe disease, known as «enhanced respiratory disease», in immunised people who do become infected. Basically, if a vaccine triggers ineffective antibodies, they can form immune complexes that clog the lungs. This happened with a respiratory syncytial virus vaccine given to children in the 1960s, and in animal experiments with vaccines against SARS and another coronavirus disease, Middle East respiratory syndrome. The prospect of growing large batches of virus before killing them also poses problems; twice in the last five years, live poliovirus has escaped from European plants making inactivated poliovirus vaccines. Yes, yes, what some conspiracy theorists claim happened in the «mysterious» virology lab in Wuhan has happened before in Europe itself, without the western media or any crazy president pointing an accusing finger at us.
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But inactivated SARS-CoV-2 vaccines, unlike mRNA and other technologies widely supported by Operation Warp Speed, have a strong track record. «There are many different ways to make vaccines, and it's great that innovation is happening alongside proven approaches,» says Nicole Lurie, strategic advisor to the Coalition for Epidemic Preparedness Innovation (CEPI), who previously served as US assistant secretary for preparedness and response. «Inactivated vaccines are one of several proven approaches.» Meng Weining, senior director of Sinovac, says they compared the inactivated approach - which they already use to make six vaccines - with two other strategies in animal models. «The inactivated whole virus vaccine gave a much, much better result,» says Meng.
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Although it is theoretically easier to produce mRNA in large quantities than to grow the virus on a similar scale, vaccine experts say the production of inactivated virus vaccines is unlikely to be an obstacle. CNBG, for example, has «enormous resources»: 10,000 employees and scientists, huge manufacturing capacity,» says Nicholas Jackson, who heads CEPI's China office and formerly worked in vaccine R&D at Pfizer. «They are a very competent beast.» And, crucially for Chinese vaccine diplomacy, many other countries have manufacturers that have been producing inactivated virus vaccines for decades.
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If China's COVID-19 vaccines work, manufacturers say they could produce 1.5 billion doses in total next year. And countries that cannot access Warp Speed-funded vaccines, especially those that have hosted Chinese efficacy trials, could have a more assured vaccine supply.
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Sheikh Mohammed Bin Rashid Al Maktoum, prime minister of the United Arab Emirates (UAE), on 3 November tweeted a photo of himself in Dubai with the right sleeve of his kandura rolled up high, being injected with a CNBG COVID-19 vaccine. «We wish everyone safety and great health, and we are proud of our teams who have worked tirelessly to make the vaccine available in the UAE,» Al Maktoum wrote. Two of the country's top ministers had received the vaccine three weeks earlier.
Pictured above is Mohammed bin Rashid Al Maktoum (left), Prime Minister of the United Arab Emirates, shortly after receiving a COVID-19 vaccine from CanSino Biologics on 3 November under his country's emergency use authorisation.
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The UAE has become the cornerstone of the NBSC efficacy trials and is following China's controversial lead in allowing people to receive the vaccine outside of clinical trials.
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At a 23 June videoconference linking Abu Dhabi, Beijing and Wuhan, health officials, ambassadors and CNBG executives sat at long tables in rooms decorated with the flags of each country and celebrated their decision to conduct a trial together to assess efficacy. The trial has since expanded to Bahrain, Egypt and Jordan and is expected to recruit 45,000 people. CNBG says it came to the UAE to test its two whole-virus vaccines - similar inactivated preparations made by two independent, and even competing, laboratories, one in Wuhan and the other in Beijing - because the high rate of SARS-CoV-2 infection there should hasten a sign of efficacy. But diplomacy and trade also drove the decision. The UAE's huge foreign workforce means that trial participants come from 125 different countries. «If you can prove that these vaccines work in the UAE,» says Huang, «that means everyone would think the vaccine would work in their countries too.».
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China may be hoping for a public relations (PR) benefit as well: The United Arab Emirates and many of the other partner countries have large Muslim populations, which Huang says could help mitigate human rights complaints about China's treatment of Uighur Muslims in Xinjiang province. «They certainly don't want to have more enemies abroad,» he says.
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Huang adds that through its series of overseas trials, China hopes to create goodwill for its Silk Belt and Road Initiative (BRI), massive infrastructure investment in more than 100 countries to increase trade. Critics have accused the BRI of being «debt trap» diplomacy that is a form of neo-colonialism. «China wants to work with these countries and prioritise them to have the vaccine because I think this will facilitate the implementation of the BRI,» he says.
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China's vaccine diplomacy has not always worked well. On 9 November, after Brazil suspended a Sinovac vaccine trial following the death of a participant, President Jair Bolsonaro took to Facebook. «Death, disability, anomalia,» he wrote, quoting a Brazilian health agency that had listed the possible reasons for the suspension: death, disability, genetic anomalies. Bolsonaro's message was clear: This Chinese vaccine, called CoronaVac, was dangerous.
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«A lot of people were very surprised by that post,» says Esper Kallas, who runs the vaccine trial centre at the University of São Paulo that the participant had joined. «He was celebrating the failure of a vaccine.» For Bolsonaro, it was a public relations victory over his political archenemy, the governor of São Paulo, who supported the CoronaVac trial. The president was also reveling in a setback for China, which Bolsonaro, like his ally, US President Donald Trump, has relentlessly criticised.
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It turned out that the participant died of a drug overdose. His death had nothing to do with the CoronaVac, and the trial was quickly resumed.
