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Traders on the New York Stock Exchange in April 2018. Image: Keystone
interview
Asset manager Pirmin Hotz explains what you need to look out for to get the most out of the stock market this year.
Daniel Zulauf / ch media
WatsonAlso read: Let’s look at the next stock market year: What will 2024 look like?
Pirmin Hotz: I was afraid of this question. Like everyone else, I don’t know what the future will look like, and if I’m honest, I’m happy about it.
Asset manager Pirmin Hotz. Image: hotz-partner.ch
Is this what you tell your clients who trust you with their assets?
Naturally. But I also tell them that I know intelligent, scientifically proven methods to overcome this uncertainty.
What do you think are your stock market principles?
I only invest in investments that are based on a process of economic value creation.
That means?
As a shareholder, thanks to Nestlé, I know that more than 300,000 people go to work every day to produce or sell something. I receive a dividend on the results of this work and in the long term the value of my shares also increases because the company continuously increases its profits with the existing capital. But if I buy a Bitcoin, I receive neither dividends nor interest. My hope rests solely on the fact that someone will pay me more for this Bitcoin than I paid.
“To put it bluntly, it looks like a pyramid scheme.”
Pirmin Hotz, asset manager
So there is no process of economic value creation and that’s why I don’t own any Bitcoins.
What other principle do you follow in your financial activities?
Solid investment diversification is crucial for long-term success on the stock market. An average stock portfolio includes around 50 different stocks – divided by industry, geographical region and other criteria. In the long term, this results in an average return of 7 to 9% per year, depending on the period under consideration. This is proven by analyzes of historical performance, such as those carried out by the Pictet bank since 1926 or by the three financial market historians Elroy Dimson, Paul Marsh and Mike Staunton over a period of 122 years.
The Swiss stock market performed significantly below average in 2023 and 2022, largely due to Roche’s poor form. Certain risks obviously cannot be diversified.
Your example shows very well why good diversification is important.
“Especially because we don’t know which stocks will be better next year, it is important to diversify the risks.”
If we knew that Novo Nordisk and Eli Lilly would again outshine all other pharmaceutical stocks in the coming year, we would of course have to concentrate entirely on these two stocks and leave out Roche, Novartis, Pfizer or Merck.
But you don’t. And you reduce your return.
No, because Roche or Novartis may be the future leaders of the return.
“Any diversified portfolio always contains stocks that are performing poorly”
Pirmin Hotz, asset manager
But let’s take the example of Martin Ebner. He had great success in the 1990s with his strategy of betting on very few stocks. I had met him three or four times in Zurich. He made fun of my consistent approach to diversification. He told me: “We know exactly which stocks to buy. We buy three or four stocks – Roche was one, ABB was another – that we know so well that we are always ahead of the market and better.”
But then Ebner almost went bankrupt.
Exactly. In 2001 the internet bubble burst. In September of the same year there was a terrorist attack on the World Trade Center in New York. The markets fell by more than 40%. Martin Ebner completely collapsed for two reasons: because he had not diversified his investments and because he had used too much borrowed capital.
“Ebner’s example proves that every guru at some point falls victim to overconfidence.”
Can an investor overestimate himself?
That’s why I like to say that I am a science-based asset manager. I wrote my thesis on the portfolio theory of Harry Markowitz, who recently passed away at the age of 95. Many people today scoff at this theory, which essentially states that markets process new information incredibly quickly and efficiently and incorporate it into the prices of stocks, bonds, and all other publicly traded securities. Because things happen so quickly, even professionals are always late.
But a professional is not a professional if he is always late.
Yes, we have to live with that. But the Ebners and all the hedge fund managers in the world, all of whom enjoy more or less guru status, wake up in the morning thinking they know more than the rest. Markowitz taught me humility from a young age. I saw that each bank was trying to distinguish itself through its best analysts, products and forecasters.
“I have learned to denounce this as complete hubris and I now know that it is the disease of all so-called gurus.”
Warren Buffett is also a guru, but his success is widely recognized.
Exactly. Warren Buffett is a true legend. But he is not a role model for me – even less so today. First, it invests almost exclusively in U.S. stocks. Secondly, it has a significant impact on insurance and banking values. Third, and most importantly, his stake in Apple represents about half of his total assets. This completely contradicts my principle. Apple is not an invulnerable company either.
Does diversification mean you should also buy stocks in companies or industries you don’t like?
NO. There are exclusion criteria.
“About ten years ago we decided to no longer hold shares in airlines, automobiles and banks”
We had to admit that these industries cannot keep up with the market average in the long term. These are industries where competition prevents the creation of long-term value for shareholders.
UBS has signed a deal with Credit Suisse. Don’t you miss a great opportunity?
We avoid bank stocks because we believe the sector as a whole will be on the brink of collapse again in the next crisis. Banks have too little capital. I’m also suspicious of the entire bonus system of the big banks.
Swedish investment company Cevian predicts UBS will double its share price.
Of course, UBS now has a great opportunity to capture a large part of Credit Suisse’s business. But Cevian is no reason to interfere. Activist investors are speculators, we don’t speculate, we invest for the long term. UBS still has to prove that the takeover of CS was a complete success.
What about the stocks of individual companies? How long do you see the decline lasting?
Making such decisions is much more difficult than avoiding an entire industry. General Electric was an icon of the American stock market until the 1990s. Everyone had to have this title, including us. But then the decline occurred gradually. Selling stocks has been extremely difficult because the more a stock falls, the greater the potential for a price recovery. But these times can be deceptive because the risk is extremely high. Restructuring doesn’t always work as well as it did at ABB twenty years ago.
“Anyone who bets on a stock that has lost 80% is essentially behaving like a casino player betting on red or black at the roulette table.”
Pirmin Hotz, asset manager
The German pharmaceutical company Bayer also collapsed. What do you do with stocks?
In this case, we decided to stick with it, knowing that the situation could be even worse. Bayer is suffering from lawsuits costing Monsanto billions of dollars and a low supply of pharmaceutical innovation. It’s a classic case: the stock appears extremely cheap based on the price-earnings ratio and the dividend yield is extremely attractive. But the risk is high.
They also invest in bonds. How do you see the national debt problem?
“We are very concerned about high levels of global debt, particularly as it continues to rise”
Japan, USA, Italy: Households in many industrialized countries need to be renovated. I can no longer in good conscience buy bonds from such heavily indebted countries. At some point, we taxpayers will have to pay off these mountains of debt. And the companies we invest in will not survive the next debt crisis unscathed. But I still feel much more comfortable investing money in companies than in countries that I know are hopelessly over-indebted.
What will Swiss stocks bring in 2024?
I am and remain optimistic. Overall, Swiss companies are developing very solidly and generating satisfactory profits for their shareholders. As interest rates have risen, stock valuations have fallen.
“It’s a solid foundation.”
Pirmin Hotz, asset manager
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