How can you invest with low risk and high returns? This is what the book “Successful Scientific Investing” by portfolio manager Andreas Beck is about. FOCUS Online publishes an excerpt in which Beck explains the basics of ultra-stable investing.
Yields only come about in business. In order to understand what a safe long-term investment is, you need economic expertise. If you look at our capitalist economic system, its brutality is remarkable.
Companies that do not achieve high returns on equity are denied their right to exist. It’s not enough to be in the black; Depending on the industry, it is about expected returns on equity of up to 20 percent. If these are not achieved, the company will be broken up or austerity measures with layoffs will be decided.
A special feature of capitalism is that it emerges stronger from crises. This may come as a surprise at first glance, but it is a direct result of how it works. In crises, equity becomes scarce and investors hold back. This increases the requirements for companies’ return on equity. Some then no longer manage to refinance themselves and become insolvent. However, most of the remainder are becoming more stable and profitable than before. As early as 1942, Josef Schumpeter called this “creative destruction”, although the full dynamics of this process only began to unfold with globalization. As a result, the world is becoming increasingly uncertain for individual companies, but the long-term profitability of the global economy as a whole is becoming increasingly stable.
It’s time investors took advantage of this ultra-stability opportunity. In concrete terms, this leads to two conclusions: An optimal stock portfolio should reflect the earning power of the global economy as well as possible, only then does one have the effect of ultra-stability. Individual companies, but also sectors or regions, can fall victim to the next crisis. Who knows, for example, whether cars will still be coming from Germany in ten years’ time? Or whether the era of large companies is coming to an end? It is therefore risky to only buy the Dax 40 or the MSCI World, which contains around 1600 large companies from industrialized countries.
The second effect is that global economic earnings should guide portfolio construction, not market capitalization. One bases oneself fundamentally on profitability and thus dampens the risk of running into speculative bubbles in certain regions or sectors. If you take this approach to heart, the result is a stock portfolio that is dominated in the long term by the compound interest effect of corporate profits instead of short-term price fluctuations. This effect means that doubling the money in ten to twelve years is normal, while doubling it in 15 years is a “disaster”.
If one assumes that the economy is the source of returns, then the classic definition of risk as volatility in investment advice no longer makes sense. Rather, a bank should switch to time-sensitive risk management. Depending on the investment horizon, the customer should get the safest portfolio for this horizon. With a five-year horizon, security is traditionally created by limiting price fluctuations. Risk management is based on quantitative indicators such as volatility or value at risk.
With a 10 to 15 year horizon, on the other hand, security is created by the profitability of the capital employed, the compound interest of the return on equity superimposes the effect of price fluctuations. Risk management is then based on fundamental key figures.
My take: Providing equity to a single company (buying a stock) is more of a bet than an investment. The bet is that the current share price on the stock market is too low, the company is actually much more valuable. Sorry but forget it. In normal market phases, thousands of mathematicians and physicists in Frankfurt, London, New York and Tokyo use special computers to monitor the market 24 hours a day, looking for incorrect valuations. When they find one, they buy it, which makes the misreview go away in seconds.
It is megalomania to think that you can consistently win this game from the comfort of your living room as a trader. On the other hand, you are on the safe side in the long term if you buy “Welt AG” – all companies if possible. The “Welt AG” has always been fail-safe and profitable in the long term. The special joke about this investment is that you can safely profit from abnormal market phases (crises). In crises, the risk of insolvency of individual companies rises sharply and professional investors cannot act rationally in crises: they have to sell at any price because they run out of risk budgets. Just because “Welt AG” is fail-safe, private investors now have the advantage of being able to act anti-cyclically without increasing the risk.