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China chose to navigate Brazil's daunting politics because with an out-of-control pandemic - it is third in the world in total infections, with more than 100,000 new cases every week - the country is a magnet for vaccine trials and is desperate for vaccines. The state of São Paulo in September committed $90 million to Sinovac for 46 million doses (this is 10 times cheaper than what the US government is paying for mRNA vaccines from Pfizer/BioNTech and Moderna). And Brazil could increase supply by manufacturing the vaccine on site under licence. Sinovac says it could transfer its technology to Instituto Butantan, a major vaccine manufacturer in Sao Paulo, a collaboration Meng describes as «win-win».
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China has had warmer receptions in other countries. In September, Turkey launched a 13,000-person efficacy trial of Sinovac's vaccine. Serhat Ünal, who heads Hacettepe University's Vaccine Institute - which is similar to Butantan's in Brazil - and sits on the health ministry's scientific board, says Turkey has «a good infrastructure for phase III studies» and, unlike the US and much of Europe, hosted a Chinese vaccine manufacturer.
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The three Chinese manufacturers also have large efficacy trials planned or underway in Indonesia, Pakistan, Saudi Arabia, Mexico and Chile (see map above). It's a good strategy, says Ünal. «When you do phase III in different countries, it's more transparent, it's more reliable,» he says.
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As much as vaccine diplomacy influences the deals Chinese vaccine manufacturers make for efficacy trials, they are also driven by capitalism, says Yip, who for four years headed the China office of the US Centers for Disease Control and Prevention (CDC). «Everyone is clamouring for a COVID vaccine,» he says. «Everyone wants to tell their people that we've got some vaccine for you.» Y Chinese companies will make profits when supplying it.
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It is a safe bet that one or more of China's overseas trials will announce efficacy data any day now. Results so far from other vaccines have fuelled a growing sense that many vaccines will crush, what is, from a vaccine's point of view, a somewhat weak virus. But China is not waiting for phase III results before using vaccines widely at home. Its regulators appear to be satisfied with the animal studies combined with minimal safety and immune response data from phase I and II trials. In June, CanSino received an emergency use authorisation to vaccinate the military, and since then both Sinovac and CNBG have been given the green light to vaccinate large populations outside of clinical trials. Unconfessable but presumably very significant numbers.
A refrigerated container with a batch of 120,000 doses of Sinovac's Chinese COVID-19 vaccine arrived at São Paulo international airport on 19 November. The vaccine will be used if ongoing efficacy trials show it to be safe and effective.
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With the pandemic defeated at home, China is vaccinating its people as insurance, often against a dangerously infected world.. CanSino's Yu says «thousands» of troops on peacekeeping missions have received his company's vaccine before travelling to places with a high burden of COVID-19. CNBG says «hundreds of thousands» of people in China have received their vaccines. «By doing this, we are able to build an immunological barrier among specific groups of people such as health care workers, pandemic prevention personnel and border inspection personnel,» the company explained in its written responses to Science. Vaccination is «completely voluntary with informed consent,» CNBG stresses. Moreover, «We did not receive a single case report of a severe adverse reaction, and no infections were reported for vaccinees working in high-risk areas».
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Sinovac's Meng says that «more than 90%» of the company's employees have received their vaccination because they are considered a high-risk group; he received it because he travels abroad. (According to China's Ministry of Culture and Tourism, 155 million Chinese travelled abroad in 2019, including thousands of students university students who are continuing their education in the best American universities). In October, the company began selling its vaccine -$60 for two doses - in Yiwu, a city in Zhejiang province. And Yip says the government was even considering vaccinating all of Beijing after an outbreak of COVID-19 there in June. Yip says officials «had already written the guidelines»; if more than 500 cases had come to light, «they would inject everyone in Beijing with the vaccine». In the end, contact tracing, testing and isolation of infected people limited the outbreak to 335 cases.
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In the end, contact tracing, testing and isolation of infected persons limited the outbreak to 335 cases.
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Morrison says that the Chinese government has «clearly decided at the highest level» that it is worth betting on creating «facts on the ground»and gain a global commercialisation advantage by having the first COVID-19 vaccines in wide use. «It's a risk but it's also potentially a big win,» he says.
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But what happens if damage is done? «You shouldn't apply peacetime rules during war. Our lives are turned upside down,» says Yip, who lives part-time in Beijing.
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If its range of vaccines is successful, China's image will gain a boost both at home and abroad. «They have reputational problems, internally and externally,» says Morrison.
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In May, China's President Xi Jinping told the World Health Assembly, which governs the World Health Organisation (WHO), that the country would make its COVID-19 vaccines «a global public good», a somewhat vague statement that left many China watchers scratching their heads. However, China fulfilled this commitment in October by joining the COVID-19 Global Vaccine Access Service (COVAX)., The WHO and UNECE are leading an effort in part to ensure that any product that is proven safe and effective reaches rich and poor countries alike quickly.
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This is primarily a diplomatic move. COVAX has not received support from the US or Russia, and China sees that it «could have a controlling influence over an important international mechanism». Moreover, says Alexandra Phelan, a lawyer at Georgetown University's Center for Global Health Science and Security who specialises in China, «It is a good act of a global citizen to support this effort».
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If a vaccine made in China proves safe and effective, it could help people forget the pandemic that started there and how poorly the government responded at first, says Morrison. And at home, it could absolutely clean up the image of China's vaccine manufacturers. Chinese citizens have recovered from a series of scandals over the past decade that include the use of ineffective vaccines against diphtheria, pertussis and tetanus; inadequate registrations of a rabies vaccine; and sales of an expired polio vaccine.
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A successful Chinese-made COVID-19 vaccine that has been vetted by external regulators would reassure the domestic market, says Phelan. «There is a lot of domestic ground to make up.».
