Editor’s note: This article was first published in May 2012; the IBEX levels, Telefónica and Gamesa purchase prices, the author’s return and Gamesa’s results are a snapshot of that market. Gamesa later merged with Siemens’ wind business, so its outlook here no longer applies.
Many readers have written to us after watching what is happening to share prices. The experts advise staying away from the stock market until the IBEX climbs back above 7,200 points, at which point we could start talking about a change of trend. That said, we all know that a lot of money can be made by buying shares at a time like this. I’ll say it without sugar-coating it: the return on my investment portfolio as of today is -18.94%. And the ironic thing is that it doesn’t take me by surprise.
Just as I sometimes tell you about my successes, it’s no bad thing for my “failures” to be known too, especially when I know where I went wrong and I hope my own mistakes will help you avoid making them. I should say that never before, in my short or long career as an investor, had I posted a negative return. My main mistakes:
1. Not listening to a great investor, Warren Buffett.
Warren Buffett likes to say that there is no dumber reason to buy a share than buying it because “it’s cheap”. That was my first mistake, and a doubly painful one, because I knew this Buffett “commandment” and understood what it meant.
I bought Telefónica shares when they were trading at €15.50, because at the time I thought they were a bargain at that price. As we can see, Telefónica is now trading well below that. Recently I bought Gamesa shares at €2.14, since that was an all-time low for the company’s share price. It has since hit new all-time lows.
2. Not listening to my intuition.
They say that to invest in the stock market you need knowledge, you need to study, analyse and so on, and that is absolutely true, although in the end what really counts is your intuition. Many of you have heard me say that we were expecting a very big “bang” in the markets in mid-2012 and that we haven’t hit bottom yet. In a way, I knew that by investing at this point I was taking on more risk than usual. Always trust your intuition; it rarely fails.
3. Being an investor doesn’t mean you have to be invested at all times.
I have given some readers these words as advice. Advice that I didn’t apply to myself, although I think I suffered from what you might call stock market withdrawal: I missed keeping an eye on share prices. I wanted to be in the game and, well, here I am playing, although I’m taking a beating 🙂
4. Poor diversification.
My stock market exposure is in just two companies: Telefónica (21%) and Gamesa (79%). It is all in a single index, which happens to be the hardest-hit index, when I could have had a high return on the US stock market.
Patience and psychology.
Patience, in stock market investing as in life, is a great virtue. I was looking for a short- to medium-term return and, well… now it’s a long-term investment. When the time comes, we’ll average down on these stocks, because even though one of them (Gamesa) isn’t widely recommended, I have faith in that company: despite its recent losses of 21 million euros, 99% of its business is outside Spain. It is affected by regulation, and in some countries that situation could change.
It has several major contracts pending and I imagine that, if it came close to bankruptcy, the company would be acquired by another one. That would be an extreme scenario, but it has to be taken into account. I am also bearing in mind that it is one of the companies hardest hit by short-term traders.
Then there is the psychological side: watching your money gradually disappear on the screen means your left hand has to stop your right hand from pressing the sell key, mostly because pressing that key won’t get back what you have already lost. But… will I lose more, cut my losses, make money? Those questions and uncertainties are the psychological aspects you have to be prepared for when you invest.
Back to the original question: is it a good time to buy shares?
If you invest money that you won’t need for the next 5 years in a company that won’t go under whatever happens in the current crisis, and that company is trading below what you consider its target price, has growth potential and gives you the feeling that it will come out of the crisis stronger, then yes, it’s a good time to buy shares in that company, as long as you take care not to make some of the mistakes I’ve described above.
We will probably see some share prices fall even further. Let’s not forget that if the IBEX entered a new downtrend, some say we could see it below 6,000 points. In the end, the decision is yours.
“To get a higher return, you have to take on more risk.”
Featured image: Zarateman, CC0 1.0, via Wikimedia Commons.
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