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Month: January 2024

Your savings are in danger

Your savings are in danger

Everyone that has a TV or does his groceries, knows this simple fact:

Inflation has been back for a few years now, and the purchasing power of everyone has been diminished. Reported numbers such as CPI, PPI and GDP deflators have been strongly highlighting that we have seen higher inflation now that we have seen in a decade and even if your president is saying that we have attained the peak, you still need to comprehend something:

Your savings are never going to be safe if you don’t take matters in your own hands.

It is undetermined at this point if this inflation phase is transitory or permanent, what we know is that in either case, you must be prepared.

To simplify my demonstration, I’m going to use the simplified Keynesian model:

He assumed that: R = C + I where R= revenues, C= consumer spending and I= investments.
Which also means that I = R – C.

At this point, you already know that wages can be increased to oppose the inflation, but it is almost never enough to compensate. While consumer spending is also increasing due to rising prices, you can obviously guess that the amount of capital available to invest is going to decrease. In that sense, it is definitely going to complicate your capacity to improve your financial situation.

Furthermore, even if you assumes that the amount of savings that you can monthly put aside is going to stay the same, the simple fact that this amount is tied to your currency means that that you are losing value due to currencies being exposed to different levels of inflation (this is why interest rates vary across currencies over time).
Meaning that, for example, if you can monthly save 1000$ in a period of inflation or not, this amount is going to be affected by the fact that your purchasing power has been weakened.
1000$ in a period of inflation and 1000$ in a period of deflation do not have the same value.
Therefore, you are losing money, EVEN if you are able to save the same amount.

If you think about it, the saving rate in the euro area was at 14.8% in Q2 2023 which means that the issue of having a capital that is deteriorating due to inflation is not concerning that many people since only a small percentage is able to save money. But for those that actually save money each month, you have to ask yourself: Off that percentage, how many of them actually invest a moderate amount and do not let it just sleep in their bank account?

Even more, do you admit that the common investing vehicle for most individuals is bonds, either by the means of a broker or a legally regulated savings account promoted by your bank which returns at its maximum a yield of 5 to 6%.

Do you think that it is enough to compensate the loss in value of your currency and of your purchasing power? It is common knowledge that inflation is a bond’s worst enemy because for an investor relying on a stream of fixed income payments, higher inflation reduces the purchasing power of fixed payments since those payments stay equal during that period. To be short, payments remain fixed while the price of goods and services increases. If you add the fact that the value of those bonds is depreciating since bonds that reflect better future rate are issued after that Central Banks have raised interest rates, you truly end up at the wrong end of the rope.

To conclude, your long term savings are not going to survive the inflation if you don’t have a proper strategy in place. For those that cannot save up money, themselves cannot be saved. For those that do save up money, but do not do anything with it, they cannot be saved. For those that let their bank counselor invests their savings into bonds or insurances, they cannot be saved.

But the one that can be saved, are the ones that realize that investing should be something that is absolutely and utterly taken seriously as priority to secure your future.



Value investing: a short and simple explanation.

Value investing: a short and simple explanation.

Value investing is an investment strategy which consists simply of purchasing shares whose price is lower than their intrinsic value. The idea is to take advantage of the undervaluation of the market to realize a long-term capital gain.

Sounds easy, right? Damodaran used the term “investing for grown ups” to explain and caricature that type of investing since you need to have a certain maturity to perform that strategy, in opposition to a childish investing strategy which could consist in fast gains appetite and a short temper.

Value investing has a long and rich history, dating back to the 1930s, when Benjamin Graham and David Dodd wrote the classic book, “The Intelligent Investor”. Graham and Dodd advocated for a conservative and disciplined approach to investing, based on rigorous analysis and a margin of safety. They also distinguished between two types of value investors: passive and active. Passive value investors buy a diversified portfolio of cheap stocks and hold them for the long term, while active value investors look for special situations, such as mergers, spin-offs, or restructurings, that can unlock value (see You can be a stock market genius: (even if you’re not too smart) : uncover the secret hiding places of stock market profits from Greenblatt).

Therefore, value investing is based on a few key principles on which I will expand on further below:

Fundamental analysis: this involves studying the financial statements of the company, its profitability, its growth, its competitive situation, its capacity to generate cash flow, its value of assets and every fundamental data at your disposition to be able to determine a correct intrinsic value of the company, which may be different from its stock market value. This search & read process is what is going to allow you to confirm if the company is worth your investment or not, this is how you become familiar with the business and its long term viability, therefore convincing you that you do not need to look at the stock price for the next five years if needed.   

Inefficient market theory: Value investing is based on the idea that markets make mistakes, and that some stocks are priced below their true value. Value investors try to exploit these mistakes by buying undervalued stocks and holding them until the market corrects itself.

Source: Damodaran.

Berkshire Hathaway, Buffett’s company, is a classic example that the market can be inefficient in its ability to properly estimate the value of stocks, and it can be highlighted in this graph: Berkshire Hathaway has been to able to compound an annual return on sixty years which beats the S&P 500 (commonly used index to represent the US Stock Market), proving the point that abnormal returns can be generated using that specific strategy.

The margin of safety: this is the difference between the purchase price and the intrinsic value of the action. The higher the safety margin, the lower the risk of losing money. The value investor seeks to purchase stocks with a sufficient margin of safety to protect against market fluctuations and valuation errors which are unfortunately very common and need to be taken into consideration as part of the value investing strategy.

Time: value investing is a long-term strategy, which requires patience and discipline. Value investors do not allow themselves to be influenced by short-term market fluctuations but focus on the long-term performance of the company. It waits for the market to recognize the true value of the company and for the stock price to adjust accordingly.

While I am certain that value investing is the right way to invest for a logical and calm individual, it  is important to mention that stories of value investors and their winning stocks backed up by numbers on how well value investing does, relative to other philosophies, are not sufficient to highlight that you can identify as a value investor and still fail.

That is why, it is of the highest priority to spend enough time studying this school of investing in the hope that you can one day, in the best scenario: challenge compounded annual returns from legendary investors. And in the worst scenario: not become a failed investor and lose parts of your capital.

Calling yourself a value investor, like many things in life, must be deserved through the means of hard work and mistakes well learned.