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In Brazil, Kallas says a similar dilemma could arise if Butantan, as expected, starts manufacturing Sinovac's CoronaVac. «There is a saying here that the neighbour's chicken is always the tastiest,» says Kallas. «We have a perception that everything we make is not as good as the imported stuff.»
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But for now, Brazil is embracing the Chinese vaccine. With cases on the rise, the arrival of just 120,000 doses of CoronaVac on 19 November became big news. The bias against China is little more than a far-right political «contamination», says Kallas, and most Brazilians see CoronaVac as «a viable option».
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In short, China is managing its vaccine supply trials around the world intelligently and strategically, with no epidemiological fires to put out within its borders. As always, the Chinese are the smartest in the class. And to their economic clout they are now adding biological and diplomatic clout. Soon no country in the world will be able to afford to be China's enemy. And its businesses of all kinds are there, freely quoted and available to any investor.
It is true that as of 3 June 2020 the S&P 500 is at -4% from the start of the year, the Dow Jones is at -9%, the German DAX is at -7% and the Hong Kong stock exchange is still at -15% YTD. It is also true that the stock markets of other countries are even further behind, such as those of Brazil, India, Russia, Indonesia or European countries like France, the UK, Italy or Spain. However, there are others which, to the surprise of many, are already at -2% levels, such as Japan or clearly in positive territory, such as Denmark.
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And not all investment possibilities are limited to matching the general reference indices of the countries, which as you can see on any website like this one, are still quite red in general. We can find some sectoral indices such as the Healthcare, Biotech or the very same Nasdaq with positive returns, despite the travails of this fateful year.
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But of course, having a portfolio full of international index funds or etfs, replicating only consistently winning sector indices, is almost as difficult as choosing a portfolio of world stocks that outperforms the market year after year.
Another possibility for the investor is to choose good actively managed funds that have managed to outperform their respective benchmarks for many years and are therefore already making money, net of fees, for their investors. The problem is that for the vast majority of retail investors (according to the unfortunate nomenclature used by Spanish regulation), finding funds that achieve substantial alpha and outperform their indices on a consistent and sustained basis over time is often as difficult, if not more so, than getting winning stocks or sector indices right.
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Here it is worth recalling what we explained in «Why big international investors don't invest in the same funds as you do»The "outperformance" of funds that consistently outperform their benchmark indices. There are some, but investors must have a portfolio size of several million to exceed the minimum requirements of these funds for professional or institutional investors.
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Fortunately, they can also be accessed through the back door, i.e. through the luxembourg funds of funds 125,000, as Luxembourg law considers a professional (non-retail) investor to be a professional investor above this minimum investment amount, and they aggregate sufficient volume to meet the minimums required by each institutional fund. Logically, the composition of these portfolios of funds of funds for professionals or institutional investors may be of higher or lower quality, outperforming or not the respective benchmark indices, since they obviously involve a fee in addition to the net returns obtained by the underlying institutional funds. It should not escape anyone's attention that being a fund for professional investors does not guarantee that it will outperform its respective index, as mediocrity is also rife among institutional funds. That said, the Luxembourg fund of funds that we have been using for our smaller Clients has also entered positive territory this week, in terms of net returns for the investor of course.
Therefore, those who are still negative so far this year could have done better, as there are options to invest a minimum of 125,000 euros and outperform the major international indices in terms of net returns. And that outperformance, that systematic cutting back in days weeks or months in the recovery period of losses generated by sell-offs like the one last March makes a huge difference to the performance we will achieve in the long run.. Because the quality of a fund or a portfolio management is not - only - measured by a lower fall in periods of crash or a higher rise in periods of euphoria, but above all by the quality of the fund or portfolio management. the speed of recovery of losses after a generalised drawdown. That is the key to those that consistently and permanently outperform the indices, and the degree to which they achieve this is critical to our earnings performance in the years ahead (of course it would also be critical to our performance to invest more in crash periods at rock bottom prices, but we have already discussed that). in the middle of a storm stock market).
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That is why it is not the same to start making money in 2020 as early as 3 June, before the major general indices of the world's main stock exchanges, as it is to start making money at the end of the month, during the summer or even later. Y Market conditions in 2020 are the best test to take the pulse of the quality of our portfolios.. Obviously the markets will go up and down and up again in the coming weeks, and every day the numbers will dance enormously. But whoever is still in negative YTD today, either with portfolios of self-selected stocks, or with portfolios of passively managed sector funds or actively managed funds, should not be cheating himself, he could have done better.
For those of you for whom the trees of panic and volatility prevent you from seeing the forest of opportunities and returns that lie in the palm of your hands, let us explain Nick Maggiulli's simple, mathematical analysis of Ritholtz Wealth, which we fully endorse.
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The crux of the matter is to shed light on asset purchases during times of panic. But first let us put the current crash in context.
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As of today, the low for the Dow Jones has occurred on 23 March 2020 and has been 35% from its highs, making it one of the worst months in the history of the US stock market.
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If we analyse all the crashes above 30% since 1915, we see that this crash is one of the fastest and fastest we have ever had.
Moreover, while in the past we see the little red dot that signals the floor, at this moment we still do not know if we have already seen the low of last week or if it is still to come in this coronavirus crash.
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Nevertheless, there is no doubt that these are golden times for investors buying equities now. Every euro or dollar we invest in today's markets will grow much more than those invested in previous months as soon as the markets recover. Because we all assume that sooner or later the markets will recover and humanity as a whole will eventually beat this virus as it has beaten other health crises before, right?
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To demonstrate that every dollar invested today will yield much more than those invested before the crash, let us imagine that we decide to invest $100 every month in the US stock market from September 1929 to November 1954 (crash of 1929 and its subsequent long recovery).
