Perhaps the most important advice that each of us should always take to our heart, is to permanently invest in our education. Human capital and intelligence solve problems and create wealth. Reading and hands-on experience accumulated through diversified investing are two practices that should not be missing in our lives.
Iancu Guda is a financial analyst with a successful career as the host of the TV show "Money on the Move". He published more than 100 analyzes, impact studies, and articles in local business publications as well as in international publications. In 2017, Iancu published his first book, "Why do companies fail? 10 mistakes and 100 solutions" on the market after analyzing the balance sheets of 100,000 companies that went bankrupt during the author's professional experience.
What is the optimal portfolio you would recommend as an investor? What percentage should be invested in startups, i.e. assets with a high risk-return ratio?
Where and how do we invest our savings? It's a question that should be on everyone's mind. The answer is not clear-cut as it depends on each individual and a number of factors such as: yield objective and acceptable risk, constraints, time horizon, other sources of income, wealth size relative to expenses and needs, the risk of losing the current standard of living, investor profile etc. All of the above influence the investment allocation strategy, i.e., choosing the targets for different asset classes. Aside from the inherent person to person differences, I believe that the investment allocation strategy should be based on the following principles:
● highly liquid assets (savings, cash reserves) are the “emergency fund” and must equate the family expenses for about three months. In exceptional situations with unforeseen liquidity needs, a six-month family expenses reserve may be considered. In general, it is not recommended to have a higher proportion of highly liquid assets, because money in this category is the "laziest": it produces the least amount of money;
● during the active life, exposure to the real estate market (own home included), should not exceed 30% of the average wealth. Of course, most people exceed this threshold at the time they purchase their first home. But, as you progress through life, saving, and investing in a diversified portfolio of assets, your financial capital grows and you should limit your exposure to real estate to a maximum of 30%. By the time we reach maturity (40-45 years), we should have a total wealth of at least three times the size of the house we own & live in. In Romania, the ratio between wealth and real estate exposure is 1.3, which is at least twice the optimal level;
● financial investments, i.e. government or corporate stocks and bonds, should represent 60% of your portfolio. When we’re younger, our risk tolerance is higher, income is stable and the investment horizon is longer, so the proportion of equities can be as high as 70%-80% from the financial investments; this should gradually fall to 30% after the retirement age;
● finally, we’re left with 5% - 10% (less the emergency/reserve fund) of the total wealth that can be allocated to alternative investments. These are generally high-risk asset classes with high return potential (it’s implied that losses can be significant too), such as: minority stakes in private companies, art, precious metals, forex, or others (blockchain, ETFs etc.).
How should an early-stage investor understand the components of the financial market?
From the perspective of investing in the capital market, the options are clear: anyone can invest in publicly listed companies (using direct or indirect investment strategies) or in private companies (via crowdinvesting platforms).
On the one hand, we have the alternative of indirect investments, most commonly done (and recommended) through investment funds. They receive money from several investors, place these amounts in financial instruments and the unit value of the fund share fluctuates with the price of the assets held by the fund.
The investment decisions are entirely in the hands of the investment fund’s managers. Of course, decisions are made respecting an investment mandate, known as a prospectus, which lists the types of financial instruments in which investments can be made, together with their risk profile.
The list of investment funds active in Romania can be found on the website of the Fund Managers Association in Romania, where you can also find information about the investment funds’ profiles, investment policies, and past years' yields.
Direct investments are made by opening an individual account with an authorized broker or a banking institution. Opening a brokerage account is usually a very simple process and, in most cases, can be done entirely online. This investment method can use two strategies:
● The active strategy - technically called “stock picking” - involves selecting and buying blocks of shares to own for long periods of time (3-5 years or even more). Basically, you decide when & what to buy or sell. In this case, timing and the initial selection of the companies are extremely important. This strategy requires time, financial knowledge to evaluate companies, and access to information and analysis, as diverse as possible.
