Cluster Family Office Blog

Now that the worst of the credit crisis is believed to be over, many people have been quick to recommend investing in the stock market because «prices are very low and there are plenty of opportunities». It should be borne in mind, however, that most of these generous voices are the same people who, a few months ago, in the midst of a bear market, were still suggesting equity allocations that ranged from high to downright excessive. Obviously, the incentives driving them at that time were recommendations (and now) are very different from the objectives and circumstances of the vast majority of estates, which is why one must, at the very least, be sceptical about this sort of well-meaning advice.

Furthermore, the fact that, for the time being, the system’s collapse has been contained The current financial situation must not mislead us into losing sight of the fact that the looming recession is going to be a long one and, for many companies, difficult to overcome. For the time being, there is no light on the horizon; quite the opposite, in fact (scandal Madoff, possible new waves of unpaid, this time from commercial properties, etc.), so it is advisable to proceed with caution and humility.
This is not to say that, in the current climate, there aren’t good opportunities to buy high-quality companies at prices we would have only dreamed of a year and a half ago, but—beware—all that glitters is not gold. When selecting stocks that may be of interest, it is very important to thoroughly analyse the company’s balance sheet, its ability to generate cash, its competitive position in its main markets, as well as the competitive advantages that shield it from its rivals; steer clear of companies with high levels of debt relative to their assets, and even then, to err on the side of caution and apply a discount to the target price we arrive at, to provide greater security for the investment, whilst always taking our personal circumstances into account, so that we can ultimately decide whether that investment suits our needs and those of our financial situation.
I’m reading a consensus portfolio on the Spanish stock market, comprising 10 stocks and compiled by 25 analysts, in which I’m not surprised to see the usual big names: Telefónica, Santander, BBVA, Iberdrola and Repsol (another day I’ll discuss the incentives that drive analysts to always recommend the same «big-cap» stocks). This is what I mean by keeping your eyes wide open and knowing how to distinguish between an opportunity and a trap. Does the fact that Santander’s share price has fallen so much represent an opportunity? What if it doesn’t maintain its dividend at the same level? Will Telefónica be able to sustain its growth given the current bleak outlook in Spain and Argentina?

As a proponent of value investing, I am convinced that there are still undervalued companies that go unnoticed by the general public, but that does not mean that simply because a company has a ridiculously low P/E ratio or a high dividend yield (projections based on past data that can change overnight), it is automatically a candidate for inclusion in our portfolio. As an example, a button. In a situation as volatile as the one we are currently experiencing, what appears to be an opportunity can turn into a trap in the space of just one quarter. Similarly, when we look at the unemployment figures in Spain (and in other things) we cannot envisage any future economic scenario other than a depression; when analysing a company, it must be viewed within the context of the economic climate and assessed on the basis of its quality and its prospects at present, decide whether it is a good investment. And, as we’ve been saying lately, the best opportunities are probably on the other side of the pond.