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If we had followed this strategy, this is what each $100 packet would have earned (including dividends and adjusted for inflation) until the recovery was completed in November 1954:
As you can see, the closer we bought to the low in the summer of 1932, the greater the long term benefit of that purchase. Each $100 invested at those lows grew $1200, which is three times as much as the $100 packs bought in 1930 ($400).
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However, even if we look at the other falls above 30% shown in the first chart, we still see much higher profits if we buy during times of major panic and market declines:
This chart shows that buying near crashes (even if we don't hit their lows exactly) provides between 50 and 100% more profit compared to an investment at other times. That means that your $100 will grow $150 or $200 more (adjusted for inflation) when the market has recovered again.
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But where does such a spectacular increase come from? Well, besides being intuitive, its origin lies in simple mathematics: Every percentage loss requires a higher percentage gain to compensate for it. At this point in the film, it should not escape anyone's attention that a 10% fall requires an 11,11% rise to recover that loss. In the same way that a 20% loss requires a 25% rise and a 50% fall requires a 100% rise. You can see this exponential relationship very clearly in the graph below:
Let us now see what the chart would look like adapting it to the fall in the markets up to last week (-33%) and see the profit that would be needed to recover it:
If we do not see new lows, the recovery needed is 50%. And what a coincidence, for every $100 invested now they will generate $150 (a further 50%) when the recovery materialises.
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But despite the obvious benefit of buying during the current panic, most investors are not doing so at all. Including those who have a lot of cash, either because they had it in other assets or because they sold during the crash in panic. And thank goodness they don't, because if they did, the crashes would no longer be crashes, and therefore the opportunities for good investors would vanish before they materialised. Excuses for not doing so can be diverse and very convincing for less good investors. Among them are «this time it's different» or «we don't know if it will fall further». As if a good investor is only one who is lucky enough to buy just on the day when the markets quote what will be the historic low of that crash. Remember that in graph 2 we talk about buying "as close as possible" to the low, without aiming to buy right on the bull's eye.
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Let us now honestly answer the following question: How long do you think it will take for the markets to recover to the pre-pandemic highs? A month, a year, a decade? How long will it take for the indices to recover from that 33% decline? Answer yourselves.
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Based on that answer, let us return again to the expected annual return in the future for our current investment. The equation is as follows:
Expected annual return = (1 + % Gain needed to recover)^(1/Number of years to recovery) - 1
But since we know that the percentage gain needed to recover is 50%, we can simplify it as follows:
Expected annual return = (1.5)^(1/Number of years to recovery) - 1
Therefore, if you think that the market will take time to recover:
1 year, then your expected annual return = 50%
2 years, then your expected annual return = 22%
3 years, then your expected annual return = 14%
4 years, then your expected annual return = 11%
5 years, then your expected annual return = 8%
Even taking 5 years for a full recovery, the market would be offering you the same return as the US stock market has historically yielded. Nick Maggiulli asked this same question on twitter and found that two out of three of his poll participants believe that the recovery will come within 3 years.
That means that if the majority of respondents are correct, any investment made now, is going to yield between 14% and 50% annualised until the market recovers. Think about what this means. Investors who choose not to buy at this time are either giving up an annualised return in excess of 14% for the next 3 years, or they believe that the market will take more than 5 years to recover and despise annualised returns of less than 8%. In short, the only reasonable reason not to do so is if you already have all your money invested and have no more at the moment (time to sell grandma to invest more in the stock market, as he said...).
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Of course, new black swans may occur on the planet, delaying the recovery of markets, as has been the case for decades in Japan, for example. But it seems unlikely, especially in efficient economies such as the US and growing economies such as China and the other Asian economic orbit. Moreover, note that throughout the article we are referring to the market, i.e. the indices. But imagine the figures that will be achieved by those who also have the possibility of investing in actively managed funds that significantly outperform the benchmark indices. In other words, those who invest in portfolios where the management team selects the companies with the greatest potential for recovery at this time (Healthcare sector in China, for example). And we will not tire of repeating that, although the vast majority of actively managed funds do not outperform their benchmarks, especially within the limited universe of funds marketed in Spain, there are world-renowned managers who have been doing so for decades. Unfortunately, however, they are not easily accessible to the average Spanish investor, as we explain in detail in «Why don't large international investors invest in the same funds as you?«.
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As he once said Jim O'Shaughnesy, Many people confuse possibility with probability, and the two are almost opposites. Keep this in mind as you face new challenges that will come in these days.
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One of the things that still surprises me is to see how simple mathematics can help us to clarify the thickets in which our own minds entangle us. Our fears and passions are our worst ally in the face of the crash caused by the covid19 virus. Objective figures are certainly a glimmer of sanity to handle Mr. Market's schizophrenia. And the numbers show us that, assuming the market (and even more so our well selected stocks by the world's best managers) will recover in the coming quarters or semesters, the returns we will get are very, very attractive. And therefore, any hypothetical new low in the stock markets would be nothing more than an additional buying opportunity and even higher profits. Fortunately for a minority, the majority do not see it this way and are still waiting to see the floor, like those who are permanently waiting to catch the next train, which will probably be an AVE train that does not stop at their particular station.
No se trata de ser tremendistas sino de simplemente tener un mínimo sentido crítico ante las barbaridades que medios de comunicación, políticos y demás organismos oficiales de muchos países occidentales proclaman según sus propios intereses y/o ignorancia. Por ejemplo, la cifra de mortalidad del coronavirus del 2% que se viene dando por buena a diestro y siniestro simplemente no es realista. Y para darse cuenta de ello basta con saber multiplicar y dividir además de querer conocer la realidad.
