Interview with interview Jose Roncal & Jose Abbo

The Big Gamble: Are You Investing or Speculating?
Jose D. Roncal and Jose N. Abbo
Wheatmark Press (2009)
ISBN 9781604940381
Reviewed by Irene Watson for Reader Views (2/09)



 

 

 

 

 

 

Today, Tyler R. Tichelaar of Reader Views is pleased to interview Jose Roncal and Jose Abbo about their new book “The Big Gamble: Are You Investing or Speculating?”

Jose Roncal has over twenty years of experience in international business and finance, having worked and traveled frequently in six continents. Specializing in telecommunications and information technology industries, Mr. Roncal has served such well-known multinational companies as NCR, AT&T, Verizon Communications and the U.K.-based blue chip company, Cable and Wireless. For over fifteen years, he has been a Chief Financial Officer, focusing on mergers and acquisitions, joint ventures, strategic alliances and spin-offs among other strategic activities. He is a well known transformational and corporate turnaround specialist and inspirational leader, with a proven track record in developing high-performance operations. Mr. Roncal has authored numerous articles on business strategy, finance, accounting, capital markets and the global economy. He holds an M.B.A. from Thunderbird University and a B.A. from Florida International University, as well as having attended senior executive programs at Oxford University in the United Kingdom.

Jose N. Abbo has two decades of experience in the capital markets. Mr. Abbo has authored numerous articles and speaks frequently on the financial markets and the global economy. He has researched and written for such well-recognized publications as “The Economist,” “Intelligence Unit” and “America Economia.” In 2000, Mr. Abbo published “Divisando Wall Street Desde el Sur de America,” a comprehensive guide for the Spanish-speaking community that explains the workings of the stock market. He makes regular guest appearances on various radio and television programs and has served as an expert witness in financial trials and forensic cases. Mr. Abbo is currently the Vice-President of International Capital Markets Analysis for the Panama office of Credit Suisse. He holds a degree in Professional Management from Nova University and has served as an M.B.A. tutor for Tecnolgico de Monterrey/ Thunderbird University Panama-based Global MBA programs.

Tyler:  Welcome, Jose and Jose. I’m happy you could join me today. Obviously, investing and the current economic crisis are on everyone’s minds right now so I’m sure we’ll have lots of readers looking for advice. To begin, will you explain to us just what the difference is between investing and speculating?

Roncal:  The reality is that every “investment” is actually a speculation, unless it contains a fully guaranteed return. Trouble is, most people who think that they are making some kind of “safe” investment are actually speculating. Even “safe” investments contain an element of risk many people don’t think about, or discount. The most recent example is real estate, which many people (even those who should have known better) assumed would always increase in value. We want to encourage people to re-evaluate their expectations of a so-called investment and see, as we maintain, that they are in fact speculating and taking a risk. If they are willing to take a risk, they should make sure that the risk is a calculated one, recognizing that there is no guarantee they will get their capital back, much less make a profit.

Tyler:  Would you explain just what is a “calculated risk”? Can you give us an example?

Roncal:  A savvy speculator relies on logic and research data to identify the most promising profit opportunities in the marketplace. He understands the complexity and unpredictability of the market—or any game that involves risk capital, for that matter—and studies the underlying forces that cause the market to swing up or down. He takes a calculated risk, one that is not driven by hunches, guesswork or gossip around the water cooler.

Abbo:  One way to calculate the degree of risk is to calculate the standard deviation, which predicts volatility, meaning how much the value of an asset will deviate from its current value, based on historical data, within a certain degree of confidence. For example, if over the last ten years a financial asset has a standard deviation of twenty percent, we can assume there is a sixty-seven percent chance that it will fluctuate plus or minus twenty percent in the future—assuming that asset will continue to behave as it has in the past.

Tyler:  So in this current economic crisis, should people play it safe, or should they speculate more while stock prices are low?

