Dangerous supposed certainty!

Like a lifeguard who thinks he doesn’t need to know how to swim, the handsomely paid bank managers at Silicon Valley Bank apparently did not consider it necessary to adequately hedge the interest rate risk lying dormant on their books. This is probably the most elementary risk that a bank needs to have under control.
Apparently, the bank executives (as well as many asset managers) believed the lofty words of the central bankers, who repeatedly emphasized that inflation was “transitory” (the bad word of the decade, if you ask me) and that interest rates would remain low for a long time to come. Safe government bonds? Well, you can be so wrong! Too bad for those whose investment strategy was based on them.

Investing money under false premises

However, temporary inflation is not the only certainty that has been shaken in recent months. Be honest: would you have made a bet at the beginning of the year that a major bank like Credit Suisse would go under in a matter of days? Agreed, the management was subterranean and the bank was reliably embroiled in scandals around the globe. Nevertheless, CS was solidly capitalized and the Swiss business was quite respectable. But once trust has been squandered, things can go quickly. So anyone who thought Credit Suisse was “too big to fail” and who had bet on a recovery of the shares shortly before its demise is now looking down the drain. Investing money should not be confused with gambling. Here, too, a supposed certainty led to ruin.
“I’m not worried about my pension assets with CS. My savings in pillar 3a are below the threshold of 100′000 francs and are therefore covered by the deposit guarantee!” You may also be one of the Swiss who believed this – and suddenly experienced a blue miracle and a few sleepless nights. Because 3a accounts are not covered by the deposit guarantee. After all, they are privileged under bankruptcy law up to a maximum of CHF 100,000 per customer and pension foundation. In other words: you’re not exactly at the bottom of the pecking order, but until you get your turn, you may be on lean food.

Bonds come before equities in the hierarchy

Speaking of pecking order: It’s been a long time, but when I was still a sporty, young and dynamic man with a full head of hair, I learned at university that equity investors come last if a company goes under. It’s obvious: shareholders have the say and profit the most when the business is running smoothly. Creditors have limited earnings potential, but can lose their entire investment and therefore need special protection.
Well, tell that to our authorities, who declared all Credit Suisse Coco bonds worthless at the stroke of a pen! At the same time, CS shareholders were spared by receiving shares from UBS. Not many, but it is still hair-raising how shares were favored over bonds. Many asset managers may agree. I confess that one of my certainties was that Russia would not invade Ukraine. Who would be so insane, I thought, and considered Vladimir Putin to be a perfectly rational person. In short: I was completely wrong and my Russia fund is now in ruins (did someone say something about an inadequate investment strategy?).

Robust investment strategy reduces risks

What are your certainties? The Fed will manage a soft landing? The central banks will certainly not allow a crash? In Switzerland, the rule of law is rock solid – right?
Be on your guard: the only sure things in life are taxes and death. There are no certainties when investing money! Investors are therefore well advised to question even (supposedly) obvious things and always remain skeptical, even if everyone in the market is convinced of something or the asset manager raves about a sure-fire investment (in which case even more caution is required).
Because it is usually the things that you think are 100% certain, but which turn out to be otherwise, that are particularly dangerous. There are always uncertainties. The only thing that can help against this is broad diversification, the selection of solid companies, a sensible investment strategy and the choice of a reputable asset manager. Does this mean you are perfectly protected against accidents? No, but the damage, should it occur, should be manageable. As with my Russia fund.

With this in mind, don’t be lulled into a false sense of security!

Yours, Mark Stock©

Mark Stock is a member of the Point Capital editorial team. “I am a stock market enthusiast and am passionate about economic history. I have been following the ups and downs of the markets for years and, of course, invest myself – preferably in shares. So my name says it all. Every month, I take up what I consider to be an exciting topic. And since the focus is on the content and not on me personally, I write under a pseudonym.”