Editor’s note: This article was first published in February 2013, and its share prices, recommendations and expectations are from then. Gowex collapsed in 2014 after admitting it had falsified its accounts, Banco Popular was resolved and sold to Santander for one euro in 2017, and Gamesa merged with Siemens Wind Power in 2017.
I know many readers may be a little confused: sometimes I say that the long term is the most profitable kind of investing, and other times I talk about speculating at specific moments, or selling, at a given point, a block of shares we bought for the long term. Just today I published that we need to separate the shell from the seed, and I did it so that, after what I’m about to explain, you keep the edible part, because I have some shell too. The advantage, in my case, is that I recognise my flaws.
To begin with, I have one enormous defect, and as tends to happen, certain defects carry over into investing. I’m not a patient person and I like to see results quickly. That’s a problem, although honestly I’ve never considered seeing a psychologist about it. I’ve been like this since I was very young. My other defect is (was) my principles, because to invest in the stock market (and now I understand this piece of advice I was given) you have to set your principles aside.
On principle, I didn’t invest in banks or oil companies, I didn’t bet against a company or a market (short positions), and I didn’t invest in companies with a persona non grata, someone under formal investigation or allegedly corrupt people in their management or on their board. I had to drop that last principle in particular, mostly because it’s rare these days to find a company that doesn’t have someone like that on its board.
In the same way, even though I’m not in favour of short positions (betting against a company or a market), since it seems that the people who ought to be worried aren’t, these days I won’t hesitate to sell short or bet against an index. With that said, let’s look at the investing method that, so far and for 12 years, has given me a positive return every year.
My investing method
My investing method… I think it has been built on the absence of any specific method and on the use of common sense. I don’t think you need to study anything out of this world to make money in the stock market. Quite the opposite: it’s when you know too much that you make the biggest mistakes in investing.
If there’s one thing I’ve learned over time, it’s that if you pick the right moment to enter the market, you already have extra peace of mind for the long term. And the right moment to get in isn’t when an analyst tells you to, but when they advise against it. Let me explain.
Santander, BBVA and Inditex are usually the most recommended stocks. And it’s true, they’re the best stocks we have on the IBEX, which is exactly why, today, I wouldn’t even consider buying them. The time to get into Inditex was years ago, when it was raising doubts, at around €35 a share, not now that it’s above €100. Santander would have been a good idea when it fell below €4, not now that it’s close to €6.
When you buy a stock at the right moment, you don’t have to worry about whether Santander goes above or below €6. It’s what I call watching the battle in the valley from a mountain peak: you can see the fighting in the distance, knowing that whatever happens you’ll have plenty of time to make a decision well in advance, and that whatever happens, you’re no longer going to lose money. Someone who bought Santander at €5.85 won’t have the same peace of mind as you. So however blue-chip they are, however good their dividends and however many recommendations they get, if I can’t buy them at a good price, I simply don’t buy them. And I know they’ll probably go up a lot more, but I’m sure the good opportunities aren’t in stocks that are only expected to rise 8% or 15% over one or two years.
My first investment
My first investment was at 21, with borrowed money, as I explained in this article. I turned €20,000 into €35,000 in five months. When I tell people this today, nobody believes me, and those who saw it at the time told me it was luck. And yes, it was reckless, and I did think I’d been very lucky, although today I see it from a different angle, and the truth is that those investments were a no-brainer. I saw the chart of a stock that, statistically, bounced back strongly every time it reached the price it was approaching, so I took the risk. At the time I had no idea about technical analysis. When I learned technical analysis, I realised I had invested in an oversold stock, in the lower part of a channel and about to form a triple bottom. In other words, the odds of winning were very high. That was speculating.
A colleague introduced me to the markets shortly after the dot-com bubble, so I started investing in a market that had just collapsed and was beginning to recover. In other words, I started in a completely bullish market. There’s no merit in making money that way, because everybody makes money then. The problem for most people is that they stay in the market when sharp corrections and trend changes arrive. Likewise, they increase their exposure to the stock market when it’s inflated.
