Coming out of the Matrix

Like many small investors, the only thing I could count on was my ability to save, time and the desire to one day stop being an employee or seeking security from an uncertain future for my daughters. That’s why I chose the red pill, the journey of no return, where to be successful it’s not enough to go for a “half measure”, and that in the long term is understood to involve equities. I’d be lying if I said I hadn’t paid for the most expensive master’s degree like we all usually do, starting my financial education by investing on my own, in individual companies by hearsay, without analysing balance sheets, or reading what hysterical journalists have to say in print. Having to endure permanent or hard-to-recover losses in value.

After learning all the patterns relating to technical analysis and Mr Murphy’s book with the theoretical explanation of why it should work, I understood the truth. In reality, our mind plays tricks on us, stop losses will be triggered sooner or later and we’ll miss out on the opportunity to buy something at a better price. And most importantly, the Matrix is all around us. A world in which huge amounts of money move around, from small investors, to analysts with blogs, YouTube channels on trading, economic newspapers whose most read articles are about the “intrinsic value” that bitcoin has. There are even more about the little gold that our planet has, various courses and most importantly, the money in brokerage fees that are often implemented by those in the trading world.

Once I got past this stage, and understanding that “there is no spoon”, I had to stick to the only strategies that have worked so far in the long term, diversification, buying and holding and looking for value in what the market doesn’t want. The long-term goal is so important to my family that I can’t depend on guessing what colour will come next on the roulette wheel. I have to win, no matter what.

In my quest for diversification and given that I don’t have the time or the means to calculate a company’s value, I decided to go for investment funds. In my opinion, the two strategies that meet my expectations are index investing and investing in an actively managed fund with value, where only mathematics and patience lead to long-term returns. In addition, as I’m a saver who starts with little capital, the only thing I can do is to make regular contributions with my monthly savings, without choosing when to invest.

I thought that investing half of my savings in indices and the other half in active management might be a good idea. But being human, I “turned to look at the girl in the red dress”, and switched completely to value funds, believing that indices such as the S&P500 have too many overvalued companies, and that over the long term the strategy of investing in low “P/E ratio” indices had worked better so far than investing in mainstream indices. That said, which would be best is anyone’s guess and this may have been a mistake in my decision making.

If I were to build a value-style portfolio, looking for sectors that have fallen in price, when my margin of safety between what I think it’s worth and the price at which it’s trading is enough for my goals, I would buy the shares, regardless of whether they would continue to fall or if I’m lucky enough for it to start to rise at that point. Let’s not forget that people say that when the market goes down, it goes down fast, but it goes up slowly. Nothing could be further from the truth, as from what I’ve seen so far is it’s full of boring, saw-shaped sideways moves, with short periods of brutal ups and downs. In a matter of a week the long-term profitability becomes clear, leaving the crumbs for those who want to play at predicting the saw teeth of the sideways moves. As I’ve realised that I’m not “the chosen one”, when I put together a value-style portfolio and shares that have fallen, they might continue to fall, simply because Mr Market will overestimate negative stimuli. By investing in contrarian funds (essential for finding undervalued shares), we’ve been fortunate to find funds at rock bottom prices. As we’re not investing in individual companies without analysing them, in this case I’ve had enough confidence to invest with all that I’ve been saving and to be able to opt for these prices. If they’d been my beloved failures involving individual companies without analysing them, I’d never have dared to invest a few years ago. And this is the real heart of the Matrix, profitability with a capital P.

“I don’t know the future. I didn’t come here to tell you how this is going to end. I came here to tell you how it’s going to begin. I’m going to hang up this phone, and then I’m going to show these people what you don’t want them to see” The Matrix 1999

Víctor R.