The Way of Pricing Leonardo Da Vinci has been credited with designing the first helicopter in 1493. The future is never clear. CONTENTS Cristal ball - page 3 When is the Euro crisis over? Attractive situations - page 7 January 2012 Meyer Burger N°1 Interview with an Entrepreneur - page 8 Author Etienne Jornod - Executive Chairman of the Alexandre R. Kaufmann Board of Directors of Galenica Ltd Noise from the street - page 14 Price Kuehne + Nagel & China CHF 20.- Kaufmann Kapital AG for Incrementum advisors AG Introduction The idea of this Letter is not to provide you with investment tips. The idea is to remind, present and promote the Way of Pricing, as opposed to the widely spread market timing tendency, that can be practiced alone without the help of any "investment professional". If you invest with the attitude of a businessman, then this Letter is for you. If the share of a listed company represents merely a piece of paper that can be traded in the hopes of making money tomorrow, then this Letter did not land in the right place. Where to find it? www.kaufmann-kapital.ch section Letter to Investors. Disclaimer The information presented in this document are provided for your personal information only, and are not to be used or considered as an offer or solicitation to buy, sell or subscribe to any securities. The price of and revenues from any of the securities or financial instrument mentioned in this document can go up as well as down. This document does merely constitute the different assumptions, views and analytical methods of the author who prepared it, and might not necessarily constitute the assumptions, views, and analytical methods of the other partners working at Incrementum advisors AG. Furthermore, the information, opinions and estimates expressed herein reflect a judgment as at the original publication date and are subject to change without notice. Accordingly, Incrementum advisors AG and Kaufmann Kapital AG accept no liability for any loss arising from the use of this document, which has been made available for information purposes only. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability of use would be contrary to law or regulation. Kaufmann Kapital AG for Incrementum advisors AG CRISTAL BALL Everybody can hear how the public finances in intervenants to change these bad habits. That is Greece and Italy are deteriorating, to the point where we need to go. that certain policymakers are now questioning this entire "euro-denial". So what are most stock It is crucial to identify correctly the problem, market intervenants trying to do? They are trying otherwise how to protect our purchasing power to assess - speculate would be quite appropriate - over time? And how are we going to do that? when the challenges faced by these countries will be solved, and at which price will the stock market By trying to ancitipate in which form will greed trade by then. appear again in the foreseeable future? Why not protect us from greed in the first place! So when will that be? Let us find out the truth in our magic By trying to anticipate how long policymakers will cristal ball... continue to kick on the can down the road, in the hopes that at some stage economic recovery will Well, to be perfectly clear, I mask the poor management of public finances? am not trying to answer that Why not protect us from denial in the first place! question. Nor should you. Why is that? The good news is that a system designed to Because 95% of the stock market community is maximize profits in the short-term is extremly trying to play that game using more or less the vulnerable, sometimes even self-destroying. Look same sources of information. How likely are we at certain large banks. Are they mostly under going to beat the crowd at its own game, in which pressure because some socialists vote against the we also belong? investment bank or because a bunch of under- washed "indignés" barbecue on Paradeplatz? Of Because when the problems with the Euro will be course not! They are under pressure because of eventually solved, then it will be too late to buy themselves. They are imploding from the inside. our favorite stocks for they will trade already at much higher levels. That comes back to our discussion about corporate culture. If the only culture is to Because when the problems with the Euro will be maximize profits, then some employees will take solved, we will face new challenges that are not yet irrational bets to maximize their own, even if they identified. And these new issues will take have to betray. The problem in banks is not the abnormal dimensions, because we still try to grow efficacy of their monitoring systems. There is no indefinitely in a world of limited ressources. system in the world that can prevent someone from cheating if he wants to. The problem is the The real problem is not the Euro or Italy or the corporate culture, and it is becoming an industry- real estate market in China. These are specific issue. Another good reason not to allocate manifestations of a wider tendency: an exag- money in this industry. gerated use of credits. In other words: greed and distress. But often distress comes as a consequence Where are we in the cycle? of greed. So greed is the fundamental problem, not the Euro. States have realized that the current levels of debts are not sustainable, and they are already The other fundamental problem is denial. That implementing measures - or at least discussing explains why the ongoing period of deleveraging about measures - in the hopes to curb the rising will need some extra time to get completed. The public debt. We are slowly moving from a state of problem with state-subventions: they preserve bad denial to a state of financial repression. Somebody habits. The main benefit of a crisis is that it forces has to pay. Policy-makers probably hope that we IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 3 are going to pay. We, the honest tax payers. By chance some of these entrepreneurs are Governement interventions, liquidity injections, working in some of our companies listed here in all of that "easing" is about to dilute our Switzerland. By chance because we can take purchasing power. And it is meant to be. financial advantage by buying and holding shares of the companies in which they work, create How to protect us against greed, denial, products, jobs, and ultimately generate share- and financial repression? holder value. Certainly not by following what policymakers If you have a few people that destroy the invite you to do. If they want you to buy their equilibrium of a complex system, it is up to other government bonds, there must be something fishy people to make up for it. That is why I refer to our about them. Remember: entrepreneurs and their employees, instead of governments tend to be mentioning the stock market and the equities. anything but transparent Behind successes and failures, there are always when it comes to borrowing. people. In the end you don't invest in equities or companies, you invest in people. That is another "The fact that basic data on point of differentiation between those pursuing domestic debt are so opaque and "market timing" and those practicing "market difficult to obtain is proof that pricing". governments will go to great lenghts to hide their books when For those sceptical about the ability of an things are going wrong, just as entrepreneur (or sceptical about their ability to financial institutions have done in identify those suc- the contemporary financial crisis. We see a major role for cessful entrepreneurs) international policy-making organizations, such as the to generate value International Monetary Fund, in providing government debt during long periods of accounts that are more transparent than those available time, there is the today." possibility to invest in real estate. Debt- - Carmen M. Reinhart & Kenneth S. Rogoff, This financed real estate Time Is Different. offer historically a compelling protec- Probably the best way to protect against denial, tion notably during greed and financial repression is to invest in few periods of financial repressions, marked by selected entrepreneurs that will manage to create negative real interest rates. In addition to that my incremental value, and this irrespective of future partners and friends at Incrementum advisors can economic developments. enumerate many reasons why gold and other precious metals offer a sound long-term These entrepreneurs need to maintain or protection against inflation. reinforce the competitive advantages of their companies year after year, in order to mitigate the How much cash in our portfolios? pressure from their competitors. They need to resist the short-term imperatives of Wall Street, One of my friend, Albert from the «Platine- designed to maximize short-term performance at Küste», still believes that cash is king. Why is that? the expense of durable profits. They need to be careful in their acquisition plans, if any, and Because he believes that «in the current maintain sustainable levels of debt. And they need environment», every shares he would be buying to establish brands, in order to have sufficient now might become cheaper in a few weeks’ time. negotiation power towards their customers if their costs are increasing and/or in the event of un- At this occasion I would like to remind about the predictable events such as currency headwinds.