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Four tips for not losing investing with Value strategy

Four tips for not losing investing with Value strategy
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José María Díaz Vallejo and Juan Díaz-Jove, managers of Rentamarkets Narval Fund and strategy

The end of value fashion will come with the next crisis

Reasonable diversification, hedging with purchases of protections and maintenance of cash balance as parallel strategies to the value methodology for risk control
From a macro point of view, we are still halfway between the intermediate stages of the cycle and the beginning of the mature stage. In other words, we wouldn’t be surprised if this growth cycle lasted 2 or 3 years longer. Investors should not forget that this investment style becomes massive during the rising markets and becomes a niche during the drop period.

To be prepared and compensate the two weak points of «value» management – ignore the macro and don’t do the risk management properly – we recommend 4 tips:

1- Place a limit on portfolio concentration

Warren Buffett says that diversification only protects us from our own ignorance. We, on the other hand, believe that diversification protects us from the black spots that inevitably always exist in any investment thesis, but we are not able to identify, quantify or estimate its potential impact. These details, in which, as Warren would say, we are always ignorant, should be covered by a reasonable diversification exercise.

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2- Use of parallel strategy focused on risk control

In our case, we use a protection purchase strategy (usually options) to cover the portfolio market risk. It is a strategy with a very different implementation of value, with a very different objective and using very different instruments. That is why it is a parallel strategy to portfolio formation.

3- Currency Risk Coverage

Don’t lose sight of the fact that we are business analysts, not currency analysts. Since we do not have a specific opinion about a particular currency, say the English pound, but we do find good investment opportunities in England, what we do is buy those good companies (using the value methodology) and cover the currency (using the parallel risk management strategy).

4- Maintain a cash balance directly proportional to the level of market risk.

When the stock market is expensive and therefore vulnerable to any shock, the cash balance should be as high as possible. This variation in cash flow will depend on the number of investment opportunities that we can find using the Value methodology, so it is a risk control tool totally consistent with this type of management.

What happens to my stocks and my investment funds if my brokerage house goes bankrupt?

If you started trading in the stock market, surely you asked yourself this question, especially with what would happen with our money: Can I lose all my money? Will I lose any proportional part of my money? What could happen?

In case the broker we operate with goes bankrupt, our shares or investment funds will be safe, since both the shares and the funds are not in the broker’s name, but in ours.
The only change we could notice is that our funds or shares would pass to a different broker, that’s all.

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The managers of the securities markets have records similar to those of registering the ownership of real estate, since they are registered values in which the owners of the shares are registered and with the number of shares held. In addition, when we buy or sell shares, a proportional part of the commission we pay goes to the registration expenses in that register.

If our broker goes bankrupt, when he has to liquidate what he needs to do, sell all the assets he owns, one of these assets, is the portfolio of clients that owns the broker, which will be bought by another broker for a negotiated price.

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Our brokers guarantee our money in case of bankruptcy?

Depending on the type of broker we want to work with, we should ensure that they are guaranteed by a guarantee fund that would cover the shareholder’s investment in case the broker goes bankrupt, and we find the two most important:

The Investment Guarantee Fund (FOGAIN) offers investors of its affiliated entities (securities companies, securities agencies and management companies) compensation of up to 100,000 euros in certain cases of insolvency of the entity providing the investment service, for the money and securities deposited or entrusted to the entity. (ClickTrade, Rent 4)

The purpose of the Deposit Guarantee Fund (FGD) is to guarantee depositors of credit institutions the recovery of their cash deposits in amounts up to 100,000 euros per bearer and entity. (BPI, Santander, Millennium BCP)

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