INVESTMENT PHILOSOPHY

Opportunities should be taken!

Every once in a while an opportunity presents itself that we can take advantage of.

25 . 05 . 2021
RICARDO Bernardo
Investor Relations

3 minutes

Opportunities present themselves in different ways and you need to pay attention to detect them in time and benefit from them in the future.

The question is, how can they be detected? Well, here are a few examples: one within and the other outside the sphere of investment.

Leaving the sphere of finance and investment to one side, when most Spanish people need to buy a product (computer, mobile phone, washing machine, clothes, furniture, etc.) we wait for the sales. Why is that? It is very simply because we are buying the same product at a substantially lower price, in other words, with less money I can buy the same product (without a reduction in quality). Every once in a while an opportunity presents itself that we can take advantage of.

In the sphere of investment, opportunities present themselves when there is a fall in the price of shares, a fall in markets, bad news with regard to a certain sector or a specific company, etc. In short, they arise when there is uncertainty and high volatility. What these falls enable us to do is to buy the same share, investment fund, pension plan, etc. at a much more attractive price than before the situation arose. This means that there is also a greater potential for revaluation (always providing the fall in price was due to a temporary issue and not a structural issue). This could also be understood as a window of opportunity in the stock market and which we can take advantage of.

Why do we take greater advantage of sales for products and not in investing activities? As we have said in previous Blogs, in investing activities an essential role is played by the emotions and biases that all investors have. We really need to set the emotions aside, because they are what restrict and condition us, and concentrate on what is rational. This is not easy but it needs to be done.

If we take a look at our portfolios, we have had and still have a window of opportunity that is, a priori, quite interesting. Between March and the beginning of April 2020, our funds reached a historical minimum. Those who invested during those months are currently enjoying very attractive profitability and others considerably reduced the average purchase price. The potential for revaluation of the portfolio should also be taken into account. That is to say, a product, investment fund, pension plan, etc. is not better just because the price is lower. We need to take a closer look at the potential for revaluation because if the potential is low the product is not attractive. Just so we understand what represents a good opportunity, the prices needs to be attractive and the potential should be high. Our international portfolio currently has a discount over the initial price of about 20% and the Iberian portfolio one of about 7%. The potential for revaluation is 121% in the international portfolio and 97% in the Iberian portfolio. Does this represent an opportunity? We believe it does.

One method that investors can use in their favour when stock markets fall, is to invest periodically. With this method we reduce market risk because we are taking advantage of these lower prices to reduce our average purchase price, so when the market recovers we will benefit from this.

Here is an example:

Investing periodically consists of making subscriptions on a regular basis.

Subscription nº Amount VL Equity interests %
1 100 € 100 € 1 9,29%
2 100 € 102 € 0,98 9,11%
3 100 € 100 € 1 9,29%
4 100 € 98 € 1,02 9,48%
5 100 € 94 € 1,06 9,88%
6 100 € 90 € 1,11 10,32%
7 100 € 88 € 1,14 10,56%
8 100 € 90 € 1,11 10,32%
9 100 € 87 € 1,15 10,68%
10 100 € 84 € 1,19 11,06%
1.000 € 92,91 € 10,76 100,00%

 

As we can see in the table, we have been making €100 subscriptions to a variable income product (investment fund, pension plan, etc.) at different prices where the total amount invested is €1,000. With this in some cases we were able to buy one share (when the VL=€100), in others we bought less than one share (when VL>€100) and in others we bought more than one share (when VL<€100.)

When a number of subscriptions are made the average price becomes a factor. This datum will show us at what price we begin to show a profit/loss. If we only made one subscription we would already know the reference price, but in this case it needs to be calculated.

The average purchase price is obtained by calculating the percentage represented by the shares we have purchased, in each subscription, compared to the total shares purchased (% column). On balance, the average price is our case is €92.91.

This is the method we use in Cobas AM in our investment process. If a company in the portfolio has had a significant decrease in price, for temporary reasons and does not change our investment proposition, we will take advantage and buy more shares. This means that we reduce our average purchase price so when the price recovers we start to show a profit from a lower price than before.

Conclusion:

During the investment process we need to be as rational as possible. Our emotions and biases and the main players that enable us to take advantage of the opportunities that present themselves.

For a variable income investor with a long-term horizon it is important to take advantage of the windows of opportunity that the market opens for us from time to time.

It is practically impossible to try and guess the best moment to invest in a variable income product, that is, for your timing to be perfect. The method of investing periodically will enable us to subscribe at different prices. In some cases, the market rises and we buy at higher prices. In other cases, when the market falls, we can make subscriptions at more attractive prices and when the market recovers, we can reap the benefit and enjoy greater profitability.

The purpose of this method is to moderate the volatility of the market, investment fund, pension plan, etc. for those investing in variable income assets.

You should not miss out on opportunities, be they in investment or in any other sphere.