● The passive strategy - can be applied by replicating the stock indices that summarize the most traded and liquid companies for each capital market (e.g. BET for BVB, S & P500 for the US, DAX for Germany). I recommend this strategy to everyone, because it is extremely simple, does not require allocating time for evaluating companies, and does not require extensive information sources.
Last but not least, investments in private companies can be made through crowdfunding platforms; in this model, private companies that are at the beginning of their journey turn to the general public for funding. For this type of investment essential for investors are: diversification, understanding the business, and transparent access to information.
You have written a book on why businesses fail. Can you give us some pointers for startups and tell us if there are any signals investors can watch out for?
Indeed, we have analyzed the financial statements of all companies that went bankrupt in 2005-2015 and identified 10 financial errors made by most of them. In general, the errors were visible through imbalances accrued in the balance sheet (negative working capital, low capitalization, significant investments with low yield), in the Profit and Loss account (high operational leverage due to excessive fixed costs, low margin due to aggressive trade policy characterized by long collection periods and significant customer discounts), or in cash flow (negative operational cash flow, not sustainable financed).
For startups that stall, the nature of the failures is different and cannot be deduced from analyzing several years of financial statements. NOT every startup is successful! Unfortunately, most get stuck along the way and only a few reach a dimension relevant for the economy.
For example, about 1 million companies were created in Romania between 2000 and 2010. If we analyze their evolution over the next decade, we find that today only 220,000 are still in operation. From these, about 11,000 have turnovers of more than 1 million euros, 5,000 have a solid financial situation, and only 1,000 are started by Romanian entrepreneurs.
So, one company out of 1,000 (i.e. 0.1% of the total start-ups) is really successful after 10 years of operation. Most failed businesses believe they have had problems in one or a combination of the following areas:
● PERIP, an acronym coined up as a combination of Passion - Expertise - Reputation - Independence and Planning. Basically, we’re talking about entrepreneurs who are not really passionate about what they do, or do not have relevant expertise acquired in real life, or do not know very well the processes or the relevant companies in their segment of suppliers or customers or start the business just to make more money or do not have the financial independence needed to start a business, and last but not least, who do not have financial planning for coherently developing the business.
Many young people are in a hurry to start an entrepreneurial project, simply starting from an idea. Some succeed, become famous, and give the impression that it is very easy to succeed in business. But we do not see the other 99% who try and fail because they are in a hurry!
Statistically, you are much more likely to succeed in entrepreneurship if you have relevant experience in the industry, know the business processes, have built a good reputation, and you are very well connected in the network of suppliers and customers.
● The TEAM. And I mean both the founding team and the first employees brought into the company. Of course, no one is stopping you from starting a business yourself, although it will be much harder for you. First of all, because no one knows everything. Then there's the operational risk. As your business grows and you need funding, your partners' confidence will dwindle if your business depends on one person.
Ideally, the founding team should consist of 3 people. We need people who know the industry well, share the vision and can express themselves clearly, are passionate about the field, and know what they have to do. The team needs to be complementary, it needs the person who runs the business operations, the person who develops the technology/product, and the person who conducts the sales & marketing. Each member must have very clear responsibilities and assume their position & decisions in that area.
● The NEED. The entrepreneur must identify clearly a need in the market, for a well-defined market segment, a need that currently is not fulfilled in the best conditions in terms of quality, price, or speed of delivery. It is very important to differentiate yourself somehow from the other competitors and the differentiator itself to be hard to replicate. The entrepreneurs that do not manage to grow the need to a significant level are those that did not identify very clearly the need, the addressable client segment, or how to remain competitive in the context of permanent competition.
What's your take on the tech startup ecosystem? How can investors get involved?
I believe that companies developing technology, products, and services based on technology and online commerce, have the greatest potential for accelerated growth in the near future. The main reasons are scalability and difficulty of being replicated by competing companies. I think the tech startup ecosystem is gaining momentum and is packed with ideas that reach many industries. One big opportunity is digital transformation. Sectors like finance - where many fin-techs are developing, healthcare - telemedicine, sustainable development, agriculture, or public administration, are all areas where technology is on the rise and solutions are needed. The increasingly accelerated development of technology startups has been supported by the expansion of funding opportunities from the general public through crowdfunding platforms, and by the growth of venture capital funds focused on this direction.
