Editor’s note: This article was first published in July 2014. It was written on 6 July 2014, the day Gowex admitted false accounts, and the author’s own Gowex and Lenovo trades and the word ‘recently’ refer to early 2014.
After waking up to the news of Gowex admitting false accounts and seeking insolvency proceedings, I suppose today we’ll see the usual “I said so, I warned you, I knew it”, but the truth is that nobody knew a damn thing, and Gowex was a buy recommended by every Spanish analyst, while Jenaro García, the company’s CEO, was presented as a visionary and a Spanish Steve Jobs.
As some of you already know, Gowex was a company I invested in and sold relatively recently in order to buy Lenovo shares, so the only reason I haven’t developed a stomach ulcer these past few days is, to some extent, pure luck. Let’s not kid ourselves.
Many of us read and reread the advice of Warren Buffett, but we tend to ignore it completely (yours truly included). So it’s time to go over a few points, and let this serve as a lesson for the future: keep in mind all those aspects of investing that we tend to forget and that don’t seem important until their importance becomes clear, when it’s already too late.
Starting with the most obvious points we set out the other day, when we talked about how Warren Buffett analyses stocks before investing, we can clearly see that Gowex would have been one of the first to be ruled out.
Who understood Gowex’s business model?
I admit that when I bought into Gowex, you could say I understood perfectly what they did, but clearly I never managed to understand exactly how they did it. All I knew was that their accounts (which we now know were false) showed high profits that were apparently recurring and growing. It’s obvious that those of us who invested in this company didn’t really understand the business model. Had we understood it, we probably wouldn’t have decided to buy. In fact, Gotham City Research, the firm behind the report that crushed the company, does seem to have understood the business model perfectly, and that’s why it bet on the company’s collapse.
The company’s manager.
We now have a recent example of the importance of analysing the manager of a listed company, something many investors see as nonsense. Jenaro García, whom El Confidencial has already nicknamed “Captain Pescanova”, had a very dubious management record, having been involved in Advanced Refractive Technologies, a penny stock that was suspended by the SEC following certain irregularities. Had we stopped to look into this person’s track record, we would probably have found nothing but bad news from before his time at Gowex.
Information is power.
Although that expression comes from the fictional character Gordon Gekko, Buffett always warns that you have to study the company you are going to invest in thoroughly. As retail investors, we have limited means to carry out in-depth research like the study done by Gotham, which looked less like an analysis and more like an NSA investigation. I’m not even going to claim with hindsight that there was something in the accounts that didn’t add up and we ignored it, because the truth is there was nothing, except lots of profit and high liquidity.
The only question should have been: why do other companies not make money while Gowex does? The smartest thing, of course, would have been not to invest until we were able to answer that question properly and knowledgeably.
Following the herd and listening to market noise.
In the end, everything leads to this mistake. Once we’ve made it clear that we didn’t know the business model or do the proper research, anyone who invested in Gowex did so on the advice of analysts and then of the herd, who said Gowex was a very profitable company that was going to be huge.
I suppose we could apply many more pieces of Warren Buffett’s advice that would lead us to conclude that Gowex was not a trustworthy investment for a conservative long-term investor. Even so, we fully understand that individual investors cannot afford to be constantly doubting the accounts a company presents, because that is what the relevant regulators should be there for, and once again they have proved incompetent in this respect.
Further reading