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Aunque a muchos pueda sorprender, la Wikipedia (gráfico inferior) resulta una de las fuentes con más datos y más actualizados día a día en esta progresión de la pandemia. Daremos por buenas las cifras que publica oficialmente China para ver que la tasa de mortalidad probablemente es muy superior al 2% mencionado, ya que si pensamos que las cifras reales son aún peores (qué otro motivo sino tendrían las autoridades chinas para manipularlas), la situación y las perspectivas serían todavía más terroríficas. En las actualizaciones diarias de los infectados por el nuevo o novel coronavirus vemos una desaceleración importante en los últimos días, pasando el porcentaje de más del 30% al 7.7% en los últimos 10 días.
Lo mismo ocurre con el número de muertos, cuyo incremento se ve también desacelerar desde niveles superiores al 35% hasta el 12% actual. Obviamente la mortalidad de una epidemia debe calcularse como la cifra de muertes respecto al total de infectados, y esto es lo que están calculando de manera errónea quienes proclaman que la tasa de mortalidad del nuevo coronavirus (2019-nCoV) es de alrededor del 2%. Pero a nadie se le debería escapar el error de bulto que cometen al calcular los muertos hasta hoy con los infectados hasta hoy, puesto que muchos de los infectados contabilizados hoy, lamentablemente, morirán en los próximos días. Es decir que la tasa de mortalidad debe calcularse cuando la epidemia ya ha pasado, puesto que si lo hacemos durante el periodo de expansión (actual) estaremos dando por hecho que ninguno de los infectados actualmente vivos va a morir. Un error tan elemental que difícilmente lo podemos achacar a la ignorancia de quienes manejan ese 2% de mortalidad como argumento para que los habitantes del planeta sigan despreocupados y haciendo una vida normal. La cifra de muertos hoy ya supera a los fallecidos por el SARS. Y es que dicha epidemia solo contagió a 8,000 personas en 9 meses, mientras que solo en China ya son más de 37,000 infectados oficiales en apenas 2 meses, y con una tasa de mortalidad real que a continuación trataremos de intuir.
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Obviamente es muy difícil afinar cuantos de los contagiados a día de hoy van a morir en los próximos días, y aún más adivinar cuántos días van a sobrevivir. Pero tan solo pensando que una quinta parte de los enfermos graves (con sus constantes alteradas, es decir realmente muy enfermos), que actualmente suponen casi el 17% de los infectados hoy, pueden acabar muriéndose en los siguientes, pongamos 4 días, y le sumamos los que ya han fallecido, el cálculo de la tasa de mortalidad se dispara a niveles superiores al 4%. Y eso sin contar que ninguno de los infectados durante esos próximos 4 días vaya a morir en los siguientes… Por tanto estamos ante una pandemia cuya tasa de mortalidad solo podremos calcular a toro pasado, pero que todos los indicios señalan que probablemente duplicará ese 2% que proclaman en la mayoría de medios. Recordad que la tasa de mortalidad de la gripe es muy inferior al 1%, existe vacuna relativamente efectiva, y aún así causa centenares de miles de muertes cada año en todo el mundo. Si a esa tasa realista de mortalidad de este nuevo coronavirus le unimos la escalofriante facilidad de contagio que está demostrando y que la vacuna está aún por llegar, el cóctel explosivo está servido. Además imaginad como se comportará esta infección en sociedades contiguas a China como por ejemplo Vietnam, Myanmar, Laos, Tailandia, Filipinas, India, Indonesia, Malaysia, etc, con 1.500 millones de habitantes cuya higiene, sistemas sanitarios y de control epidemiológico son muchísimo más precarios que los de la China de hoy en día. Allí la proliferación del virus no se podrá controlar, como está ocurriendo en China según las cifras oficiales de los últimos días, sino que sólo una medicación o vacuna accesible y a tiempo evitaría una mortaldad extravagante.
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Merece la pena leer el interesantísimo análisis de Tyler Durden en Zerohedge, indicando acertadamente que en un país como los mismísmos EE.UU. la situación también se puede complicar mucho debido al elevado coste del sistema sanitario para la población que no puede costearse un buen seguro privado. Eso llevaría a los infectados norteamericanos a evitar utilizar los servicios sanitarios, con el consiguiente descontrol de la epidemia, a pesar de ser una de las sociedades con mayor renta per cápita del planeta. Además, en buena parte de las democracias occidentales, los gobiernos serían mucho más reticentes que el gobierno chino a perjudicar sus economías domésticas para tratar de controlar la epidemia. Por definición y desgracia, la mayoría de democracias occidentales se preocuparían más por ceder ante sus lobbys y tomar medidas populistas que no pusieran en riesgo su reelección, ni la economía, ni sus intereses partidistas, que por ordenar medidas valientes aunque impopulares. Vemos ejemplos a diario de ministros de sanidad y alcaldes minimizando los riesgos y haciendo llamamientos para que la actividad económica siga igual y nada perturbe el frágil equilibrio económico del sur de Europa. Sin ir más lejos, es vergonzoso que tengan que ser las propias empresas quienes suspendan su participación en el Mobile World Congress de Barcelona, mientras las autoridades locales siguen insistiendo en convencerles para que no cancelen sus reservas de hoteles, restaurantes, chóferes y demás gastos inconfesables.
