Buy And Hold Investing? Never!

In my previous article about buy and hold investing, I promised to give my opinion on when “buy and hold” approach works and when it does not work. Should one practice “buy and hold” at all?

Mathematically, I think it works as long as you are not leveraged. Being leveraged on your stock purchase means buying stocks on margin. That means borrowing money from your broker to buy more stocks than your money can afford.

The most you could lose in owning a stock is what you bought the stock for. Meanwhile the most you can gain is practically unlimited. It could be 10, 20 or 100 times what you bought it for! The risk-reward payoff is significantly in your favor then when you “buy and hold”.

However, I do not think one should “buy and hold”.  I believe every stock ownership has an “expiration date”. Changes do occur in the company and the economy that changes your opinion on a company. Furthermore, you might want to take advantage of a better opportunity than your current stock holding might offer. One should never own a stock and stop from diligently monitoring the outlook of the company and other alternative investments.

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Not all stocks obviously have the same holding period. Some have longer periods than others. Technical stocks such as Intel, Microsoft, Google, Apple, etc, usually have shorter holding periods as they have to continually innovate to continue to grow. In fact that is one of the reasons why Warren Buffett refuses to invest in technical stocks. Think Microsoft. It had the dominant position and was the most valuable company during the PC hay day. But no longer, they were completely blindsided by the growth of the internet and how it would make the PC less relevant. Even Apple, although dominant and most valuable now might not be able to maintain that position if it is not able to come up with what they call “the next big thing”. Other smaller companies as we speak are working to develop that.

If you would like to buy and hold or would like to hold a stock for a long time you might consider basic consumer products companies-those that manufacture goods that will be used repeatedly and by most people as the population grows. The idea is behind why Warren Buffett bought Gillette and probably why you should consider buying Procter and Gamble or Unilever. After all, it is not likely that 20 years from now that parents will continue to be buying iPads for their kids. However, they definitely will buying diapers for their babies.

Thinking Of Becoming A Day Trader?

You have probably heard of Day Traders. With online access to their broker accounts, they work in the comforts of their home trading all day. They are called such because most of their positions last only a day, meaning they sell what they buy the same day. Although this is a very risky and stressful endeavor, some do make a living being Day Trader. Some even make a lot of money.

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To me, however, day trading or very active trading in the Philippine stock market is probably not feasible for the following reasons:

  1. Commissions in the Philippines are expensive even when trades are done through the internet. Buying a stock whose value is Php41k will cost you Php127- or .3%. In the US a $4ik trade might cost you less than one tenth of that in the Philippines, or $9.99. It could even be as low as $7.99- or less than .03%. When you are making a trade every day, this difference could add up, and become significant.
  2. To maximize the profit from your trades, your positions should be leveraged. By being leveraged your percentage gains or losses from your trades will be much higher than if you just owned stocks outright. Unfortunately, the investment methods used by the people in the US I do not think is available in the Philippines. Such methods include buying stocks on margin, put or call options, and stock index futures. Buying stocks on margin is probably available but not extensively.
  3. There are no extensive graphing service and trading platforms available such as in the US that will enable one to use very sophisticated technical analysis. When trading you have to rely more on technical analysis, not fundamental analysis. Technical analysis guides you on when to buy and when to sell to the minute or to the day. Fundamental analysis does not. No mistake about it, trading is hard and stressful. You have to be well armed and prepared to go to battle.
  4. In the Philippines, you can only go long on a stock meaning you can only buy and make money when you sell the stock at a price lower than you bought it for. There is opportunity to make money only if you spot a stock that you think will go up. What if you spot a stock that you do not own that you think will go down. There is no opportunity to make money, but in the US you do. You can sell the stock short. You can borrow the stock from a broker and sell it with the intent of buying it later, after the stock price has gone down.
  5. There are very few stocks in the Philippines to choose from, even less with enough volume. Less volume means its movement could be an aberration, and could throw off your technical analysis signals. Limited volume also means a larger gap between bid and ask prices, thus transaction cost is more expensive.

