After reading Part
I of this series, you now have a clearer perspective of how you can
prepare yourself for investing emotionally. The next stage is one
that’s vital to getting off to the right start. It’s not enough
for a friend or advisor to simply tell you where you will make the most
money. This defeats the important step of understanding not only the investment
climate you are in but the way that climate is going to affect your investment performance.
Also, one must not abdicate from one’s own
responsibility in investing by relying on an advisor for your actions. The
initial approach to investing is to ensure that you incorporate your goals
into your investments. When you look at another person’s portfolio you
may think that it’s what you want. But you have to understand clearly
who that person is and what they aim to achieve. It may be similar, but be
driven by different objectives. We saw this in a well-constructed national
reserves portfolio that has, we believe, been misunderstood. We describe this
to illustrate how looks can be misleading.
The Example of Venezuela
In Venezuela the President has just ordered that all
gold mined in Venezuela is to be sold to the government for their reserves. A
look at President Chavez does not convince you that you’re dealing with
an investment specialist, so you assume his motives must be solely political,
aimed at the foreign companies investing in Peru. Maybe he is simply
combating illegal mining. But that would take you to the wrong conclusion.
His central Bank President is an educated man
who’s aiming to reach what, he believes, is the best shape for the
countries reserves. He knows that the country is close to the bottom of the
popularity table, so he must construct the national reserves to fend off any
adverse effects of unpopularity. The nation has ordered the repatriation of
their gold reserves from the important gold vaults of leading central banks
around the world. This removes that gold from any possible confiscation or
freezing, by those nations. This may be a difficult move to make in
transporting that gold back home, but it certainly will protect it. Over 300
tonnes of gold is being moved. The country has gold reserves of around 1,000
tonnes in the ground, which over time is headed towards the national
The main export product of this nation is oil.
President Chavez has fought many battles with foreign oil companies and is
certainly headed to switching buyers of that oil from the U.S. to China, thus
protecting himself against any adverse U.S. action against him, because of
his mistreatment of the U.S. In addition, he is switching the foreign exchange
reserves away from the U.S. dollar. Looked at through political eyes, these
actions look anti-U.S.
Now look at the portfolio of the nation’s
reserves and the source of its cash flow, as an investor. Oil, for the
foreseeable future, remains the most liquid asset in the world and in
constant demand. While the price may fluctuate, it’ll remain in demand
in all parts of the globe, assuring Peru a constant cash flow no matter its
unpopularity. With its currency reserves removed from the U.S. banking system,
it is no longer vulnerable to the weakening of the dollar, which appears
unavoidable in the years to come, thus strengthening the reserves of
Venezuela and the possibility of capital appreciation of its reserves. Bear
in mind, it will continue to receive U.S. dollars for its oil in the future
to retain the flexibility of switching back to the dollar.
So this portfolio is structured to combat a very
difficult time in the days ahead, whether this comes from the U.S. or just
what’s going to happen in the global investment scene. It holds
reserves that will counter the ills of the currency world and allow
sufficient flexibility. This will ensure that the nation’s reserves
will help the nation weather the storms that lie ahead. Peru may become the
envy of many central banks in the future.
– An Exact Science
As an investor, you have, squarely in your sights,
the overall objective of maximizing total
long-term returns. What do you see before you, across the broad spectrum
of the different markets out there? A glance at the past shows you how well
the different markets have done in the last decade.
What you see is not very impressive, except for,
maybe, precious metals. If you had received a tip on some particular share
you may not have put the tip into this context. The tip may have been
fundamentally correct but didn’t perform because of this picture. Those
who knew what was going to happen in advance probably ignored the tip you
were given, because it was in the wrong sector. The bigger picture is your starting point.
Hindsight is an exact science and there are vast
numbers of experts who could correct you when they can look back at the
actual performance. But what about the way forward? How will the different
markets perform in the future? Suddenly, that vast army of Professor Hindsights drops to a
handful of experts who can forecast the markets.
So, will we see more of the same we saw in the last
decade or will it be different?