Value Column von Hans Peter Schupp

30 OCTOBER 2024

How to build up a fortune

Hans Peter Schupp, managing partner of Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) outlines the simple long-term path to financial prosperity

With the return of interest rates, call money investments are also making a comeback. Providers advertise it as safe, high-yielding, simple and free of charge. It may indeed be an alternative for short-term investments. However, it is not suitable for building up assets.

Capital investment works like a staircase. In the long term, shares yield more than bonds, and bonds yield more than fixed-term deposits. That has to be the case. After all, investors must be compensated for the greater price fluctuations in the respective asset classes through higher returns.

Long-term statistics from the USA display what this means in real terms. They show how the individual asset classes have performed in net returns – i.e. after deducting the inflation rate – over the past 99 years. This real perspective is important. After all, the purchasing power of assets only grows if the return is higher than the rate of price increases.

Since 1926, investments in the US money market – overnight money – have yielded 0.3 percent per annum in real terms. Overnight money has therefore roughly preserved assets after inflation. However, this calculation neglects the risk of bank insolvency, which certainly existed during the 2008 financial market crisis, for example. In Germany, for instance, amounts up to 100,000 euros only are protected by the state. There is no guarantee for higher deposits.

In retrospect, government bonds fared somewhat better. In the USA, they yielded a real annual return of 1.9 percent after inflation. In 99 years, a fortune of one million dollars became just under 6 million dollars adjusted for purchasing power. After all. Anyone who invests his money with the state of Germany today for 25 years will receive 2.5% interest. Only time will tell whether this is enough to compensate for future inflation and even increase assets beyond that.

Investing in company shares is unbeatable in the long term

An investment in US blue chips leads to a completely different outcome. Since 1926, they have yielded a real return of 7.0 percent per annum.  Thanks to the compound interest effect, a fortune of one million dollars became more than 800 million dollars (!) in 99 years, adjusted for inflation.

Hence, we have a clear assessment at Fidecum: When it comes to long-term wealth accumulation, investors cannot ignore company investments.

The only question to worry about is how this should be implemented. For many investors today, an investment in the seven US tech giants Apple, Microsoft, Tesla, Nvidia, Amazon, Meta Platforms and Alphabet seems to be the safe route to prosperity. We doubt that. It is risky to put all your eggs in one basket, i.e. to have your investment success hinge only on a small number of stocks with extremely high valuations. In the long term, it is likely to be more profitable to diversify capital and concentrate on companies with upside potential, a comprehensible business model and a favorable valuation.

The ideal route to prosperity is a portfolio of attractively valued, first-class shares

To give you a good example: Danieli is a producer and supplier of equipment for steel mills. Danieli is one of the few companies that can produce “green” steelworks. The business potential is correspondingly large. That alone is interesting. Despite this, few analysts are looking at the company. They are probably put off by the fact that the corporate structure is complicated and there is a holding company and an asset management company in Luxembourg. When I asked why this was the case, the company’s CEO replied: “We have the equivalent of our market capitalization of almost EUR 2 billion in cash assets and we don’t want to have them in Italy.” This seems plausible and certainly in the interests of the shareholders.

Danieli is therefore a company that hardly costs more on the stock exchange than its cash holdings. It works with pioneering technology and is currently trading at a price/earnings ratio of ten. Subsequently, Danieli is part of our portfolio, which currently consists of a large number of similarly attractive companies. We are convinced that this will enable us to build up assets in the long term.

Build up a fortune in the long term

With our Contrarian Value Euroland Fund, we have remained true to our investment philosophy of investing in undervalued companies with potential and a comprehensible business model for 25 years. In doing so, we act like an entrepreneur who wants to buy the entire company and – if necessary – deliberately go against the prevailing market opinion.

About the author: Hans Peter Schupp, is a managing partner of Fidecum AG and the portfolio manager of the Contrarian Value Euroland Fund.

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