Last week, a colleague of mine, Ed Dunne, with whom I was doing my usual weekly boxercise class (one-on-one) was trying to demonstrate the importance of having good balance.
He said you must have good roots in order to both box accurately and to move well enough to avoid the counter punches. At least with boxercise you don’t get hit! As he said ‘You can’t fire a cannon from a canoe’. You might be asking yourself what this has to do with investing, but bear with me on it for a moment!
I thought it was a great phrase! If any readers in the South Dublin area have an interest in boxercise or self-protection classes (which he also runs) you can contact Ed by email to firstname.lastname@example.org or call him on 086 8121854.
The analogy applies to many areas of life, and in investing I guess a good grounding might refer to a solid investment strategy that can stand you in good stead in both bull market (up market) and bear market (down market) conditions. What might a solid strategy be in investing terms?
- At the heart of good investing has to be buying value with minimal risks attached. Whether you are buying businesses (equities), physical property or government or corporate bonds, buying value is central to obtaining inflation-beating returns over the long-haul.
- As I often say, the value you buy at the outset has a significant bearing on the subsequent returns you receive. For example, buying Irish commercial property today with initial rental yields of 7-8% when the Irish 10-year government bond yield is below 3% makes a lot more sense than buying the same asset when rental yields were below 4% and the Irish Government 10-year bond yield was above 5% (as was the case in the 2003-07 period in Ireland).
- For the majority of ordinary private investors, valuing assets and identifying the underlying risks can be daunting tasks. However, private investors can keep things simple by:
- diversifying using funds.
- keeping an eye on the earnings and dividend yield on offer in the major markets and comparing them to the yield available from long-dated government bonds.
- outsourcing the process to an independent source like an investment newsletter or using a boutique asset manager.
- Understanding the risks that you face is also particularly important and allows you to make informed decisions about what risks you are prepared to take. The two principle categories of risk include:
- The economic risks we all face when investing – which include the chances of recessions in the real economy, outbreaks of inflation or the dreaded deflation.
- The stock/fund-specific risks which include the business, financial and valuation risks.
- In terms of the economic risks, we know that equities (and property) prosper in a healthy and democratic economy but, as we can’t tell the future, we can’t be sure we will get those conditions. Hence, we may choose to invest a portion of our savings in equities, a portion in bank deposits (no risk and bank deposits benefit in times of rising interest rates), a portion in long-dated bonds (which do well in deflationary conditions), a portion in precious metals (do well in inflationary conditions) and possibly a portion in hedge & absolute return strategies (which are supposed to provide investors with positive returns in all economic conditions).
- In terms of the stock/fund-specific risks, diversification through funds is an easy solution, and each investor must know his/her own limitations in this regard. Of course, while diversification via funds controls both the business and financial risks it still doesn’t assist if markets overall are overvalued.
- Buying funds listed on markets which offer above average dividend yields can make for a sensible long-term strategy. The funds control the business and financial risks while the above average dividend yield indicates reasonable value. There is a table on our website that does exactly that for subscribers.
- Buying funds where the fund manager has demonstrated a bias towards value investing in the past and who has a decent track record also fits the bill. We regularly highlight such funds to subscribers.
- Spreading your monies across the five major asset classes (equities, government bonds, precious metals, hedge & absolute return strategies and bank deposits) can make sense, but if economies continue to make upward progress over the long-term, as they have in the past century, you have to recognise that the returns from a balanced portfolio are unlikely to match equity returns over the medium-term. We provide analysis of stocks and funds across the various asset classes on the website for subscribers. At present, our view is that we would avoid long-dated government and corporate bonds as the asset class offers no value.
Having a strategy to follow that you understand and that makes investment sense can also assist, but it will be important you maintain some discipline:
The Three Most Common Errors in Investing
In our experience, the three most common errors investors make in markets are:
- Speculating instead of investing.
- Using debt or leverage (via spread-betting accounts or contract-for-difference (CFD) accounts).
- Buying overvalued assets.
Speculating versus Investing
The investor and the speculator may occupy the same space in stock markets, but they go about their business in very different ways. To be an investor is to be an ‘owner of assets’. By owning assets you can benefit from the returns the assets produce over time. In contrast, the trader or speculator is looking for gains over shorter time horizons and, therefore, does not have the time to benefit from the underlying asset growth in markets. The speculator is playing a ‘zero sum game’. His gain must be at someone else’s loss. The promotion of trading or speculation in markets is everywhere from those trying to teach trading or speculative strategies without being honest about the risks, to the private client sections of stockbroking companies and spread-betting operators who benefit from the additional turnover (and commissions) that speculating generates.
With a small bit of assistance or training, it’s easy enough to find an investment strategy that can suit your temperament and risk tolerance.