«Banks will again collectively face collapse»
The Swiss asset manager explains why he steers clear of UBS equities, the dangers of stock market misconceptions and his views on gurus.
Pirmin Hotz considers diversification to be the key to long-term stock market success. But not every sector has a place in the Swiss asset manager’s portfolios. Banking, automobile and airline equities have been excluded for about ten years. He believes that these stocks will not keep pace with the market average in the long term.
Mr Hotz, what will the new stock market year look like?
I was afraid of this question. Like everyone else, I don’t know what the future holds, and to be honest, I’m glad about that.
And is that what you tell your clients who entrust you with their assets so they can grow?
Of course. But I also tell them that I am well versed in intelligent and scientifically proven ways of dealing with this uncertainty.
And how do you do that?
I only invest in assets that have an economic value-added process. A solid diversification of investments is central to long-term stock market success. The average equity portfolio contains around 50 stocks, diversified by sector, geography and other criteria. Over the long term, this results in average returns of 7% to 9% per year, depending on the period considered. This is supported by analyses of historical performance since 1926, as conducted by the bank Pictet, and over a period of 122 years, as done by the three financial market historians Elroy Dimson, Paul Marsh and Mike Staunton.
The Swiss stock exchange underperformed in 2023, mainly due to Roche. It seems that some risks cannot be diversified away.
Your example shows very well why good diversification is important. Precisely because we don’t know which stocks will perform best next year, it’s important to diversify risks. If we knew that Novo Nordisk and Eli Lilly were going to outperform all other pharmaceutical stocks again next year, then of course we would focus on those two and ignore Roche, Novartis, Pfizer or Merck.
Does diversification entail that you have to buy equities you don’t like?
No. There are also exclusion criteria. About ten years ago, we decided to stop holding airline, automobile and banking equities. We had to admit that these industries could not compete with the market average in the long term. These are industries where competition prevents the creation of long-term shareholder value.
UBS acquired Credit Suisse (CS) at a bargain price. Are you not missing a great opportunity?
Banken werden in einer nächsten Krise wieder kollektiv am Abgrund stehen. Darum meiden wir die Aktien dieser Branche generell. Die Banken haben viel zu wenig Eigenmittel. Auch das ganze Bonussystem in den Großbanken ist mir suspekt.
The Swedish investor Cevian predicts that UBS’s share price will double.
Of course, UBS now has a great opportunity to absorb a lot of Credit Suisse’s business. But Cevian is no reason for us to take a stake. Activist investors are speculators; we do not speculate, we invest for the long term. UBS will have to prove that the Credit Suisse acquisition was a great success.
Diversification may prevent crashes, but it also prevents skyrocketing returns.
In any diversified portfolio, there will also be stocks that perform poorly. But take the example of Martin Ebner ...
... a glamorous Swiss banker ...
... he was very successful in the 1990s with his strategy of investing in very few stocks. I met him three or four times in Zurich. He laughed at my rigorous diversification approach. He told me: We know exactly what equities to buy. We buy three or four stocks – Roche was one, ABB was another – that we know so well that we always have an advantage on the market and are better.
But then Ebner almost went bankrupt.
Exactly. The dotcom bubble burst in 2001. That same year, in September, there was a terrorist attack on the World Trade Center in New York. Markets fell by more than 40%. Ebner lost everything – for two reasons: Because he did not diversify his investments and because he used too much borrowed capital. Ebner’s example proves that every guru eventually falls victim to overconfidence.
When does an investor overestimating himself?
This is the main reason why I like to say that I am a science-based portfolio manager. I wrote my doctoral thesis on the portfolio theory of Harry Markowitz, who recently died at the age of 95. Many people today laugh at this theory, which essentially says that markets are incredibly fast and efficient at processing new information and incorporating it into the prices of stocks, bonds and all other exchange-traded securities. Because this happens so quickly, even professionals are always late to the party.
But a professional isn’t really a professional if he’s always late.
Well, we have to live with it. The Ebners and all the hedge fund managers in the world, who all enjoy more or less guru status, wake up in the morning thinking they know more than anyone else. Markowitz taught me humility at an early age. I saw how each bank tried to outshine the others with the best analysts, products and forecasters. I learned to expose this as hubris, and I now know that this is a common trait among supposed gurus.
Warren Buffett is a guru too, but a successful one.
You’re right. Warren Buffett is indeed a legend. But Buffett is still not a role model for me – even less so today than in the past. Firstly, he invests almost exclusively in US stocks. Secondly, he has a significant weighting in insurance and banking equities. And thirdly, his investment in Apple accounts for about half of his total portfolio. This goes completely against my principles. Even Apple is not invulnerable.
What about individual company shares? How long will you watch them fall?
It is much harder to make such decisions than to avoid an entire sector. General Electric was an icon of the US stock market into the 1990s. Everyone had to own it – including us. But then it started to decline. It was extremely difficult to sell, because the lower a stock falls, the greater the potential for a recovery. But these moments can be deceptive because the risk is extremely high. Not every turnaround works as well as it did at ABB more than 20 years ago. Someone who invests in a stock that has lost 80% of its value is essentially behaving like a gambler who bets on red or black at the roulette table.
Daniel Zulauf (External)
Dr. Pirmin Hotz,
63, wrote his dissertation at the University of St. Gallen on the portfolio theory of Harry Markowitz, who won the Nobel Prize in 1990. Many banks in Switzerland and Germany were receptive to the modern theory and hired the young PhD student from Zug to train their client advisors. In 1986, he founded his eponymous investment advisory firm, which now employs 25 people. In 2021, he wrote a wide-ranging book on investment strategies entitled Über die Gier, die Angst und den Herdentrieb der Anleger (FinanzBuch Verlag, Munich). Pirmin Hotz is the father of three grown-up children.