Why do I like small caps so much?
Statistically and historically, small speculative stocks (what Spanish investors call chicharros) return much more in a bull market than the companies in the main index. If we pick a good one, it may stay asleep for a long time, but when it wakes up, it does so with a lot of energy. Clearly, what many people dismiss as chicharros, I call excellent investment opportunities. Don’t tell me to invest in Santander, Inditex and Viscofan because they’re big companies. I already know they’re big companies; in fact, everyone knows it.
Instead, point out to me which of those small stocks will at some point stop being treated as chicharros by the market, because there are many small companies that nobody recommends, and when they’ve gone up 1,500%, that’s when they tell you to buy.
One strategy I’ve followed in some years, especially when I’ve caught a bull market, is to take part in the recapitalisation of blue chips, take profits and invest them in several different small caps.
To invest in small caps…
There’s no such thing as a bad company if the entry point is good.
To invest in small caps, you should do it at support levels or in the lower part of a channel, if the stock has a defined channel. Never buy a small cap because it has gone up 70%. You’re more likely to win if you buy one that has started to rise after losing 80% (obviously, we need to look at why the company lost 80% of its value).
A few months ago I invested a little money from capital gains in a company on the OTC market, Herborium Group, a company that doesn’t even qualify as a lowly chicharro yet, but over the last month it has gained 100%. What caught my attention were its natural, herb-based products and its dreadful balance sheet, one that has been improving over the last few financial years. Luckily, this company has an acne product that contains no oestrogens, so the scandal that has splashed other products on the market because of oestrogens has put this small company in a good position. When I bought it, its market capitalisation wasn’t even $1 million, and today it’s worth $2.58 million. Its shares currently trade at $0.0036.
That same colleague advised me to buy Gowex, a company on the Mercado Alternativo Bursátil (MAB, Spain’s alternative market for growth companies), and as we can see, right now it has the market’s backing, with all kinds of recommendations.
While people don’t believe what returns you get, I still can’t believe that so many investors keep buying the same old song, the blue chips, to earn 5% or 10% plus dividends, or invest with nothing but dividends in mind. Not that it’s a bad investment to do this, but it would be a better bet to invest for dividends at the right moment (when the companies are very cheap).
I took part in Banco Popular’s capital increase when all the media were advising against it, and my main bet at the moment for 2013-2014 is Ezentis, a company that raises doubts in the market, to the point that many of its own shareholders didn’t take part in the capital increase. Let me take this opportunity to say this: if you trust a company, take part in its capital increases. If you don’t trust it enough to buy more of its shares at a lower price, simply sell your shares. That’s one piece of advice I can give you today.
“If the shareholders themselves don’t take part in a capital increase at the company where they have their money invested, to the point of putting the success of the increase at risk, they are screwing up their own money.”
How do you take advantage of the volatility of small caps?
To start with, I would only invest in a small cap with a long-term view, so I must have seen something in it: it’s been over-punished, it’s undervalued, it has plenty of growth potential, and so on. (Read: Quotes from the best investors.)
Small caps are usually ideal for trend trading. As a rule, they spend a long time in a sideways channel. If we buy the company at the bottom of the channel or at a support level, we hold on until it reaches the top. If it doesn’t break through decisively, we sell half, a third or two thirds of our shares and then buy more lower down. With these sideways moves and the ups and downs within the channel, we keep locking in a steady return while we continue to increase our exposure to the company, waiting for it to take off. This is the strategy I’ve been following for some time with Deoleo and Ezentis, and the one I’ve started with Banco Popular. I want to keep these three stocks in my portfolio for the long term, and they give me peace of mind because I bought them at a good price.
Trading or trend trading?
You already know my opinion about day trading every day: you’ll probably end up losing money. That doesn’t mean you can’t take advantage of it at particular moments. On the famous day of Draghi’s magic words, most of us who got in made a lot of money. You probably earned far more in three hours than with a 12-month fixed-term deposit. It’s a one-off day. I only recommend trading when a strong move is expected (up or down).
