Wrong move


Wrong move

The Sterling Report


Sunday, May 31, 2020

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Have you ever made a mistake? If you have bought bonds and one or more subsequently defaulted whether recently or in the past, you probably know what I am talking about.

Is it easy? Not at all. You grapple with a lot of frustration, a lot of anger and of course some amount of helplessness.

Firstly, you are probably looking for someone to blame. This is natural, because it is a painful situation and it is human nature to want to avoid pain. On the question of blame, are you blaming yourself, your financial situation, or your advisor? All three? Do they deserve the blame? Hmmm, that is an interesting question.

The answer would be: it depends on the following questions.

Did you make the decision with the best information available at the time? Now this is a serious question. I sincerely hope that you really did your due diligence. I hope that you didn't buy based only on the name.

Unfortunately, name recognition cannot be the only basis on which you make your investment decision. You may not possess the skill set, but looking at a company's financials or even a summary of it is essential. Your financial analyst should be able to offer you some analysis on prospective investments and should be able to break down the information to ensure that you are comfortable with the company's condition.

The second question is, after purchasing the company's bond, did you start to see a deterioration? Did you make any attempt to periodically perform a “check-up” on the company?

As many of my colleagues have pointed out, it is rare that a company goes from hero to zero immediately. You are likely to have seen some warning signs along the way. The question is: what did you do at that point?

I like to think that when you own bonds, it is OK to put some of them on “probation” — meaning they have to prove that they are worth keeping in your portfolio.

The third question is, how much of your money did you invest in that specific bond? Did you remember to keep a balanced portfolio? Is it well diversified? I hope that you won't say that you put all your money in one bond or one investment. This is never a good idea, no matter how wonderful it seems at the time.

If the investment minimum is too high for you to diversify, then you probably should look for another investment rather than having all your eggs in one basket.

Lastly, some of these questions may feel a little harsh, and let's face it, no one is perfect. But never let a mistake pass without learning the lessons which will improve your future investment performance. Blame is unfortunately not particularly helpful after the fact.

I encourage you to look at how profitable the company is, the macro environment that is present at the time and the state of their balance sheet. If there is no equity in the company, for example, or the equity is negative, you should be extremely concerned. But you won't know if you don't look.

Every investment must pass your test.

Lastly, mistakes happen to everyone. Accept what occurred and do your best to help yourself and others to avoid those mistakes in the future. Happy investing!

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.

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