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Dicho esto, obviamente las esperanzas no debemos tenerlas en el control de la pandemia a nivel global, sino en los tratamientos efectivos y posteriores vacunas que puedan ponerse a disposición de la población mundial en las próximas semanas. Porque si no tenemos esos fármacos hasta dentro de varios meses, la pandemia puede llegar a nuestros propios barrios y acarrear millones de víctimas, y con especial crudeza en Asia. Pero no basta con descubrir un fármaco o una vacuna efectiva, también debemos ser capaces de fabricarla masivamente y a un coste asumible para la inmensa mayoría de población y/o Estados del planeta.
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Empresas del sector salud como Inovio, líderes en investigación ante virus como el Ébola, MERS o Zika, están ya ensayando posibles vacunas para el 2019-nCoV en animales. Y probablemente los criticados «atajos» en los protocolos internacionales de ensayos clínicos que China a buen seguro está tomando, aceleren la consecución de un tratamiento eficaz que salve millones de vidas en todo el planeta. Porque ante la elevadísima tasa de propagación y mortalidad de este coronavirus, el tiempo es más que oro, es Vida.
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¿Pero como está afectando a la economía global esta pandemia? Pues apenas estamos viendo la punta del iceberg de los efectos destructivos en cuanto a crecimiento económico se refiere. Obviamente la primera de la lista en verse afectada es la economía de China. Pero el efecto en cascada puede ser devastador debido a la interconexión existente entre los productos chinos y los del resto del mundo. Fijaos sino en los componentes chinos (piezas a menudo internas e invisibles) que tenéis a vuestro alrededor, y pensad que ya están materialmente dejando de ser producidos temporalmente.
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Esa palabra, la temporalidad, es la clave para convertir en oportunidad una lamentabilísima crisis sanitaria global. Porque aunque el tratamiento o la vacuna llegue a tiempo de evitar la epidemia global, la crisis en China es ya un hecho inevitable. Pero que sea ya una realidad el hecho de que buena parte del país esté colapsado, con sus negocios cerrados, sus transportes bloqueados y la gente encerrada en sus casas, no significa que esa situación no sea reversible en los próximos trimestres, sino precisamente significa que el resurgir de China está más próximo. Porque, a diferencia de otras crisis como pueden ser una guerra comercial, un embargo económico, una guerra militar o cualquier otro conflicto geopolítico, esta epidemia tiene fecha de caducidad. Y la tiene no solo porque la infección generará un pico natural y acabará auto-controlándose, sino porque además cualquier vacuna o medicación acortarán drásticamente dicho periodo y la mortalidad que conlleve, minimizando sus efectos y vigorizando la recuperación.
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Dando por hecho que dicha medicación o vacuna llegue a tiempo de evitar una pandemia que afecte gravemente a Europa y América, ¿cual será el escenario post-epidémico en Asia? El timing natural epidemiológico indica que la recuperación de la normalidad en China puede llegar mucho antes que al resto de vecinos. Y además China dispone de muchos más recursos, disciplina y estructura sanitaria para medicar a su población de manera efectiva cuando llegue el momento. También será determinante la férrea voluntad política y la capacidad económica del Estado chino para recuperar su economía mediante estímulos financieros, que pueden incluso empequeñecer los QE llevados a cabo por los bancos centrales occidentales. Debemos esperar pues una respuesta post-epidemia del gobierno de Xi Jinping descomunal. No se escatimará ningún esfuerzo para que la economía china recupere el tiempo perdido, que recordemos que no irá más allá de un par de trimestres, puesto que los tratamientos (chinos u occidentales) no tardarán en aparecer y estar a disposición de quien los pague. Por tanto, es previsible que durante el segundo semestre de 2020 (o incluso antes) la recuperación de la economía china esté en marcha, siendo una cuestión de Estado y de orgullo nacional volver a la senda del dominio de la economía mundial al que parece ser que los chinos están llamados. Además, la guerra comercial con los EE.UU. no ha vertido sangre al río, como ya vaticinamos hace casi un año, por lo que hay aún menos motivos para el pesimismo en la recuperación económica de China.
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Por todo ello, además de prepararnos por si acaso a nosotros mismos y a nuestro entorno para el peor escenario de la pandemia (recordad que la más que probable tasa de mortalidad actual es muy superior al 2% como hemos visto), haríamos bien en posicionar nuestras inversiones para aprovechar de la mejor manera este cisne negro de libro llamado coronavirus. Debemos pues aprovechar las posibles caídas de los mercados asiáticos -especialmente el sectorhealthcarechino– para comprar acciones de empresas que resurgirán de las cenizas de esta epidemia con una fuerza y un orgullo que difícilmente veremos en occidente. No obstante resulta significativo que hasta la fecha las caídas de las cotizaciones han sido sorprendentemente moderadas, quizá anticipando dicha fulgurante recuperación económica, o bien fruto de la crónica esquizofrenia de Mr. Market, quien sabe.
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Hace tiempo que vemos en las economías crecientes de Asia el único nicho de crecimiento económico robusto del planeta, y así lo hemos dicho en repetidas ocasiones. Sólo allí se dan los dos factores imprescindibles para el crecimiento económico: Una alta productividad; y una demografía con mayoría de jóvenes productivos y minoría de jubilados extractivos. No es casual que un buen número de fondos en los que invertimos estén gestionados en Asia y por gestores locales. Por eso este lamentable cisne negro viene, como todos, acompañado de una oportunidad como las que se suelen dar escasas veces a lo largo de una vida inversora. Por el momento los Mercados asiáticos parecen ajenos al bloqueo que se está gestando, y si la solución farmacológica llega antes de que las bolsas caigan, mejor que mejor. Pero si vemos bajadas importantes de precios en las próximas semanas, desde luego será una oportunidad para comprar y sobreponderar empresas de Asia, especialmente de China, con un potencial enorme en los próximos semestres y años.
