The long-term preservation of assets is a major concern for all wealth holders, particularly those with medium and moderate levels of wealth. In this first article, we will discuss the role that a particular equity investment can play today in comparison with other types of financial assets.<\/p>\n
![\"\"](\"http:\/\/www.bfotos.com\/albums\/amor\/ternura-imagen.jpg\")
A strategic error in the choice of investments entails an opportunity cost that dramatically affects the growth of one\u2019s wealth over the years. The further ahead we look on the investment horizon, the accumulation of small (and large) strategic errors and\/or mediocre or poor investments will make comparisons of wealth growth all the more stark, as time amplifies their effects in ways most investors do not anticipate, for better or for worse.<\/p>\n
Over a five-year period, the growth of a portfolio that has failed to optimise its investments sufficiently (not to mention poor investments resulting in substantial losses) will be far below the level achieved by assets that have been properly managed. Yet that very mediocrity in management will lead to differences abysmal and irreparable<\/strong>, if we project it over 7, 10, 12, 15, 20, 30 or more years. The short-term mindset that is ingrained in many investors prevents them from even realising the importance that these \u00abminor\u00bb differences in returns have in the long term.<\/strong> Because, just as with compound interest, mediocrity and opportunity costs accumulate, one after the other, and over the years this makes a huge difference between one level of wealth and another.<\/p>\n In the current situation, in the The New Normal<\/a> by Bill Gross, who We warned about this more than three years ago<\/a><\/strong>, the developed world\u2019s over-reliance on fixed-income assets has been alarming. To the extent that the traditional approach of allocating assets between fixed income and equities \u2013 to protect wealth from unwanted volatility and achieve moderate growth \u2013 may prove useless or recklessly outdated. The Argentine debt crisis demonstrated that the assets best able to weather the storm of insolvency are those most closely linked to the real economy. In other words, Businesses keep their feet on the ground when debt becomes worthless. <\/strong>Conversely, whilst the volatility experienced by these assets during turbulent periods is at its peak, the volatility that fixed-income securities from sovereign issuers may face in situations such as that in Argentina a decade ago \u2013 or in the European periphery without the de facto bailout currently being provided by the ECB \u2013 is by no means negligible. And we must not lose sight of the fact that high volatility becomes a very minor evil when we are talking about long-term wealth preservation in a minefield such as the New Normal.<\/p>\n History has shown that, in times of default, good businesses continue to make a lot of money. And, more importantly, as soon as the panic subsides, as soon as the dust raised by the financial or geopolitical bombshell has settled even slightly, the share prices of excellent companies rise again like a phoenix. This does not, of course, happen with less impressive or mediocre companies, nor with those which, despite being excellent businesses, are trading without a substantial discount to their intrinsic value. All of these may continue to perform in line with (or below) their respective benchmark stock market indices, that is to say, generating losses for their shareholders during crashes and bear markets for years on end. The same applies to fixed-income markets that have become saturated following a crisis such as the one in Argentina, for example, where bondholders are still losing a great deal of money more than ten years on. Is it not better, in critical circumstances, to accept extreme volatility whilst keeping our assets closely tied to the real economy? Only such assets \u2013 that is, shares in companies with global operations and excellent business models, purchased at substantial discounts \u2013 rise from the ashes shortly after an economic and financial \u2018nuclear explosion\u2019. (To give just one example: It\u2019s been many months since everyone<\/strong> The equity funds in which our clients invest have now, for months, surpassed their 2007 highs. This means that even investors who, in the height of bad luck, had entered the market just before the 2008 crash are now making money. How many international equity fund managers can say that? We\u2019d be hard pressed to find any amongst those managed by financial institutions, for example. <\/em>It is this very quality of the investments that stands the test of time, with or without further market crashes and\/or mass defaults, because their effects are amplified over the years in any known economic scenario. That\u2019s no small thing.<\/p>\n Note: The chart compares the average share price (indices) and not outstanding companies trading at significant discounts in terms of their price-to-book ratio (value investing), in which case the difference would be even far greater.<\/em><\/p>\n![\"\"](\"http:\/\/1.bp.blogspot.com\/_jsMXMC57Y_o\/TN1VIBxYieI\/AAAAAAAABqs\/mtQaTfoIJw8\/s1600\/3+rendimientos+a+largo+plazo.jpg\")
<\/p>\n