“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell”. This quote from John Templeton, the renowned British investor and fund manager, is perhaps one of the most difficult for us to grasp and is one that we should apply more as investors. Personally, I would perhaps ignore the second part of this famous quote, selling when there is optimism, as long as we have a profile as long-term investors and savers and only rarely would I sell, unless I had an unexpected need for liquidity.
As an investor in Value philosophy funds for over 15 years, I invest in equities with the intention of growing my savings and having a substantial retirement in the future. I make contributions when my pocket allows it, with the vital premise that these investments that I make in variable equities will not be needed soon, for example, in the next 5-7 years at a minimum, even if they have achieved an attractive return.
I also agree that it is important to start investing as soon as we can afford to do so and to be able to take advantage of the magic of compound interest.
The graph below shows how two people investing at different times in their lives, with the same money and taking into account annual growth of 8% can cause a difference of more than twice the return just by having invested 10 years earlier, when compound interest comes into play.
This compound interest consists solely of reinvesting the interest or capital gains that we receive, year after year, and next year’s interest is applied to an increasingly large amount, which grows as investment periods develop.
Investing consistently and starting to invest early must be accompanied by investing in the right stocks, and accepting a philosophy with which we are consistent and where we can embrace the rules.
During the most distressing weeks of COVID-19 we have been able to witness moments that usually occur in a economic cycle (3-5 years), but in a brief time of only a couple of months, which is unusual. Behaviours have been revealed that, if well managed, can turn out one way or the other.
On the one hand, the falls of more than 30% in a large part of the equity indices, most of which are unjustified and caused by a general feeling of panic, brought about by uncertainty and a lack of control, have led to the emergence of some investment opportunities in certain stocks where the intrinsic value far exceeds the price they carry, and which are then put within reach. However, these systemic and mass falls mean that the investor misses out on some unique opportunities to invest in some stocks that make sense according to our Value philosophy.
On the other hand, the subsequent recovery, with a comeback proven by the euphoria of the recovery and a mirage of visibility for the future (and the return to the so-called “new normality”), meant that once again concerns of missing the train led the private investor to take a wrong position on stocks that were again overvalued or did not correspond to their actual value.
In either case, two things should be kept in mind. First, the complexity of identifying these opportunities. Second, the importance of managing fear first, and euphoria later. In my case, to maximise success, I recommend delegating this management to specialised and experienced industry professionals. It is easy to access historical information on the effectiveness of value portfolio management, and a significant indicator is perhaps the track record of the last 10 years or more, if this is available.
Now more than ever and in the midst in such a delicate and unique situation, we understand the effort involved in generating savings and managing them. Therefore, equities can be a good haven if we consider the previous examples specific to my situation: invest early; have a strategy to which we are faithful; and consider the long term as a way to benefit from compound interest. If this is true, how much should I invest in equities?
The answer from some entities will probably differ from that of independent Value managers such as Cobas. They will tell you that you should invest according to your risk tolerance and then according to the moment in time and your expectations. They will then make a tactical adjustment, increasing or decreasing this percentage.
This means that Spaniards have less percentage of their savings in equities than they should have, and they usually invest at the wrong times, when things have gone well and they are already very expensive, and they usually get out when things have gone badly and they are cheap, leading to a waste of profitability by arriving late.
At Cobas it is clear for us, the percentage that an investor must have in equities corresponds mainly to the time period of his or her investment. Therefore, if welcome a client with the intention of investing a part of his or her equity that will be required in the next 2-3 years, perhaps this client is not understanding our philosophy and we are surely not the manager he or she is looking for.
It should be kept in mind that equities are always a tool for balancing the role that each asset plays in our overall portfolio and that as a type of investment they are the most profitable and secure option as long as they are invested over the long-term, as history shows.
It is clear that investments in equity funds can bring changes along the way, curves and sharp and gentle corrections. In short, scares for people less tolerant of these movements or less used to them and good opportunities for those of us who believe in these investments. We should not see this volatility as a risk to our portfolio, but rather take advantage of the moment by being clear that it is due to irrational falls and by trying to identify whether it is a value trap concealed by certain stocks. In the end, price and value come together and you just have to be patient.
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