Unfortunately, and strange as it may seem, many people don’t really know what they’re getting into when they see that their savings in the bank aren’t yielding much of a return and decide to do “something” with that money to get more out of it. That “something” is so varied that it can be confusing for anyone who doesn’t know what they want. There are shares, government bonds, corporate bonds, property, investment funds… and what’s more, within each category there are dozens of sub-categories! The range of investment vehicles is so vast that most people end up choosing one almost at random or, worse still, the one suggested by their current financial adviser, without being entirely clear about what they expect from that “investment”. Well, yes. Everyone knows what they expect from their investments: that they’ll make them money.
But making money without having a clear understanding of the rules of the game is not only difficult, but almost impossible in the long run. An analogy that springs to mind would be wanting to win at poker without even knowing the hand rankings. What’s more, even if you did know them, just imagine sitting at a table full of card sharps… Your money wouldn’t last you very long. The markets are highly professional and very dangerous gambling dens.
To put it simply, there are two ways of approaching personal finance, and our success in this endeavour will depend to a large extent on our in-depth understanding of them. One is infinitely more popular; it has been written about ad nauseam and usually promises easy money with minimal effort. This is speculation. On the other hand, there is investment – always maligned and rarely promoted by financial players (as it is less profitable for their own pockets).
Speculation involves using financial instruments to capitalise on fluctuations in their price, in the hope of finding someone who will subsequently pay more than the speculator originally paid. AThe Greatest Fool In a proper sense, let’s say. The problem with speculation is that it’s directly linked to one of humanity’s oldest sins: greed. Who wouldn’t want to get rich overnight without lifting a finger? We all know this isn’t possible, and yet people often take the bait and fall for misleading adverts for products promising sky-high returns in just a few months. Well, there’s always the chance you might win the lottery… But it’s important to note that 90% of those lucky enough to win in prize draws lose their money within less than 10 years.
Although it is rarely sustainable in the long term, there are indeed people who have become wealthy through speculation at specific points in time. A well-known example is that of what is probably the most famous speculator of all time, George Soros, who made his fortune speculating in foreign currencies – specifically the pound – by taking advantage of the fact that the Bank of England was reluctant either to raise interest rates to the levels of its European neighbours or to allow its currency to float freely. In Spain, property speculation has contributed to the enrichment of many people in recent years. The case of people putting down deposits of €10,000 or even less and then, as the saying goes, «passing the property on» to a third party, has unfortunately not been an isolated incident (and we’re reaping what we’ve sown). What I want to point out here is that, whilst it is not impossible to make money through speculation, it is extremely dangerous for one’s personal finances to ignore the fact that the money was made in this way; for once or even twice, the gamble may pay off, but in the long run we are bound to lose out.
By contrast, investing involves putting money into assets that generate a return through methods such as dividend or interest payments, or even through capital appreciation itself if we have bought them at a discount. Warren Buffett says he has two main rules in the business world: 1) Never lose money. 2) Never forget rule number 1. And judging by the spectacular performance of his company’s shares over more than 40 years, it seems that keeping these rules in mind at all times has certainly done him no harm.
There is a wide variety of investment approaches, depending on the field in question. When it comes to Warren Buffett, fundamental analysis – or, more specifically, «value investing» – begins with Benjamin Graham and whose leading exponent in Spain is Bestinver, is an example of how to invest in the stock market in a way that is the complete opposite of speculation. When it comes to property, investing means buying a house at a price where the rental income covers the mortgage (something unthinkable in Spain at present) and even leaves us with a little extra each month. Or, if we prefer fixed-income investments, looking for companies with low levels of debt and attractive yields.
The fact that investing our money first requires in-depth research usually puts many people off (it’s much easier to read the business pages and choose a share that gives us a «good feeling» than to sit down and study its annual accounts for the last five years). Fortunately, there will always be people for whom this effort is worthwhile; it will bring them great satisfaction and spare them the odd unnecessary disappointment.
To conclude, I would like to emphasise that, whilst investment strategies are the most suitable way to preserve our capital and grow it slowly but surely over time, at a young age – when one has not yet taken on serious commitments (such as having children), which entail financial responsibility, speculative strategies can indeed be viable, provided you know what you are doing and the risks involved. A pinch of pepper in certain dishes can really hit the spot.