FROM THE DECKCHAIR

The solution for my five investment mistakes: Value investing

Before I turned 35, I’d made five investment mistakes due to my lack of knowledge and failing to seek good advice, diversify and think long-term. I’m outlining my experiences here to help others avoid the same pitfalls.

07 · 06 · 2018
JORGE Álvarez Mateo

3 minutes

I bought my first shares when I was 18, just months before the so-called “dot-com bubble”. Specifically, I invested €10,000 divided equally between shares in Telefónica, BBVA and Santander. I barely monitored their progress while I was at university. I was young, inexperienced and I made my first two investment mistakes:

Validity and quality of advice. When it comes to choosing and buying shares, if possible seek the opinion of experts in this field. My first mistake was to let myself by guided solely by the recommendations of a deputy branch manager at a (now defunct) savings bank. Always, always consult the true professionals.

Lack of information. As an independent investor, you have much less information about companies other than those you own. It’s not enough to glean information from the press; you have to delve deeper into the accounts.

One plus point I can claim is that, at least, I was concerned about my savings at an early age. The sooner you start, the better. The institutions should be fostering interest in finance and financial literacy, from the concept of saving up to the various types of investment products.

Years later, I started buying and selling on the MAB (Spanish alternative stock exchange) where high yields were being earned. Obviously, this is not what we would call investment, but simply trading. Turning to the MAB brings with it other issues that need to be highlighted, such as what would turn out to be my third investment mistake: illiquidity. In other words, companies you want to shake off and nobody wants to buy. There are no ready buyers for some shares and you find yourself “stuck” with the company. You realize all this a few years later and decide not to purchase individual stocks ever again. We could say that you learn the hard way the meaning of diversification.

In 2012, the news bulletins were telling us that Spain was about to go bust. What could be done? I tried to protect myself by grouping my personal and business investments, with a maximum of 100,000 euros per bank. However, in doing so, I made my fourth investment mistake.

It’s easy to calculate that the country’s Deposit Guarantee Fund is insufficient to guarantee all the bank accounts and deposits in Spain. We can therefore reach the conclusion that your savings are safer when invested in shares in countries throughout the world. Of course you will be hit when the next crisis comes, but less severely, and this is just another milestone along the way.

The way to amend my errors

After all this, I decided it was time to amend the first of my mistakes (better late than never) and seek professional advice. In 2014, I looked at several private banks and opted for one of them. For the time being, I’ve absolutely no regrets about my choice, as I’ve received – and keep receiving – really useful advice, particularly regarding specific options such as venture capital funds investing in unlisted companies and suchlike.

It’s true that commercial banks don’t want you to know about independent asset managers; they are only interested in earning commissions as you move your money from one fund to another. Here we see the fifth error: buying into funds that have performed very well on one occasion, without considering an asset manager’s estimated returns over 15 years, for example. Therein lies success.

I’m 35 years old now and, two years ago, I came to the conclusion that what I needed was a long-term investment horizon (perhaps it took me too long to realize this). It’s not something your parents, friends or acquaintances tend to tell you, unless they are financial experts or regular investors. In general, most people are looking for a short-term payback, so you have to isolate yourself from the noise around you (family, news media, ordinary banks, etc.) and reach this conclusion on your own, perhaps after falling into different traps several times.

I’m young and will most probably commit many more financial errors from which I can learn. However, after analysing all I’ve been through and the blunders I’ve made, I decided to invest exclusively in actively managed equity funds and SICAVs with a value bias. These are the reasons I recommend this:

  • – Investing in shares means investing in businesses like those you yourself could manage, so it’s not just gambling. Investing means trusting management teams as good as you are in your own business.
  • – Inflation is the great trap laid by governments. They want it to keep rising so they have to pay less for their debt. Companies are the only ones who, by raising prices, are able to pass on increasing costs to consumers and thus stay ahead of inflation.
  • – I don’t like debt in my companies, so how am I going to like it in other people’s companies?
  • – Right now, it’s clear that fixed income means losing money; at other times, however, it may be difficult to see.
  • – Passive management, highly fashionable due to the use of robo-advisors and automated tools, may make sense in the United States, where only 10% of asset managers beat the indexes. In Europe, as regards annual returns, many managers are able to outperform the ETFs.
  • – We are but a drop in the ocean of large investment funds, so trying to go against the market or short selling does not seem to be the right approach.
  • – You have to look after yourself month by month. Your first monthly “expense” should be a saving for your future. This will enable you to make extensive use of compound interest.
  • – Moreover, if you can make regular investments on behalf of your children right from birth, time will do the rest.

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