Fundamental question

money-1604921_1920

Peter Bobik
Consultant
Bratislava, Slovakia

I had feelings like these… couple of years ago. In recent weeks I was taken by an urgent, persistent thought. We have been through this before, I know this. It is a déjà vu of 2007 (according to Wikipedia, déjà vu is an intense feeling that something has already been experienced in the past).

 

Several people called me with an offer of investment with high return in a short time. These were investments from a margin of the investment spectrum, with high risk and logic that I did not understand. And a participant of one of our courses, with zero experience in investments, asked me about cryptocurrency (and she was not the only one; I have heard about it at least a hundred times…). And just from a quick glimpse on the current share pricing I realized that I am not going to find anything cheap…

We have been through this; here we have the time again when everyone is buying high-risk investments (or is thinking about it). The country is shrouded in optimism. Everyone wants to ride this wave of prosperity and no one is afraid of possible negative development. Excellent… we are rejoicing. This is beneficial for consumption (meaning economic growth). And it can even last, and last long. It can… But will it last? If only we knew… Everyone (or almost everyone) will earn a little bit more (there are more orders and commissions, more trading, sales are growing…), but my concern is, what are we going to do with this money and the money earned in the past. Where are we going to put it/invest it? If we used it, spent it, threw away, that would be beneficial, everyone would gain. But the savings rate is also growing, we save more than we did in the past. And there are more high-risk investments in the portfolios of investors, but also individual savers. Here the optimism can foreshadow a possible catastrophe. What if future is not only good? How many people will lose money? And how much? With this optimism, it can be a lot. This type of ‘greed blindness’ becomes much more virulent/contagious especially after a longer period of growth in investments value (e.g., 2009-2017). And this virus is very much here again. I see it very often, practically everywhere… The feeling is stronger now than in 2006-2007. Is this what comes before the fall? A million dollar question. If only we knew. But not knowing the answer does not mean that I cannot profit from it (I am not talking about cryptocurrencies). This is a response I have given many times recently. An answer to the question how to react here and what investment strategy to choose in times like this.

The answer is not to sell all the high-risk investments. This might not necessarily pay off in the end (markets can be growing for years). The answer is to set the ratio of high-risk investments among your assets to a level that you can bear even during ‘adverse weather’ and that allows you not to commit financial suicide (sell out in unfavorable time, suffer great losses). How to do that?

First of all – especially in times like these – it is necessary to know, if what I have or I am going to buy is what I really want to have. Each investment should undergo a thought test, where I ask: Am I willing to accept the worst that can happen to my investment? Can I bear, for example, its fall by 50%? This information, about how risky the investment I am buying is, is essential (most essential). How much can I lose? If the people offering you the investment cannot answer this, run from the room by the speed of light. Every serious administrator can answer this in detail (based on statistics). If you are OK with this information, ask another question, still: Do I really want to bear this risk with this expected return? Is it worth it? If the answer is again positive… but I would be very, very surprised, with investments like cryptocurrency, derivatives, high frequency trading etc. Just to be completely sure, ask the fundamental question: Whom will I blame if I lose a lot (even everything) because of this investment? Who will be the bad guy? My advisor? My administrator? Someone who talked me into this? If these are your answers, stop immediately and do not buy it. You are an adult, an intelligent person, you should not let yourself be talked into something like this.

The only correct answer here is – I will blame myself, because this is how I wanted it. And if you want it this way, if for you the risk represents a logical part of investing and a fee for bigger returns, then buy it (or keep holding onto it).

With an appeal to your common sense and legal capacity with regard to investments and with best wishes for market growth (although I am not sure about this one…), for now I bid you farewell.

 



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