Everyone invests according to their own personality and appetite. Knowing yourself as well as possible means to be able to reduce your risks.
Editorial written by Ionuț Pătrăhău, Managing Partner & Corporate Development @ SeedBlink. In addition to his vast experience in banking, Ionuț Pătrăhău also worked in the medical services field, being former CEO of the private health network Regina Maria and co-founder of the Brain Institute, a neurosurgery center developed in partnership with the Monza Hospital.
When you lost your flight and you’re waiting for the next one in the empty airport lounge, when you travel by train and you have some “me” time, or when your thoughts are simply evading the papers in front of you, it looks like it’s a good moment you could use to think about what you’re gonna do tomorrow and in ten years time, about how you interact with the others in your life, how’s the world these days, what is good and what bad, if you like your wine red or white, what’s healthy food and which of your habits are actually vices, long life vs. seizing the moment, modern vs. traditional, equity vs. debt, and any other themes more or less philosophical.
The topic that includes equity vs. debt, short or long term, stock exchange vs. real estate, it’s surely about investments. And, like in any popular subject – football, politics, psychology, or personal investments – the simplest approach is to plunge fearlessly into it, like when having a discussion at a party or when having a coffee with some friends, mixing personal views with facts and building an opinion that should look bulletproof and undeniable. As the saying goes “there is no accounting for tastes”; the popular discussion subjects fall in the same category.
We invest how we want or – better said – how we know. In the end, everything seems to be a lottery and we will never know for sure what would have happened if we took a “wiser” decision.
Well, even the investments can be seen as a science, and even if it cannot take into account the zillions of factors affecting the financial world and making “economics” a field that cannot actually be modeled, still it is able to reveal some of the main risks and offer ways to mitigate their effects.
We have had spoken about investment thesis, diversification, and specialization, about what we like and what we’re really good at; the time has come to discuss risks and how we perceive them, understand them, and how can we use them to our benefit.
Let’s make an analogy: you probably have had colleagues that couldn’t care less about their future. They were having a lot of fun, borrowing money from everybody and living like there is no tomorrow. They were young and thought that – one day – they would stop and think more seriously about the legacy they’ll leave behind.
We all had such colleagues and we know that, in most cases, things did not evolve towards their happiness. Once life is started and lived having “seize the moment” as a motto, its subjects might end up with a very “stable” lifestyle that will not change – unless they experience an unfortunate & unexpected life shock. And nobody wants such events in their lives.
The above analogy was made for investing exclusively in liquidity, which has the advantage of knowing on any day what’s your wealth and being able to cash it out in a matter of days.
However, the economic cycle will always show its shifting nature, so you might find yourself one day in the middle of an economical depression that turns your portfolio into a highly illiquid one. Specifically, all the buying demand disappears from the market and leaves you without partners for any transactions, despite the fact that your offering price is extremely reasonable.
Therefore, a portfolio based exclusively on short-term assets, aside from its low efficiency, can also be affected by a liquidity squeeze. And in our desperation to recover something from the loss, we end up selling for peanuts, because “you never know how low can it go”, isn’t it?
Yet another analogy: you have other colleagues who don’t know what real life is. They buy properties due to the instinctive fear that their pension will not be enough. They don't trust their business brain, startle at each unexpected economic event, unknowingly passing over all potentially beautiful moments in life. They don’t even hope something will change at a certain point; they simply wait for their pension age and, till then, they chatter continuously about the lack of predictability in life. This type of character doesn’t seem to have a very healthy philosophy, either.
This analogy was made for investing exclusively long-term, in illiquid assets and with low yields – tiny, to be more accurate. Along the same economic cycle (as above) we can see contractions and recoveries in the property market, and our souls follow on, from agony to ecstasy, in long, multi-year cycles.
Some of the risks we actually do not even notice, and when they happen we call them “inevitable”. However, they do exist and will get out eventually, even if the time intervals are longer than expected. If we’d take them into account, we could invest cyclically and anti-cyclically, accepting the risks deriving from the duration of the investment but also the ones coming from the execution of a plan, no matter the cycle pattern.
Startup investments are made these days via personalized portfolios, that show their gaining potential once in every few years. Some startups grow a lot, some just a little, and become zombies, but most of them simply die.
At the end of the day, however, well-built startup portfolios produce satisfactory yields. It seems that the startup ecosystem is less connected to the economic cycle, and has its own rhythm in which the available liquidity is sometimes limited. In these cases, for the companies beyond B series financing, we can usually take into consideration reducing the valuation; in the first stages of financing the impact is substantially lower.
Any investment portfolio should include startups – grouped themselves in a (sub) portfolio of their own and individual investors should assign a bit to each economic field.
The investment risks theory advises us to identify as accurately as possible the systemic risks and to keep away from them. Business risks are usually covered by the investors via “corporate governance”, a system that reveals the major mistakes, fraud, or conflicts of interest.
While it might seem counter-intuitive, the financial organizations with the greatest success are not those that invest in their sales, but those that perform efficient management of the risks, those that understand the risks and have mitigation solutions.
At our individual level, we should aim to act like a semi-professional investor, by splitting the available resources into smaller chunks and investing them diversely. One part in the stock exchange, one in real estate, another in equity, and others wherever we have the expertise so that we can limit the risks with our knowledge and personality.
The world evolves and we are not the ones to decide the exact percentages. Everyone invests according to their own personality and appetite. Knowing yourself as well as possible means to be able to reduce your risks. No train journey is too long for reflecting a bit and discovering your inclinations.
I just arrived in Constanta. We’ll be in touch on the next trip.
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By Ionut Patrahau
PublishedFebruary 09, 2022
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