In the EU more and more alternative investment fund managers are becoming more and more -are governed by the AIFMD (Alternative Investment Fund Managers Directive). The alternative investment nomenclature includes all European investment vehicles that do not meet the requirements to be considered UCITS (Undertakings for Collectible Investment in Transferable Securities). If, in addition to being non-UCITS, their managers comply with the above-mentioned directive, they will be considered AIFMD funds. UCITS funds are those usually sold by Spanish banks to their retail and private banking clients. However, it should not escape anyone's attention that on the other hand alternative investment funds are the funds of choice for major investors worldwide. In other words, although for the vast majority of Spanish retail and private banking investors their investment universe is limited to the 10,000 or so UCITS funds marketed by banks in Spain, for professional investors and the world's wealthiest individuals, alternative investment funds and hedge funds make up the vast majority of their portfolios. In other words, most of the world's best funds in history (some even closed to new investors as they do not accept any more money) are not UCITS and are not marketed in Spain, but alternative management funds, which can be invested in jurisdictions that are much less restrictive than Spain.
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Let us remember that there are more than 100,000 investment funds in the world. And the million-dollar question is, how can a Spanish retail investor access this universe of 90,000 non-UCITS funds that are not marketed in Spain? The answer is not so simple, as it is not enough to open an account in a bank abroad. There are additional difficulties The most common problems encountered by the ordinary Spanish investor, such as taxation, which is linked to the jurisdiction where the fund is domiciled, are as follows. As we will see below, funds do not necessarily have to be domiciled in the same country as the management company. Most of the world's alternative investment management companies, domiciled in the USA, Asia, etc., have their headquarters in the same country as the fund management company. have local funds for investors in their own country, but they also have replicas of these funds in offshore jurisdictions for large international investors.
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The reason why fund managers create these mirror funds or feeder funds for international investors in offshore jurisdictions, where taxation for the investor is zero, is not so much so that they do not pay taxes, but so that they are not harmed by the taxation of the country where the fund manager is located in addition to their own taxation. In other words, if they invest directly in local funds, they would be subject to double taxation: That of the country of origin of the fund manager and that of their own country where the investors reside. It is true that in some cases such double taxation could be fully or partially recovered if there is a treaty between the two countries to avoid it, but not in all cases. Moreover, even in those cases where such treaties would be beneficial, it is still an inconvenience that adds to the investor's fiscal discomfort and uncertainty.
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This is why large international investors often use offshore and non-EU mirror funds, mirror funds or feeder funds domiciled offshore and in non-EU countries. OECD to invest in funds from American, Asian, etc. fund managers. In this way a Spanish investor who invests in a US hedge fund, for example, should not be taxed in both the USA and Spain, but only in Spain, without the need to resort to bilateral treaties to avoid double taxation.. The problem is that Spanish taxation penalises investors resident in Spain who invest in funds domiciled in these offshore countries, where the aforementioned replicas aimed at international investors are usually located (we will explain later how this penalty can be avoided).
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Let us look at an example of a benchmark fund manager with the aforementioned duplicity of funds, aimed at investors according to their country of origin: The manager of the legendary fund Medallion (already closed to new investors since 1993) is the prestigious Renaissance, of which we have already we spoke at length and explained our visit to their bunker in this article. Well, this fund manager, like so many other world leaders in management, has funds for domestic institutional investors (US-investor), domiciled in the USA; and funds domiciled in Bermuda for foreign investors (non-US investors). As we have already said, the distinction is made so that the international investor does not suffer the taxation of the funds domiciled in the USA and so that they only have the effects of the taxation of the respective countries where each investor resides.
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However, there are also other reasons for fund managers to domicile their funds for large international investors in non-OECD/offshore jurisdictions. In addition to avoiding double taxation for the international investor and saving taxes for the fund manager itself, those jurisdictions do not entail any restrictions in terms of trading platforms or geopolitical vetoes when it comes to underwriting funds. For example, most international investors would find it very difficult to subscribe to funds in countries such as China, Korea, Indonesia, the Philippines, Vietnam, Russia, etc. In some cases because of political/economic sanctions imposed by certain countries, and in others simply because the markets are still technically, politically and/or regulatory unwilling to allow international money into their domestic funds.
The fact is that, whether by hook or by crook, large international investors use these channels created ad hoc for them. And either they are not penalised fiscally by their respective countries if they invest in these jurisdictions, or they have investment vehicles and structures that legally exempt them from these penalties. The loser, as always, is the ordinary Spanish investor, who is condemned to invest in the UCITS environment and the few retail hedge funds domiciled in Spain, in short, condemned to the fish that our banking system sells them.
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It is true that some American or Asian fund managers, eager to attract retail funds from the European market, set up their own UCITS vehicles in Ireland or Luxembourg and register them for marketing in various EU countries. But unfortunately they are often not the brightest but the most voracious.. And they do not seem to mind giving up much of their alternative know-how and assuming the restrictions on portfolio concentration, liquidity, restriction of hedging and/or restriction of operational freedom in general that the UCITS label entails, in exchange for inflows of money from small European investors. The result is that these UCITS funds are very different from the original ones and with much lower returns.
