Like any of the articles in my blog this post does not constitute a form of an investment advise. It is based out of my personal interest and experience in pursuing financial freedom as well as looking at how markets and economies evolve. Over the last couple of years, we have witnessed significant changes in how people consume and create news. The rise of social media and technology use in finance has lead to significant amount of “noise” and unfair valuations in both public and private markets. There are many examples that we can look at: during the financial crisis of 2007/2008 the sovereign debt of countries like Greece, Spain or Portugal went to record low levels based on the assumption that they will default of payments situation. True, there were challenges, however there were no defaults and everyone got fully repaid. The same goes for real estate, in London for example. Please have a look at the data from the land registry.
Something where similar happened to many other assets when there “unusual” situations. Lets look at the PetroBras stock in 2015/2016 when there was a corruption scandal and former president Dilma Roussef was ousted, prices dropped well below 5 USD a share. Same goes for VW when the diesel scandal started. With the impact that social media has now on publicly traded assets the list can go on for long. It is important to note that always there are a lot of assets that due to the current situation are wrongly priced. Look at the prices of real estate in Dubai, when the financial crisis happened in 2008… So how can we find value in distressed assets?
Nowadays this is difficult as there are so many information sources that produce soo much content. It is often impossible to distinguish factual from non factual information. Factually, we live in the era when countries go to war without having proven facts (i.e.There were no weapons of mass destruction in Iraq ). So be aware. Trust only factual information. Do your due diligence as carefully as possible. Also, do that a couple of times so you do not miss something. Do your best to verify the authenticity of the facts that you were given. For example, when the distressed asset you are looking to invest in is a public company do study their balance sheet carefully time and time again. Where does the revenue of the company comes from? Look at the “story” that has lead the stock price to fall. What the impact of that story will be on the product that listed company sells? Would their biggest customers be affected. How long do you think will it take for the public image to recover? Can their product be easily substituted? Would their competitive advantage diminish because of what happened? When it comes to real estate assets – do make sure that the deal that you are presented from an agent is factual – look for all the supporting documents, go and speak to people in the neighbourhood, do speak to the local businesses. What they think? How is their business? Etc.
Goes hand in hand with looking at the facts. Logic, logic and logic. Try to find out what is the reason why the asset you are looking is distressed? What is the logic behind it? According to that same line of thought when this asset will start trading at a premium?
Human beings are emotional. This is a fact. Statistics prove that there are higher chances for you to lose some of your capital. This article from Barclays Wealth can help you understand your emotions while investing. Often experiencing fear, greed, over excitement leads us to making unreasonable decisions. For example in situations when i am angry and i can be rude to someone without any reasonable justification. In most cases I am wrong. I guess similar experience has happened to many. Think of it when you invest, as it is the same thing – do invest based on facts not on emotions. Avoid them as much as you can. Before you make an investment decision, make sure you are calm and you have studied all the facts that you have verified. This is agreat article on how to avoid investing while lead by emotions.
Risk management is key. In my experience, the most powerful emotions that we experience while investing are fear and greed. Often before we make a decision we are scared and we think in what if mode. What if I lose? The same happens when an investment does well – we want more and tend to get overexposed. The key here is to avoid emotions and look at the facts. Forget fear and greed, when you learn how let me know.
Nowadays politics play huge part in asset valuation. The most recent example I can think of is BREXIT. Look at the volatility of the british pound, a major reserve currency has experienced because of the state of the current political negotiations. Furthermore, what happened to ZTE and Huawei recently while the US essentially mentioned that it will take the necessary steps to limit their access to their market. In the same line of thought, think about the broader context of the distressed asset that you are looking at. What are the invisible factors that will impact its current and future valuation?
Perhaps the most important piece of the puzzle while looking at distressed and any other assets – what is your risk appetite. How much of your existing wealth you are willing to lose forever in order to potentially have a gain in the future? What is you can afford both mentally and financially? Once you have answered this question for yourself you are good to go.
All the above steps are hard to follow. In my experience they are very hard to follow and constantly implement, which is the reason why the world has not seen many investors like Warren Buffet. Having contrarian approach often helps create value and can be resumed to a simple buy when others sell in masses and sell when others buy in masses. What is the approach you have buying distressed assets? Let me know what you think about the article here. Like. Share. Comment.
Boris Grozev is a seasoned fintech executive. Moreover, he is an entrepreneur by heart. Boris has helped number of businesses. To clarify, he has created and implemented business development and product enhancement strategies. In addition, his advisory work in emerging and frontier markets has resulted in culture and technology change. Above all, it has fostered innovation and lead to tangible results. He also invests in variety of asset classes and shares his experiences from the journey to financial independence. Boris’ leadership abilities, ambition naturally spread to others. He is a fast learner. His stamina, attitude and passion to succeed help to achieve common goals.