Think before you invest!
By: Federico Humbert
President of Empresa General de Inversiones, S.A., holding company of Banco. General, S.A., Petróleos Delta, S.A. and other subsidiaries.
Date of publication: March 2000.
Friends and clients often remark that they are mailed investment program brochures or marketing literature that advertise financial products with potential returns above the average of normal global economic cycles. Oftentimes, however, all that glitters is not gold.
I chose to publish this article to share with our reading public some thoughts on the subject of investments. These thoughts are not all from my modest repertoire, but ones that I have helped myself to from financial publications on the topic. I do not pretend to be a financial advisor, because I am not; and much less do I want, in any way, to have people interpret these ideas as recommendations to go ahead and invest or to put if off. I merely wish to offer some suggestions that may be of value when reviewing your personal investment portfolio.
Security has a price; in other words, "there is no free ride".
Potential return rises with an increase in risk. The higher the risk, the higher the potential returns; extraordinary yields, extraordinary losses. This risk-return tradeoff explains why government bonds guaranteed by the United States earn, medium-term, approximately 6.5%; however, paper from Brazil, 13%; from Russia, 18%; and from Ecuador, 70%. This basic principle is sometimes forgotten, and we continually fix our attention only on the returns of an investment. As human beings, we rarely stop being rather ambitious.
Certainly, if you, esteemed reader, are the kind of person who allocates a small percentage of your investments to market speculation and fluctuation and it does not affect your way of life...great! But, on the contrary, if your investments represent a great portion of your earnings or the guarantee of a chosen lifestyle, then you must think twice about the risk-return tradeoff.
Every investor's situation is different, which underscores why we should not follow the crowd.
More often than not, to follow the crowd is the worst mistake one can make. I remember having read, many years ago when speculating in gold was the trend, an article by a banker who wrote that when the amateurs enter the ring, it's time for the professionals to get out. That is exactly what happened with gold. Many people of median resources speculated in gold ventures and lost those median resources... which for these average investors were all of their savings. What is good for John is not necessarily good for Peter; moreover, it may be the worst thing that could happen to Peter!
Being disciplined with your funds will determine where your financial resources will wind up.
Spend and enjoy your investment returns, but do it with discipline and preserve your capital. Of course, there are circumstances in which you have no choice, for example: health considerations or your children's education, etc. However, to the extent possible, do not use your principal on unnecessary expenses, such as going on a cruise or purchasing the latest model car. Use your interest earnings for this. A cruel joke in a magazine warned that the only thing worse than dying was surviving all your savings.
Beware of 'What's hot!'
The temptation exists of investing in projects that are all the rage; which brings to mind the "chain letter", the game in which you sent five dollars and three letters, and you would soon triple your investment. There are other larger schemes similar to the "chain", which have cost people a lot of money. I am positive there will be many more, like submarine or space tours, etc. Still, these temptations are difficult to ignore because elaborate "brochures" tout potential returns of astronomical proportions.
Sadly, they ultimately end up as losses that are simply out of this world. Similarly, the argument could apply to what takes place in the New York Stock Exchange and the famous NASDAQ, where highly speculative, technology stocks with tremendous potential are sold. However, I am not referring to this kind of speculative investment; but instead, those investment offers peddled by financial vultures to the naive citizens of Third World countries.
Never put all of your eggs in one basket...it may fall and break them all.
Prudence dictates reflection and due diligence before acting. A wise policy to follow is to diversify your investments in excellent quality bonds, time deposits in major banks, and buy stock in well-known companies with solid track records and a history of taking care of even the smallest of shareholders. If one investment falters, there will always be others left that will take up the slack and secure a decent investment return.
Oftentimes, the first loss is the best loss
Do not be alarmed when an investment goes sour. It is preferable to swallow the bitter pill and accept the loss in good time, rather than deceive yourself and remain hopeful for a reversal that you know will not occur. Alas, there are those who buy bonds or stocks at 100, but, due to varied circumstances, these drop to 60. When the investor is asked how they are going to detail this in the balance sheet, they try to save-face by answering: this is not a loss; this investment matures in 24 years, by then it will have recovered! Let's not deceive ourselves. That argument lacks all validity. Today, the reality is that the investment is worth 60. Or you accept reality, or you cut your losses and sell.
The old proverb "Hasty climbers have sudden falls" can be applied to the business world.
Prudence dictates not to invest more than our savings capacity, however attractive the investment. To do so can be very dangerous. Unfortunately, we are often led by an eagerness to be included in the elite list of the most successful investors, to later ask ourselves: How am I going to pay for this?
The grass is always greener on the other side.
False. In normal circumstances, what is more, in most circumstances, it is preferable to invest in our own yard than our neighbor's yard. Experience has taught us that that there are very few foreign investments that have been successful. I remember one investment in the United States where, together with some of the most successful businessmen in Panama, we invested in some property overseas. After three years and an out-and-out loss, I begin analyzing what had happened. Amid so many conclusions, the one that stood out was: If the properties were so good and the price so fabulous, where were the local investors who let pass such a tremendous investment opportunity to a group of Panamanians who tried to conquer the real estate market in their own backyard? Remember...our yard is better and much safer.
The Know-how and know-who
We used to believe that business or investment know-how was the most important factor when making an investment decision. Today, my dear friends, things are not so simple. It is as important to know the business as to know the people. It is not hard to recognize the ruthless investment promoters who market half-truths, for example: those who apply historical yields to the immediate future. Beware of persuasive advertising; once again, remember that all that glitters is not gold!
Financial Advice
It is very important, in today's unpredictable world, to rely on an individual or company that will, in collaboration with the investor, look after your investment portfolio. The first rule is to trust your investment advisor. However, trust is only earned by past performance, honesty, reason, common sense and loyalty. If you are considering giving your financial advisor a green light regarding your investment choices, then it is convenient to establish minimum investment conditions.
I have wanted to share in this space some thoughts before you start investing. Some of these ideas have been borrowed from good advisors. Others are the product of years of experience that have contributed to many gray hairs. My hope is that you might find something useful in the contents of this modest article.
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