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Message from the CEO

Placing a value on time

After spending a few days cleaning up my old childhood home, I was intensely reminded of how things change over time. We really did have a manual typewriter when I grew up. I also reflected on how the era of a standalone caller ID beside the phone was short-lived, and that the once-essential bank passbooks now feel like a memory from a terribly distant age. Bill Gates once said, "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

To the financial reports

But placing a value on time is, of course, about much more than just that. We are sometimes reminded very suddenly of the transient nature of life, and the only conclusion I manage to draw is that we have to prioritise our time for things that really matter. It always feels a little more meaningful if we can feel that we have achieved something constructive with our time, whether that might be building something, changing something or experiencing something new. When nothing changes or nothing develops, the time feels lost in my view.

When you read financial theory, you learn that time is money. Compound interest tends to multiply in a fascinating way over long periods of time. Even money saved in a bank passbook increased historically through an extra payment at the end of each year; the interest on the capital. You also learn to make present value calculations in which large initial investments are justified by positive future cash flows discounted to a present value. In every textbook example, the cost of capital was a measure of the investor's required return; the reasonable payback that the investor could accept in order to exchange purchasing power in the present time for purchasing power in the future. Of course, the investor expects the investment to also generate some kind of surplus, especially in comparison with money placed in a bank account or some other risk-free alternative.

Over time, these concepts should somehow coincide. The real economy develops through rising productivity and through innovations that improve the standard of living and increase the efficiency of society. The interest for an investor should, over the same period, not only compensate for inflation but also provide some form of real remuneration.

If we are to believe that these trends remain intact over the long term, today's pricing of fixed income securities feels very unrealistic, given what we believe about inflation and real growth over time. A Swedish 10-year bond yield of around zero and inflation of 2 percent per year means that the market has now priced in over 20 percent weaker purchasing power in ten years' time. What will break first? Will development suddenly halt? Or will inflation turn into biting deflation?

It may be that what looks reasonable in a two-year perspective becomes unreasonable in a ten-year perspective. I think that the market in this case is underestimating the value of time in the longer term.

Time is one of the most valuable things we have. Cherish it, right now.

I wish you a really pleasant summer!

Last changed: 17 January 2020

Erik Kjellgren

Head of the Swedish Funds operations
Direct: +46 8 614 25 12

Important Information

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