In the old days, practically the only way to access equities was by investing in shares. Nowadays, in contrast, there are a variety of more sophisticated alternatives on offer, which allow assets to be diversified and reduce inherent concentration risk. One such option are mutual funds.
Investment in mutual funds in Spain has increased ninefold since 1997 from 27 billion euros to current levels of over 253 billion euros. The number of shareholders in mutual funds has also risen considerably – by some 60% – from 6.2 million in 1997 to around 10 million.
The world of mutual funds encompasses fixed income, guaranteed, mixed, equity funds, hedge funds…each with different management styles. There are funds focused on growth, funds which replicate indexes, real estate funds, commodity funds and, of course, funds that focus on value investing.
It is no secret that the end goal of all investors is to earn money. In other words, keep inflation from diminishing the purchasing power of their savings. The problem arises when lots of savers forget to manage their money, investing in products which lead to a loss of their real purchasing power.
Indeed, the changes in investors’ habits go beyond the choice of vehicle for channelling their savings; some have also shifted their mindset and investment philosophy.
It is a common mistake in the investment world to only see what we want to see. Thus, we often end up ruling out potentially better alternatives. Investors need to be well aware of their own limits and question their aspirations when taking investment decisions.
Asset managers who adopt a true “value” investment approach manage some 8.6 billion euros.
Over the last twenty years, some investors have made the journey towards adopting a value investing philosophy as a means to increasing their savings and maintaining their purchasing power.
This journey has been made by all types of people, but even so asset managers with a true value focus only manage around 8.6 billion euros, barely 3% of the total fund industry. We can therefore conclude that there are still plenty of investors out there who have yet to take this path.
It has not been plain sailing for those who have embarked on this journey. In recent years, converts to the value investing philosophy have faced markets where “value funds” have lagged the rest of the market or simply suffered similar falls to the overall market. And while indexes have posted positive results, value investors have had to weather worse or even negative results.
It is at these times when the temptation to “follow the herd” is greatest – to act impulsively and erratically in response to the ups and downs of the stock market; it is also when these investors’ reveal their true value nature. At its core, the essence of this nature is understanding that market volatility is an opportunity to generate value. In other words, to increase the potential upside of portfolios.
True value investors are aware that declines do not have to mean a permanent loss of capital, but rather an opportunity to take a running start and increase the chance of obtaining better returns in the future.
A value investor’s biggest asset is patience, which is a key virtue for taking advantage of long-term investment opportunities.
But again, this approach is not easy to assimilate. Value investors can endure long periods, or more specifically various bear markets watching our investments decline. That’s until the journey towards becoming a value investor reaches a degree of maturity, where uncertainty and fear evaporate or at least are no longer factors that weigh on investment decisions.
What’s left after this journey or evolution? Typically a “value investor” will share the following traits, they:
- Invest as opposed to speculate.
- Invest logically and simply, in things they understand and which are in keeping with their way of thinking.
- Find a management team whose interests are aligned with their investors.
- Avoid taking decisions based on past returns.
- Pay scant attention to the ups and downs of indexes, focusing on the long-term.
- Are clear that any savings put into this type of investment should not be needed for at least five years.
- Embrace volatility as an opportunity, not a risk.
- Refrain from selling when the net asset value of their funds fall.
- Use excess liquidity to increase positions after falls.
Ultimately, the path towards applying a consistent value investing philosophy can be a long one, at times fraught with discomfort at negative short-term returns, but in the long-run highly satisfying and profitable both intellectually and financially.
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