In your latest book - Economics in the Age of Corona Virus - you describe the opportunities and good practices for entrepreneurs in crisis situations. What do you think is the impact of these times on investing in private companies?
Obviously, the uncertainties caused by the pandemic have slowed the significant investments for many companies. For example, the percentage of fixed assets from the total assets of all companies operating in Romania fell from 48% (in 2019) to 41% (in 2020), the lowest level in the last decade. Also, the book value of non-current assets decreased from 990 billion lei (in 2019) to 929 billion lei (in 2020). The dynamics can be observed in all components, be it tangible assets (equipment, machinery, buildings, land), intangible assets (software, patents, licenses), or financial assets (acquisition of other companies or long-term financial assets).
I think most entrepreneurs have become much more disciplined in their investment planning, starting with the internal needs and then external opportunities. Opportunities exist at every step, but they need to be prioritized in 4 stages:
First of all, we focus our resources and attention on the core business, through investments destined to increase sales or decrease expenses. Then, we should invest in our business sector, i.e. in downstream or upstream products or services that add value to our customers or suppliers. Third, we are on the lookout for companies that we could buy because of their synergies with our business. Only lastly, if we still have financial resources, available people, and time, we can consider investing in other sectors to diversify our business.
You have a TV show addressing successful financial literacy - Money on the Move. What readings do you recommend for those who want to learn how to diversify their portfolio?
One of the main goals of the show "Money on the move" is to reach out to all Romanians with topics for personal finance, but also to the entrepreneurs, offering best practices for business development. Perhaps the most important advice that each of us should always take to our heart, is to permanently invest in our education. Human capital and intelligence solve problems and create wealth. Money made without financial intelligence fizzles out quickly, and the lack of strong, professional skills limits the alternatives and the ability to make money. Reading and hands-on experience accumulated through diversified investing are two practices that should not be missing in our lives.
Recently, on the anniversary of the first year of the show, we have published a book with the same title "Money on the Move. Wealth in 10 Steps"; you can find it online with a few clicks. In this book, I present the 10 principles for achieving financial independence and how you can implement them in your everyday life. Then it reveals the secrets of smart investing in real estate and the capital markets, through investment funds or brokers. Chapter 4 is dedicated to alternative investments in precious metals, art, private companies, forex, cryptocurrencies or blockchain. There is also a chapter dedicated to investor psychology, in which we learn about the emotions and rational limits that influence our financial decisions, how we can become aware of them and mitigate their negative effects.
Basically, the first half of the book is dedicated to investments: in what we should invest our savings and how to make those investments specifically, to achieve financial independence. The second half of the book is devoted to the other key topics essential for taking wise financial decisions: how we handle credit and the relationship with the bank, insurance solutions, how to start a business, and the impact of taxes, inflation, and currency fluctuations on our financial decisions.
The book concludes with concrete solutions for financial independence at retirement age and 10 techniques to teach financial education to children. A suitable book for anyone who has no experience in investing but is concerned about their financial future and wants to understand concretely, how exactly to invest in Romania.
For those who are at the beginning of the road, many interesting, general principles can also be found in books by Robert Kiyosaki or Napoleon Hill. A more sophisticated book I recommend for those interested in value investing, is Benjamin Graham’s - The Wise Investor.
Most financial education books convey a simple message, albeit difficult to implement in the everyday life: financial education is not about money, but about life, choices, habits, and long-term vision. Those who want to get rich quickly, usually stay poor their entire lives. Invest constantly in your education, start saving as early in life as possible, and diversify your investments as much as possible. To get financial independence you’ll need patience and time. Money needs to flow in the economy and work for us, not the other way around!
We hope you enjoyed this insightful talk with Iancu Guda.
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By Bianca Iulia Simion
PublishedNovember 25, 2021
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