Abbo:  Speculators are already “bargain hunting” and betting that the market has bottomed out. However, I would caution average investors to stay on the sidelines and preserve their capital until the middle of 2Q 2009. This severe recession has changed long-held concepts regarding investments—as we predicted in our book—to the point where even defensive stocks have lost their appeal. Companies that provide basic goods and services, which typically fare well during downturns, are experiencing deep declines. No wonder investors flew to the safety of Treasuries to protect their principal—even when they were yielding zero or negative returns in the close of 2008. So-called defensive stocks have performed more like cyclical stocks based on declining numbers. Avon products are down 42.6%, Sara Lee 41.3% Pepsico 29% and Pfizer is down 25%, to name a few.

Roncal:  Look at it this way—you’ve got to take your shot if you want to reach your monetary goals. But please let your rational brain run the show. If you let your emotions drive your desire to become rich, or give in to the herd mentality, you’ll be gambling — and that is not the way forward.

Tyler:  Would you explain to us what an economic bubble is and why they happen?

Roncal:  Economic bubbles are an artificial run-up in the price of an asset, be it tulip bulbs, tech stocks or real estate, unsupported by the real value of the asset itself. It is fueled by emotion on the part of the investor, not logic. There is a “herd mentality” that comes into play when people think they are going to miss out on the riches they see others accumulating. Of course, bubbles inevitably burst, and people lose fortunes in the process. In the 17th Century, in Holland, at the height of Tulipmania, a single bulb cost as much as a house.

Tyler:  What’s a good way for a person to determine how much risk they are willing to take?

Abbo:  Taking risks is the price you pay for wanting higher returns. In today’s markets we are seeing a “flight to safety” with money flowing into T-bills with nearly zero interest rates. But under normal circumstances, most people who invest more aggressively do so in order to outperform the return they’d get from parking their money in a bank savings account or Certificate of Deposit. Since there is a higher degree of risk in the stock market, you need a higher return to compensate for that.

Roncal:  If the thought of losing every dime you’ve invested keeps you up at night, makes your stomach turn, or might cause financial hardship, then you are right to be risk-averse and conservative. You need to be aware of your own risk tolerance so you can manage your money wisely or trust it to someone who will.

Tyler:  If a person has an extremely low tolerance for risk, should they invest in something safe like T-bills with very low interest rates, or are they only hurting themselves because those interest rates won’t keep up with inflation?

Roncal:  Treasuries, annuities, money market and bond funds are traditionally considered “safe” investments. So are bank Certificates of Deposit. The downside, of course is low returns. If your T-bill pays 1 percent and inflation is at 2 percent your real rate of return is negative! You’d be better off putting your money under the mattress. A bank Certificate of Deposit will pay higher interest, but CDs are not insured by the FDIC—something many people don’t think about—so you need to have confidence in the issuing financial institution.

Abbo:  Remember that money flowing into T-bills now is getting parked there temporarily for safekeeping. As soon as the market turns up—and it will—you’ll see money flowing back into common stocks.

Tyler:  What are the best kinds of investments at this time? Should people buy mutual funds, stick with a Roth IRA, or do something very safe like buying treasury or savings bonds?

Abbo:  This severe decline in share values has created the opportunity to grab shares of companies with strong balance sheets and low P/E ratios during Q2, 2009. This should yield decent returns once the market rebounds, but you need to watch prices daily as “long-term” has lost its meaning. Many so-called investors have learned the hard way that it is all speculation.

Roncal:  We’re not investment advisors, of course, but bond funds, particularly tax-free municipals, have continued to perform well. It’s important to remember that recessions do come to an end, and the markets will be moving up again. People have to consider their long-term financial goals and take prudent risks in the meantime. Those who try to get rich quick are just gambling, and that makes no sense unless you can afford to lose it all. Not many of us are in that position.

Tyler:  Would you tell us a little bit about some of the people mentioned in your book? For example, you talk about Sam Walton. What lesson can we learn from him?

Roncal:  Starting a business is the most speculative investment of all. If you roll the dice, put $10,000 into a portfolio of stocks and lose it all, you’ve still got your day job and a paycheck. Sam Walton had the guts to take $5,000 of savings, borrow $20,000 more from his in-laws, and open a retail store based on a simple concept: undercut the competition on price to drive sales volume. It’s easy to forget that was an innovation at the time—and so was his idea of making store managers limited partners in the business.