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Therefore, we are going to focus on the solutions so that a smaller Spanish investor can access the best American and Asian hedge funds on the planet without suffering, on the one hand, double taxation for investing in their funds aimed at local investors, and on the other hand, the tax penalty for investing in their feeders or offshore mirror funds aimed at international investors. There are two absolutely legal and transparent ways of doing this:
This second option solves in one fell swoop the 3 problems encountered by the ordinary Spanish investor:
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First of all, the first insurmountable problem for most investors is the minimum investment requirement. And the fact is that The best funds in the world often lack retail classes and require prohibitive minimums of $500,000, $1 million or even $5 or $10 million or euro equivalent. Moreover, without going any further, funds such as those of the aforementioned Renaissance not only require a minimum investment of 5 million, but they also select the institutional investors they like the most, and can be rejected even if they exceed this minimum investment (Cluster Family Office had to pass this filter to be approved as investors in Renaissance, considered the best fund manager in the world for several decades). Well, these AIFMD funds of funds that contain large institutional funds 125,000 minimums are usually as low as 125,000 eur.
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Secondly, it avoids the tax penalty that offshore investments suffer from, as explained above, as they are funds domiciled in Luxembourg and under the AIFMD label. Therefore, Spanish regulation and legislation considers their capital gains to be as deferrable over time as those of any Banco Santander or La Caixa fund.
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And thirdly, by investing in them from accounts in Luxembourg banks, it avoids the restrictive reading of the Spanish regulator to qualify as a professional investor, This makes it de facto impossible for ordinary investors to subscribe to these funds from Spain. These Luxembourg funds are marketed exclusively to well-informed investors (or qualified or professional investors, depending on the nomenclature of each jurisdiction). In other words, a Spanish retail investor cannot invest in them from a bank in Spain, as alternative management is considered a complex product, even though it bears the European AIFMD stamp. Therefore, according to Spanish regulations, these AIFMD funds can only be marketed in Spain for professional investors, which implies very restrictive requirements that are impossible for ordinary investors to comply with. Moreover, the only way for a retail investor to explicitly request to renounce his status and be allowed to invest in these funds from Spain as a professional is to comply with the following requirements at least two of the following requirements according to Spanish regulations:
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That the client has undertaken transactions of significant size in the relevant market in the financial instrument in question or similar financial instruments, with an average frequency of 10 per quarter over the previous four quarters.
The size of the customer's portfolio of financial instruments, consisting of cash deposits and financial instruments, exceeds EUR 500,000.
The customer holds or has held for at least one year a professional position in the financial sector that requires knowledge of the operations or services envisaged.
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It should also be noted that it is the Spanish marketer or bank itself that must check and demonstrate to the regulator that these requirements are met, and that it will obviously prefer to sell this client its usual catalogue of own and external retail funds with its juicy implicit or explicit fees, rather than consider him eligible to buy alternative funds that are outside its marketing agreements. It is obviously de facto impossible for most Spanish investors to access such funds from accounts in Spain.
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By contrast, Luxembourg's regulation is much less restrictive and much more friendly with alternative investment funds for junior investors, as it is sufficient to be considered as a «well-informed» investor. The regulation reads as follows:
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To qualify as a «well informed» investor you must be either:
An Institutional Investor
A Professional Investor
Any other investor who has confirmed in writing that they adhere to the status of a «well informed» investor and who:
Either invests a minimum of EURO 125,000 in the specialised investment fund;
Or who has an appraisal from an EU bank, an investment firm or a management company certifying that they have the appropriate expertise, experience and knowledge to adequately understand the investment made in the fund.
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In other words, that 125,000 is sufficient for any investor to apply to be considered as an investor in Luxembourg. well-informed and therefore eligible to invest in an AIFMD fund. It is therefore advisable to open accounts with Luxembourg banks in order to be able to invest in these funds. Another thing is that banks require a minimum amount to open accounts for new clients, which is unfortunately often the case. That is why it is also essential to work with a professional who has a sufficient number of clients with these banks, i.e. who has influence on them to persuade them to accept new clients with accounts as small as 125,000 euros.
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In short, thanks to Luxembourg's less restrictive legislation, any Spanish investor with a minimum of 125,000 euros can invest in a completely legal and transparent manner in AIFMD alternative funds that contain the best alternative funds and hedge funds in the world, despite having very high minimums and being domiciled in jurisdictions only suitable for large institutional investors with complex investment structures and vehicles.
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The drawback obviously is that a fund of funds is commission on commission. It is therefore necessary to look very carefully at the historical NET returns obtained by the fund, and whether or not these are clearly higher than those obtained by each individual in their UCITS investment portfolio and Spanish banking universe..
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In the tables above you will see the historical performance of 3 world-renowned hedge funds - which some of you may recognise - with minimum investment levels of half a million, one million and 5 million. And finally, below these lines, the performance of a Luxembourg fund of funds AIFMD, therefore accessible to any investor. well-informed with an account in Luxembourg from $125,000, containing a dozen international funds (including the 3 above) plus a few listed stocks (Berkshire Hathaway...), so that you can compare it over the long term with your own portfolios.
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And finally, for those who still think that the limitations of the UCITS environment are worth it because of the possibility of investing only in transferable funds, here is an article entitled «Is it worth holding on to an upgradeable investment in exchange for further deferring accumulated capital gains?«. The results of the calculations you will find in that article are devastating, as just by improving the return by 0.21% per annum, the benefits of 20 years of capital gains deferral are outweighed by the average return of the last quarter of a century. More importantly, once the sold portfolio has been taxed, in addition to being free to invest at a higher yield in any hedge fund in the world, you can also defer taxation forever, either with your own investment vehicle or through a fund of funds AIFMD, as explained in points 1 and 2 above.
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Having said all this, for those who do not have that €125,000/$ minimum, there are honourable exceptions in the limited and mediocre UCITS environment. World-renowned Spanish value managers such as AZ Valor, Magallanes or Paramés himself (although his COBAS has yet to make headway) may be the best way to invest a small portfolio in an easy and simple way.
