Ibiza is one of the most quintessentially Spanish Islands in the Mediterranean and ranks alongside some of the most serene and beautiful places I've ever been to. Why then, do so many people ask if I'm either off my head or going through a mid-life crisis when I tell them I am going there on holiday?
It seems that most people think Ibiza is not actually an island, but rather a massive amplifier, pulsating to a Balearic beat and populated entirely by drunken and dazed clubbers.
Don’t get me wrong, there is a good night out to be had for those looking for this kind of adventure, but in the main the island is a lot quieter and more sophisticated than people give it credit for.
This is only one of the many inconsistencies between perception and reality in today’s world and there are a whole lot more to be found in the investment market.
Take debt, for example.
Following the financial maelstrom of the last two years, UK plc is now saddled with billions of pounds to pay off and, according to many commentators, is ultimately knackered.
However from an investment point of view, debt is not the bogeyman that many believe and it is actually surpluses that tend to create more problems – just look at Japan and how its healthy balance sheet ultimately made it as sick as a parrot.
A faltering currency is another thing that many believe is a poor investment sign.
Apparently it reflects a country on its uppers and marks out a nation with some difficult times to go through.
In actual fact weak currencies have historically walked hand-in-hand with strong stock market performances and this time around appears to be no different.
Another benchmarking tool that seems to get misused is a firm’s P/E ratio.
The perception is that the higher the ratio is, the less value the company holds.
This is over simplified nonsense and a high P/E ratio may actually point to a firm whose earnings are about to take off, while a low ratio may indicate a firm that is about to go bust.
Investors, like the rest of us, are looking for short cuts and more often than not they lead to losses rather than a land of financial milk and honey.
There is nothing wrong with sticking to a simple set of simple rules when it comes to investing.
Indeed such an approach helps to keep emotion in check and maintain a level of consistency in investor’s decisions.
However for anyone employing this strategy it is worth investigating whether the perceived wisdom they rely on actually holds water.
If it does not they will be pinning their colours to the wrong mast entirely and effectively scuttling their chances of making a decent return.
Courtesy of FT Adviser, 18 December 2009
