Over the last 10 years, there has been a proliferation of stock market “courses” catering to all tastes. Some purport to teach how to trade derivatives, others show how to carry out technical analysis of charts to theoretically beat the market on a consistent basis, whilst others even sell their winning trading algorithms and strategies. All of them are advertised as the panacea that will make anyone who buys them rich. There is a whole world of techniques to choose from for supposedly getting rich on the stock market, with very little effort and very quickly, as their adverts claim. However, they all have one thing in common: their sales generate profits for their creators that the latter have not been able to achieve in the markets using their own methods – at least not consistently over time.
The acute crisis we are experiencing on the European periphery has, moreover, fuelled sales of these ‘magic formulas’, leading to a proliferation of those that rely on excessive leverage. In other words, more trading courses and systems are being sold where you don’t need to invest large sums to stand a chance of winning – or losing – a lot of money. That’s the nature of aggressive leverage and its marketing: when there is not much left in the pockets of gullible customers, they are offered ‘magic formulas’ promising that with just €100 they can walk away with €1,000 in a matter of minutes – or end up up to their necks in debt, of course. These are desperate times, and the snake-oil salesmen know it.
Lotteries and other games of chance also attract more attention in difficult times. And although the amounts staked during times of crisis are smaller, the statistics confirm that a larger proportion of the population desperately tries their luck, albeit with smaller stakes due to a lack of money.
However, the gambling element of the financial markets is, if anything, even more harmful than that of games of chance, as it has a technical, specialised and sophisticated aspect to it that is deceptive. Furthermore, public opinion and the media refer to those who gamble away everything they have – and even what they do not have – on the financial markets as “investors”, as if they were in the deadliest of casinos. In contrast, the concept of a gambler or compulsive gambler is relegated to those who stake their money on slot machines, bingo and other casino games. Consequently, although the pathology and ultimate outcomes of these practices are practically the same, the image of problem gamblers in casinos and on the financial markets is radically different, with the latter being unaware that, rather than investing, they are simply gambling.
Investment with a capital ‘I’ is something very different from what the various courses, systems and get-rich-quick schemes peddle to the unsuspecting who think they are investors. It is not a matter of throwing some money on the table and seeing what happens to it after a few hours, days or weeks. No. Investment (and this is how we view it in CFO) is something that cannot be done without a thorough understanding of the business or businesses in which one is going to invest.
In the same way that we would never become partners in a neighbour’s business without knowing every detail of its past, present and future prospects. Only if that business is excellent and sound, its prospects promising, the neighbour and their management team possess excellent business acumen, and the price they are asking for the shares is attractive relative to the value we know it truly holds, will we consider investing in it and becoming partners. Furthermore, we would view such an investment as a long-term commitment, as it would make no sense to try to resell those shares the very next day or within a matter of weeks, given that the business’s positive performance is the source of the returns we expect, is it not? Well, exactly the same should apply to our investments on the stock market. The only difference between partnering with our neighbours’ businesses and buying shares on the financial markets is that the former are not listed on the stock exchange – and are therefore less liquid – whilst the latter are. Nothing more.
It is true that many of you will say that, despite their illiquidity, the level of insight we can gain into a neighbour’s business is far greater than that of a listed company. Listed companies, due to their larger size, greater complexity and the fact that it is harder to engage with their management face-to-face, are businesses that are more difficult to understand in depth and to value accurately.
But that is what good investment fund managers are for: they analyse the fundamentals of the companies in which they invest, assess them down to the last detail, and also regularly visit not only their management teams but also their competitors. Unfortunately, most fund managers do not do this, and that is how they fare (in terms of results, that is; because if they belong to banks, they unfortunately sell them off like hot cakes). However, the leading figures in the world of fund management do carry out this work of gaining an exhaustive and personal understanding of the companies in which they invest, and their results have shone consistently over decades amidst the prevailing sea of mediocrity.
Furthermore, no self-respecting “Investor” portfolio should be without investments in ‘private equity’ funds – funds that invest in companies which are not yet listed and are therefore smaller in size and at an earlier stage of development than large listed corporations. As many of you will know, their liquidity is limited and these are investments that should be viewed over a 3-, 5- or even 10-year horizon. However, the returns achieved by the leading private equity fund managers are also spectacular.
To give you an idea, the funds we are currently investing in have a track record of over 20% per annum (IRR), which is difficult for investment funds managed by listed companies to match, although we also invest in some of them that have exceeded this figure over the last 10 years. But that’s another topic we’ve discussed on previous occasions; you can find out how we gain access to the best funds in this article entitled “Investment funds and the devil take them all…“.
I hope this article helps to set the record straight for those who believe – and try to convince others – that placing speculative bets on the stock markets is the same as investing. Nothing could be further from the truth. The short-term results of stock market gambling may be positive, just as they are with games of chance. But in the long term, you cannot make money by betting on tickers and numbers on a screen without knowing exactly all the details of the business behind them. And as business dynamics are slow (even tech companies need several quarters to take off or go under), holding shares for periods as short as hours, days or weeks is not compatible with the concept of investment, but rather with that of speculation or gambling.
Businesses, however good they may be, need many months or years to develop successfully and generate the wealth expected of them. Not to mention that the erratic Mr Market may take even longer to price in that real wealth creation and recognise its value. And along the way, we must ensure that Let’s not let volatility blind us to the bigger picture of business wealth creation. As Antonio Machado said, only a fool confuses value with price.
We must focus on business if we want to be proper investors. Let’s leave gambling to the lottery and casinos, even though on every street corner they’re trying to sell us platforms for trading derivatives, various systems and leverage schemes, which will do nothing but line the pockets of those selling them. So what are you – an investor or a gambling addict?
Sadly, as we write this article, Bankia’s share price is fluctuating by 20% a day, amidst a veritable hive of gambling addiction and despair. Place your bets, small-time investors – Mr Market and the banking croupiers are relishing it.