Editor’s note: This article was first published in March 2016, and its specific positions, including ArcelorMittal and Repsol, and the author’s age are as of that year. Its remark that Facebook and Twitter pay no dividends dates from 2016: Meta began paying a dividend in 2024, and Twitter was taken private in 2022 (now X).
We very often receive questions like “Where do you recommend I invest right now?” or “Is company X a good investment?”. Bear in mind that I don’t know you, I don’t know how much money we’re talking about, I don’t know what your financial goals are (besides wanting to make a lot of money from the investment), and I don’t know how much risk you’re willing to take.
I rarely make stock recommendations, and when I do, it’s almost always after sharp falls, because that’s when we can find bargains by analysing companies’ fundamentals and being guided by the likelihood that the share prices of the hardest-hit companies will rise. If we choose that moment to enter an investment, always counting on a market recovery, we clearly limit the risk by going in with a certain margin of safety.
(See: 5 recommended stocks to buy in 2016)
Within the risk that equities always carry, choosing solid companies or companies that have been heavily punished in this way keeps the risk to a minimum. Even so, universal recommendations might not suit everyone, although so far this approach has almost always worked for almost everyone.
Building an investment portfolio is like making a made-to-measure suit. Depending on a person’s measurements, the suit will have longer sleeves, shorter trousers and so on… That’s why you can’t answer a request for an investment recommendation so coldly.
A company that’s a good investment for me might not be one for you.
Suppose you’re 59 and looking for an investment opportunity that will generate a return for you to enjoy in retirement. Clearly, the investment you need could be very different from mine, since I’m 36. Likewise, if you’re 20, the kind of investment you need could be very different from mine. Perhaps I won’t get to enjoy an investment in a renewable energy company or one working on cancer cures, but a 20-year-old today may well see high returns from companies like these.
The stock market tends to rise over the long term, but over that long term we also have to allow for the possibility of a huge market crash just as you retire, leaving you unable to take that money out except at a much lower return or even at a loss.
It’s often said that if you have a lot of money to invest, you should look for a moderate return with low risk. If you have a considerable amount of money to invest, perhaps we could talk about diversifying the risk. If you have little money, you’re forced to take on more risk (to speculate).
But this saying isn’t entirely correct, and it’s a mistake many people make when they only have 1,000 or 2,000 euros to invest. They want to squeeze so much return out of it that they take on so much risk that they end up losing the little money they had.
A young person with little money and even little experience has two paths when it comes to investing:
- Long term and accumulating shares. That is, buying shares in blocks of 1,000 or 2,000 euros as you save money, aiming for capital gains plus dividends. Let’s say this is Warren Buffett’s formula, the one that lets compound interest do its work.
- Short term and speculation. It’s not a bad way to invest; quite the opposite. The only thing is that it requires more experience. Let’s say it would consist of buying riskier shares that are more likely to move sharply (penny stocks), and even using leveraged investment vehicles such as options, warrants and so on to take advantage of trends.
And we can also use both methods at the same time. Personally, both systems have earned me returns.
If at some point you consult an investment adviser to put your portfolio together, the typical form where you sign to say you understand the risks of investing in equities won’t be enough. That person will need to know you thoroughly and know exactly what you really want. In many cases, most people don’t really know what they want when it comes to investing.
How long do I want to keep the money in the market? 5 years, 10 years, until retirement, forever…
How much money am I prepared to lose? I’ve sometimes made investments of 1,000 or 2,500 euros in companies that would either soar or lose me all the money. I knew the risk, and since it was a 100% speculative investment, I was counting on the possibility of losing it all. That’s what happened in most cases, although it’s true that in the few cases where I “got it right”, the gains outweighed the losses. Even so, I don’t recommend playing this game, because it’s like playing roulette.
As a general rule, once we know the investor’s risk profile, we can always allocate a smaller or larger percentage to shares with greater growth potential, and therefore higher risk.
Am I looking for strong share price growth or for dividends? Clearly, if you’re looking for dividends, companies like Facebook and Twitter aren’t for you. You need to turn your attention to other kinds of companies.
(See: Which companies to invest in for reliable dividends)
And without a doubt, I always recommend that people, whether or not they consult an adviser, stay in control of their money, meaning that they can sell their shares whenever they want. In fact, I like investing in the stock market because it’s a liquid investment. The moment you put your money in the hands of a third party, you lose that control. And sometimes you can see the storm coming from a long way off.
Do you recommend investing in ArcelorMittal? I’ve averaged down on this company several times. It’s a company I’ve chosen for the long term, as I have Repsol. For me it’s a good investment, given my risk profile and my investment horizon (in Repsol’s case, I’m looking to sell when it reaches 17 euros). For you, they might not be the most interesting investments, or perhaps they might.
See also: How to invest when you’re young and/or have no experience
Featured image: Amtec Photos, CC BY-SA 2.0, via Flickr.