Buy And Hold Investing

Sometime ago, I described to a blogger how I took long term investing to a limit- 15 years!  Shortly before the Asian financial crises in 1997, I bought two stocks: DMCI Holdings (DMC) and SM Prime Holdings (SMPH). The timing was bad, because at the height of the financial crises that followed, I was down to 40% of what I invested. However, I held on and did not sell. In fact for the next 15 years, I hardly checked the value of my investment.

buy-and-hold-investingEarly this year, when I checked my statement, I was surprised to find out that my DMC and SMPH investments have turned into serious money. The Php30k DMC stock I bought 15 years ago is now worth Php 2.8 million while my Php38k SMPH stock is now worth Php 2.2 million! Yes, you could indeed make serious money in the stock market!

My experience probably suggests most people should forget about short term trading and instead be a “long term” investor, perhaps even be a “buy and hold” investor. Probably true but not always. In my next blog I will describe why and when I think the “buy and hold” approach works, and when it does not work.

* This article was originally published on December 29, 2012

Do You Want To Own A Company?

Do you constantly dream of owning a company someday, but do not have millions to spend?

Do you want to own a company that is growing and sells products that are interesting, or in demand?

Do you want to own a company but do not feel you are capable of managing the company, or do not have the time?

Do you want to buy the company cheap?

Do you want to buy a company that you can unload quickly if you decide you need the money?

Do you want to get rich owning the company?

If the answers to all the above are YES, then invest in the stock market. By investing in the stock market, you can buy a portion of the company with as little as $1000 or less. You could buy a portion of any company listed in the stock exchange such as Microsoft, Amazon, Facebook, Citicorp, Bank of America, IBM and of course Apple. These is just a sample of companies that not only sell interesting products but products that are in demand and I might say even change the world.

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Not interested in managing the company, well these companies have seasoned managers in place already with credentials and track record that are hard to beat. Unfortunately, for Apple, you cannot have Steve Jobs working for you anymore but Tim Cook is an able replacement.

Do you want to buy the company cheap? There is an opportunity for that, just be patient. Every now and then current owners sell their ownership at a significant discount for no good reason at all. They just happen to be in a panic mode.

Want to be able to unload your ownership quickly. Well you really can. Unlike real estate where you have to wait weeks, months or even years you can actually unload your ownership literally in the click of a button at the known going price.

Want to get rich owning the company as well? Certainly. Had you bought Apple at a measly $13,000, 14 years ago, you would now be a millionaire (in dollars too)! Did you have $13,000 then?

* This article was originally published on December 2012

Why I Prefer To Invest In The Philippine Stock Market

Although I can invest in US stocks and take advantage of the extensive choices and research that is available, and the flexibility of selling short and using various derivative instruments such as the options and futures, I prefer to invest in Philippine stocks because in the past five years it has performed better. As the graph below shows, had you invested in Philippine stocks 3 months ago, you would have now earned a return of about 50%. Compare that with investing in US stocks, where you would have just broken even.

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Of course, the issue is this comparison still true recently. And the answer is yes, as the graph below shows. Had you invested in Philippine stocks five years ago, you would have at the very least broken even instead of losing more than 5% had you invested in US stocks. Comparing the performance in the last 3 months is fitting as it covers the period before the most recent peak of the market and the ensuing recovery currently going on.

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Of course the two graphs are not compelling enough without some rationalization on why the above difference in performance will continue in the future. In my next blog, I will explain why indeed in my opinion this is true.

Which Bank Stocks Should You Invest In?

Bank stocks are one of the best performers in the Philippine Stock Exchange (PSE) this year. The PSE Finance Index has in fact surged 35% so far, compared with 19% for the benchmark index.

This is probably not surprising considering that bad debts have dropped and accelerating economic growth has boost loan demand. The$225 billion economy grew a faster-than-estimated 5.9% in the second quarter. Furthermore, the Central Bank cut its benchmark interest rate to a record –low 3.75% in July a bullish move for bank stocks not only because it spurs loan demand but it also increases margins.

If one has to invest in bank stocks, however, the question is which one?

When evaluating which one, it is probably appropriate to distinguish between first tier banks from second tier banks. Although arbitrary, one can define large tier banks to be those whose market capital is at least Php200 billion.