Tyler:  How about Bill Gates? Should we really see him as a financial model? Isn’t he rich because he knew how to invent something that was needed, not because he knew how to play the stock market?

Abbo:  We profiled Walton, Gates and other business innovators not because they speculated in the markets, but because they show what it takes to build a company into a “household name”—guts, persistence and an innovative idea that they turned into cash. We want readers to learn to spot ground-floor opportunities like the next Google, by looking at who is leading the company, for one thing.

Tyler:  How can an investor find out that kind of information about a company’s leader, and what information specifically should they look for? What warning signs should also make them avoid investing in a company?

Roncal:  It’s important to investigate before you invest, and part of “due diligence” involves assessing the background and ability of the management team — especially in a start-up or early-stage venture. What’s their track record? Are there skeletons in the closet? How much of their personal capital is on the line? When they have “skin in the game,” they’ll perform better.

Abbo:  With a public company, you should read the annual report, the 10-K filings, the most recent 8-Ks, and perform a Google search, entering the names of the key people and products. You can also use social networks, such as LinkedIn or Facebook, to get background information.

Roncal:  I’d recommend analyzing the financial statements. Look at the key financial ratios to make sure they are not overleveraged, and read all the footnotes. Look at executive compensation (disclosed in the 10-K filing) to see how much is riding on short term stock performance. That is a red flag to me.

Tyler:  In “The Big Gamble” you talk about early warning systems. Will you explain what these are?

Roncal:  There’s no easy way to predict where the next “bubble” will form or when. But the most reliable predictor is liquidity. In the simplest terms, just “follow the money.” Available cash flows into investments that the market considers most likely to benefit from the state of the economy. Is money moving away from stocks into bonds? Is it flowing into commodities, like gold or oil futures? Or back into real estate as speculators pick up foreclosed properties right and left?

Tyler:  We keep hearing we should stay in the market because we’re buying now when prices are low, but is there a time when it’s best to get out of the market, or at least stop buying for a while?

Abbo:  Experienced speculators will walk away from an investment when a miniscule risk premium signals low compensation for high risk. Whether it is a stock dividend, bond coupon rate or rental income, the risk premium (income) needs to be high enough to compensate for the possibility that you will not get the return you expect.

Tyler:  When did you decide to write this book? Did you foresee the current economic crisis coming when you set out to write it, or were you lucky just to have it appear at a time when people will feel they most need advice?

Roncal:  We knew all along we wanted to write something related to speculation and risk taking. As the book was going to press, events surrounding the real estate bubble, credit crisis and Wall Street meltdown amounted to “breaking news” and we were rewriting and expanding as events unfolded. We decided to develop a website, www.financialspeculation.com to serve as an online update service for readers.

Tyler:  What do you think is the most important advice for people to hear right now when they are nervous about their investments?

Roncal:  Investment is about putting your money in an opportunity with a safe, guaranteed return. And as we’ve seen in the news, there aren’t too many of those in our world. Examples are few: U.S. Treasury debt securities, federally insured bank deposits, and fewer than five nonfinancial corporations with bonds rated AAA by standard and Poor’s. In contrast, speculation is about taking calculated risks, using your experience, shrewdness and a keen awareness that even getting your principal back isn’t cast in stone—much less earning what you expect as a return.

You’ve got to take your shot if you want to reach your monetary goals. But please let your rational brain run the show.

Tyler:  Thank you, Jose and Jose for allowing me to interview you both today. Before we go, will you tell us about your website and what additional information our readers can find there about “The Big Gamble: Are You Investing or Speculating?”

Roncal:  At our website, www.financialspeculation.com, readers can find excerpts from the book, articles covering subjects like retirement planning and “hands-on” due diligence, plus on-going blog postings that serve as food for thought and update the book itself. Readers who register can download a free report, “12 Keys to Smart Speculating in Tough Times.”

Tyler:  Thank you both for the informative interview today. I trust many readers will want a copy of “The Big Gamble” so they learn not to make mistakes with their investments in the future, and I appreciate that your website will have additional up to date information. I wish you much success with your book.

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