In this day and age, it is becoming increasingly difficult to find a safe haven for our money, and indeed for any type of asset. The safe investments of the global economic paradigm of the past no longer exist. How easy it was for the investor who wanted security, a decade or two ago, to place assets in fixed income or bank deposits, with the only worry being that inflation would not eat them up, wasn't it?<\/p>\n
In the Old Normal, it was simply a matter of calculating the yield required for adequate growth, as the majority of bond issues, deposits and other products guaranteed by banks had virtually assured \u201csolvency\u201d. In other words, at maturity, nobody wondered whether this or that multinational would be able to repay the principal on its issues, because if it found itself short of liquidity, it could issue more debt to pay off maturing issues and further drive the expansion of its business.<\/p>\n
Let alone did anyone consider whether or not the sovereign debt might default, or undergo a partial write-off in the Greek style. Or whether deposits and other bank investments were at risk should the institution go bankrupt. How could a state or a bank in the developed world possibly go bust? Was this some sort of Central African banana republic? The credit ratings were regarded by most investors (and as we said at the time<\/a><\/strong>, and also by far too many professionals in the sector) as mere indicators of higher or lower returns, but not as determinants of an investment\u2019s creditworthiness. Because, barring a few exotic exceptions, all debt and bank fixed-income products were sound in a developed, robust, growing world, fuelled on demand by an increase in credit that was believed to be infinite.<\/p>\n In contrast, in this \u2018New Normal\u2019 \u2013 or new global financial paradigm \u2013 which many did not realise existed until the collapse of Lehman Brothers, the main concern for most conservative investors is no longer beating inflation; no. Now the big question for the average Spaniard is how to navigate this financial minefield.<\/p>\n In other words, where to put your money\u2026 simply so as not to lose it!: Spanish property losing value to infinity and beyond (the politically correct 15-year timeframe for the bad bank should serve as a warning to all\u2026); deposits, interest-bearing current accounts and other guaranteed and structured banking products of all kinds, which carry an extremely high bank and country risk; and traditional, sovereign and corporate fixed-income securities from developed countries, with such a high level of debt that they become insolvent and unpayable as soon as the debt snowball comes to a halt\u00a0or simply get narrower<\/strong>.<\/p>\n The latest debt bubble, with guarantees and collateral conjured out of thin air, is the creation of the misnamed \u201cbad bank\u2019 (I recommend Guru Hucky\u2019s insightful analysis entitled \u201cBad bank, from carpet to carpet, and I\u2019ll take a shot because it\u2019s my turn<\/strong><\/a>\u201c).<\/p>\n And this financial surrealism of debt upon debt in a developed world in recession means that fixed-income securities have, for the first time in Western history, become a high-risk asset<\/strong>. And We must bear in mind here<\/strong><\/a> the vast difference between risk and volatility<\/strong>, as the losses resulting from a bond that is not repaid at maturity are irretrievable<\/strong>. Just ask Argentine investors in sovereign fixed-income securities, who, a decade on, are still down 70% on their investment, whilst the country\u2019s stock market has not only recouped the losses from the \u2018corralito\u2019 but has also gained more than 1000% over those years.<\/p>\n We have already pointed this out in previous articles\u00a0a year ago<\/a>,\u00a0by all means<\/a> <\/strong>y passively<\/a><\/strong>: Solvency \u2013 that precious and increasingly scarce treasure that will preserve our wealth over time \u2013 has deserted the fixed-income markets of countries, companies and products guaranteed by developed-world banks.<\/p>\n Investors in this \u2018New Normal\u2019 must accept the concept of volatility in exchange for greater solvency and security. And this paradox is occurring for the first time in the modern economy, as historically high volatility has been (erroneously) associated with lower security, and vice versa.<\/p>\n But where has solvency gone, if we can no longer find it in fixed-income securities or bank-guaranteed products in this part of the world? Well, as well as still being able to find a very good and profitable safe haven in carefully selected fixed-income securities from emerging countries and companies, solvency is to be found \u2013 and has always been found \u2013 in investing in companies with the following characteristics:<\/p>\n Sound, debt-free businesses with recurring revenue and profits, whose operations are based in or supported by markets with growing economies. And, above all, purchased at prices well below their intrinsic value. Obviously, the selection and valuation of these investments is an art in itself, and we must identify the best specialists in managing such investments: the world\u2019s best investment fund managers (whom we have already discussed in \u201cInvestment funds and the devil take them all<\/strong><\/a>\u201c). Today, we are already seeing figures of the calibre of McLennan and other leading experts proclaiming that careful equity selection is the best way to preserve wealth in this New Normal.<\/p>\n In such capable hands, investments may be subject to the volatility typical of share prices. However, in the medium and long term, they will provide us with the best safeguard against permanent losses to our wealth<\/p>\n . In the short term, such volatility may lead to temporary losses, but nothing that cannot be offset by the value created by these businesses, which will be adequately reflected in the share price over the course of a couple of years or so.<\/p>\n In fact, in CFO<\/a> We do not consider investing in any fund that has remained in the red for more than 3 or 3.5 years at any point in its history, even during the 2008 crash. Or to put it another way, any investor who, in the height of bad luck, had invested in these funds at the very worst possible moment (the day before the crash), would have been back in positive territory and making money a long time ago. Some funds even recouped their 2008 losses in less than a single year!<\/p>\n In short, not only do these investments protect against irrecoverable losses, but they also generate sustained, long-term double-digit returns, thereby making them the best safe haven in this \u2018New Normal\u2019, in which the value of the two main global currencies is crumbling before our very eyes.<\/p>\n However, The volatility that must be accepted when investing in equities means that this cannot be a one-size-fits-all solution for all investors; such funds should be combined with others offering the best emerging market fixed income, investments linked to commodities such as consumable precious metals, or energy (return to fundamentals or tangible assets), as well as the inclusion of an excellent absolute return fund \u2013 which is not always easily accessible under certain investor circumstances (the framework for funds registered in Spain, trading volumes, etc.) \u2013 and which must be assessed on a case-by-case basis.<\/strong><\/p>\n We will never tire of repeating that the key lies in knowing how to select the world\u2019s best fund managers who consistently outperform their benchmark indices. And let\u2019s not fool ourselves: this selection of \u2018artists\u2019 is, in turn, also an extremely complex art form:<\/p>\n A thorough analysis of their figures, portfolios, decisions and investment philosophy; regular face-to-face interviews with these fund managers; the acquisition of the minimum required investment amounts; the platforms and regulatory jurisdictions through which to invest in their funds; etc. And once this selection has been carried out optimally and the full range of investments has been diversified to complement an appropriate asset allocation for each family, we will be well placed to progress effectively, consistently outperforming the market. Only in this way will we succeed in safeguarding and sufficiently growing our wealth in the long term.<\/p>\n Any investor who believes that the worst of this crisis is over fails to grasp the terrible reality in which we find ourselves, and will pay dearly for it if they do not have the right guidance. Unfortunately, the desert is only just beginning, even though many are already dying of thirst.<\/p>\n But to better cope with what lies ahead, Here\u2019s a fun video with Spanish subtitles: \u201cDebt Bomb\u201d<\/strong><\/a>\u2026 Better to laugh than to cry, especially if you\u2019re able to cross the desert with a good compass and enough provisions.<\/p>\n