After years and years of the same activity, in my case nearly 18 years of giving investment advice, certain fundamentals precipitate in your mind and become self-evident. There is also a touch of serendipity when one finds that these fundamentals often have a general application, not just to one's field of activity.
What we call experience is, to a large extent, the formation of such understanding. Perhaps that is why investors get better with age, unlike great theoretical physicists, or earth-shaking artists, for example, who must make an impact by the time they are 35. This time space adds to this profession's many blessings which compensate for the hazards.
1. There is no such thing as a perfect investment.
Many people with money to invest are often looking for a perfect investment, even if they do not know it, even if they sometimes do not admit it when pointed out to them.
There is in the psyche this general idea of a great investment:
An investment with steady capital growth, which pays a good level of income, with no risk, with no tax, which can easily be sold, with little or no fees and charges, which can be transferred to the spouse or the heirs instantaneously and without any problem. An investment with an option to stop receiving the income and compound it with the capital. The investment would be secure, nobody can steal it, nor can the investor misplace it. If there is an accident, it is insured, or will be replaced by the provider.
That would be a perfect investment. (There is no guarantee that everyone will agree it is!) Never expect a serious investment adviser to offer you a perfect investment. If he or she does, then the faster you are out of the office, the better for your pocket.
Also, don't go about wishing someone would find you such an investment. If you do, you are inviting being taken for a ride. It is much safer to get it in your mind that such an investment does not exist.
Having said that, I would like to note two things. First, with hindsight, certain investments do approach people's idea of a perfect investment. But that is always after the fact. That same investment which, with hindsight, was the paragon of investments might send you to the proverbial poorhouse tomorrow. Study but don't get carried away with the past.
When someone takes the plunge into certain emerging country bonds, for example, desiring the high yield such bonds provide, he or she is not just looking for someone to acquire the bonds for them on the market but also to morally sanction the transaction. Finding a balance between greed and prudence is very difficult in most cases and especially when one's uncle is getting fat interest cheques in the mail. Until that moment in time, perhaps, an Argentina bond would have seemed a perfect investment and the investment adviser who warns him strongly about the risks involved seems, at best, naïve in thinking that governments can "go bankrupt".
Such an investor rarely places funds with such an adviser and walks out, seeking "moral" comfort elsewhere. The adviser is left with one less client but with a feeling of having done the right thing. The investor perhaps eventually finds gratification and all is well with his perfect investment until Argentina refuses to pay.
As a lover of incunabula I read about many such scams and defaults in history. This is not the first time Argentina did such things and once, long ago, one of its defaults led to severe falls in US shares.
Second, while the perfect investment is impossible, much effort is expended by some very intelligent people to offer investments which are as close to perfect as may be. Compare this with that famous "I have a dream" speech. People always have dreams and always try to reach them.
Loans led to bonds and various types of bank accounts which have led to "guaranteed capital products" indirectly investing on the stock exchanges. We have the great hedge funds' search for "alpha" (take it as performance that cannot be attributed to the market) and now "portable alpha", that extra performance which can be de-coupled from the asset class from whence it came.
Risk is packaged, re-packaged, decorated, transformed, concealed, bought and sold. There is no perfect investment, true, but it is not for want of trying.
2. There are no miracles.
While there is such a thing as a good investment, there is no such thing as a miracle, except with supernatural intervention.
Every investor has to keep this in mind while his adviser is discussing the various investments and making recommendations.
If someone tells you that you can today get 10% from a AAA-rated bond, or from some other "definitely secure" investment, walk out.
Investment advisers generally recommend their best products up front. Investors may not like what's offered first and may wish to have more income or would be willing to go for a higher potential capital gains in lieu of receiving income regularly.
The adviser may suggest something else. But one has to keep in mind that whatever is offered has to be pinned by the economic facts. Client and adviser cannot drift off into cuckoo land where returns are always high and risks miniscule.
If the investment adviser has it, there is no reason why s/he won't give it. It is very rare indeed that a dent is going to be made in the supply of any security by a private investor.
If somebody offers you a miracle, ask to see the saint.
The corollary is this: if someone invites you to bet against his delivering a miracle, he already knows how to do it, and so don't bet against him.
3. Invest only when it is appropriate to do so.
You do not necessarily invest on the day when you happen to go see your investment adviser.
Many investors seem to expect that because they met their adviser, say, on Monday, November 16, at 3.30 p.m., the adviser should invest their portfolio there and then on that date in a number of investments to make up a suitably diversified portfolio.
Such action is rarely advisable except perhaps when dealing with small amounts and one wants a general-purpose investment such as a with- profits insurance policy or a collective investment scheme. Apart from the requirement to get to know the investor's circumstances and to discuss various options, it is often necessary for the client to think carefully about the various matters discussed and the options available.
The client must also get a portfolio which s/he can live with. Once client and adviser gain an understanding, then the portfolio has to be put in place.
It is often appropriate that a portfolio be put in place over a number of weeks or months, for various reasons. Important issues of new securities may be in the offing, critical announcements (for example, on interest rates) may be due, various factors may be playing in the market and they need to clear before a decision is taken, sometimes the volatility of markets is too high, etc.
At times, you can see a number of good opportunities, all waiting to be had, at others, there is a paucity. One has to wait for the right time.
Trying to get the timing right is one of the adviser's main jobs. It is very rare that things come together in such a manner that it is the right time for everything.
Once the shape of an eventual portfolio is decided upon, it is likely to be put in place before long. Impatience does not make for good investment decisions.
All three factors discussed are related. It has to do with investors' expectations versus what is considered professionally sound practice. All three have to do, to a certain extent, with high expectations: that, of all things, there is in this world full of imperfections a perfect investment, that a miracle might happen, or some sort of magic, some other Potterish phenomenon, that the adviser may find a very high yielding though perfectly secure investment, that one can execute deals and put a portfolio in place in a jiffy. For the benefit of good investment returns, expectations have to be tempered by common sense.
I do not wish to treat how the principles above apply to life in general. This would push this column too much towards the philosophical to go down well with my usually very practical readers. But each of us, with his or her own life, can easily find a parallel application. We all know of people who believe in a perfect world of perfect relationships, of miracles waiting to happen, and of things that shine before they're done...
pvazzopardi@usa.net
Mr Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking Readers are requested to seek professional financial advice tailored to their own personal circumstances.