After a big rally or a heavy sell-off, corrections or rebounds usually follow, sometimes lasting three days, sometimes two months. At those moments, if the trend is well defined, we can get in and ride that short or long trend. Of course, when there’s no defined trend, as is the case with the IBEX 35 right now, I wouldn’t risk getting in, because there are days when I don’t know whether the IBEX is rising because buyers are really coming in or because the bears are taking a break and taking profits.
On the other hand, if you got in during the summer, when nobody was recommending investing in the IBEX, you can be a bit more relaxed, because I don’t think we’ll see 5,900 points again. That’s what entering at the right moment means: it’s when practically everyone has sold their shares.
And here I admit I made big mistakes, because it would have been an ideal moment to add Santander, BBVA and Telefónica to my portfolio, stocks that hit excellent lows for buying. At bargain prices, I would certainly hold them for the long term for the dividends.
My investing blunders
So that it’s not all the pretty side of investing, I think it’s worth knowing what kinds of mistakes even those of us who’ve been investing for a while make. Nobody is immune from making mistakes in investing; the bad thing would be to get used to making them. I hope these mistakes are useful to you.
Readers who have known me for longer already know about my old romance with Gamesa. I loved this company, and I bought it at €2.14 with the long term in mind. I liked it, but the market didn’t. When it fell to around €1.70 I bought again, trying to average down. When it lost €1.70 I got rid of it, because I was already down more than 20%.
In the end, luckily, I made a big purchase near the €1 level and sold it at around €1.90. I think next week they’ll give me the award for the world’s biggest idiot, because Gamesa has now shot up on the stock market. Today it closed at €2.28. Obviously I sold too soon, but I still don’t understand how it has now broken through the €2 level (a resistance zone) and the €2.14 level, an even stronger resistance.
My other blunder was the Facebook IPO, where I rushed in to buy like so many others. I don’t need to explain it, because you all know how Facebook has performed since its IPO. At least I cut my losses on the second day of trading.
Which brings us to another saying I always recommend: “Better to be wrong and miss out on gains than to be wrong and lose money.” Sometimes it’s better to miss a rally on which we didn’t make any money, because at least we haven’t lost any, and there will be another opportunity.
And my last piece of advice…
Always listen to the doom-mongers
Our society has a problem: there are too many clever people. We all know more than everybody else, and that’s when the so-called doom-mongers appear. They’re called that because they announce that some catastrophe is coming, that we’re in a bubble or that the economy is going down the drain. Politicians, bankers and economic experts naturally tend to deny these claims, and the rest of the herd ignores the “doom-monger”. According to the old investors, it has always happened this way.
When people come along whose music plays to a different tune, we call them crazy, alarmists, doom-mongers… then the crisis hits all at once, people lose their money in the stock market, lose their jobs, end up in debt, and ask themselves: “Why didn’t anyone warn us about this if it was already known?”
The doom-monger replies: “You were warned well in advance, but you didn’t listen.”
The doom-mongers got me out of the stock market weeks before Lehman Brothers went bankrupt. At the time, the indicators showed the market was overbought and insiders were already anticipating bad news. Prices were far too inflated, and the most effective indicator was common sense: anyone who couldn’t see that the pace was completely unsustainable had to be blind.
Even so, remember the old investors’ saying: “Buy when everyone is selling and sell when everyone is buying.” Over time I’ve learned that this is probably the most effective and accurate advice anyone can give about investing in the stock market. In 2007, with Acciona above €200 a share, I think it was a better time to sell than to buy.
I’ve probably left many things unexplained, because it would take a whole book to explain the system of analysis for choosing one stock over another and the other variables to take into account.
Further reading
- 5 steps to building a dividend investing strategy
- Lessons from Benjamin Graham, the investor who taught Warren Buffett
Featured image: Zarateman, CC0 1.0, via Wikimedia Commons.