The following are then the first tier banks: Metropolitan Bank (MBT: PM), Bank of the Philippine Island (BPI: PM) and Banko de Oro (BDO: PM).

In trying to evaluate the better investment, I compared the stock performance in the last 5 years of the 3 companies. The rationale is this. A stock that is consistently trending up faster over a long period is fundamentally a better company. It is likely to be more profitable, its revenues are growing faster, it is run more efficiently and its future outlook is probably better. It is important to evaluate the performance over a relatively long period such as 5 years to negate the temporary up and down swings.

As the graph below shows, the MBT and BPI are running neck and neck, with a slight edge to MBT. It is without question that BDO is lagging behind.

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I would invest in MBT and as a hedge invest only 70% of my allocated funds in it with the remaining 30% in BPI.

In my next posting, I will evaluate the second tier banks: Security Bank (SECB:PM), Union Philippine Bank (UPB:PM), Rizal Commercial Bank (RCB:PM) and China Bank (CHIB:PM). I will not include Philippine National Bank (PNB:PM) because of the uncertainty it faces with its merger with Allied Bank.

*This article was originally published on September 10, 2012

Should You Avoid High Priced Stocks?

How many times do I hear an investor, especially beginners, rationalize why they did not consider buying a high priced stock. Their rationale: “they are expensive”. They judge the attractiveness of a stock as an investment by its stock price. This is understandable because the first thing they ask and learn before even asking in what business the company operates in is “What is the price?”

Because the objective is to make money, they assume that a low priced stock is more likely to appreciate more than a high priced stock. From what I can tell they probably reached that conclusion by assuming the following:

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  1. They assume that a low priced stock suggests a smaller company and therefor e more likely to grow faster than a high priced stock which represents a large company. After all, most understand that it is easier for a Php10 million company to increase to a Php20 million company than it is for a Php100 million company to grow to a Php200 million company.
  2. They assume that a low priced stock is undervalued relative to a high priced stock. Over time, an undervalued investment is indeed more likely to appreciate faster than an overvalued investment.

These assumptions are obviously flawed for the following reasons:

  1. The size of a company is not a function of the stock price, but of market capitalization (the total value of the company’s outstanding shares). Meanwhile, total market capitalization is the product of the share price and the number of shares outstanding. A low priced stock could therefore be a much larger company if the number of shares outstanding is that much larger. For example, Ayala Land (ALI) is trading at around 25 while DMC Holdings (Consunji company) is trading at 56. It would be a mistake to think that the DMI Holdings, a construction company is twice as large as Ayala Land because of their stock price comparison. In fact, Ayala Land, with a market capitalization of about Php 350 billion is more than twice as large as DMC Holdings, whose market capitalization is Php 150 billion. The shares outstanding of Ayala Land is more than four times that of DMC Holdings.
  2. There are various ways of measuring how much a company is worth (its value). (Unfortunately it is not a simple enough subject that I can cover in a short blog as this.) Irrespective, because investors go through periods of extreme optimism and extreme pessimism, there are periods when stock price could be trading much higher than what it is worth (overvalued), or trading at much lower than what it is worth (undervalued). Being overvalued or undervalued however is just as likely to happen to a small company as it is for a large company.

So the next time you decide to avoid a high priced stock, think again. The company might not be as large as you think. And more importantly, do not think for a moment that its appreciation potential is limited.

And do not fret if all you can purchase of a high priced stock is one share! The highest priced stock in the world is probably Berkshire Hathaway Class A stock, currently selling at $176,000 a share. (that is a share, in dollars). It is the company that Warren Buffett manages, by far the most successful investor in history. He is also the second richest person in the world with a net worth of $60 billion (that is billion dollars). A $10,000 investment in his fund in 1966 would be worth $300 million now. In this case the highest priced stock is also the most successful.

How To Make Your Child A Millionaire

It is every parent’s hope that their child have a great future. Among other things, perhaps be a millionaire.

Assuming you are not rich enough to hand in a million dollars to your child in your will, how can you help your child be a millionaire? Certainly one way is to help your child get a good education. Help the child marry a rich partner maybe? Buy your child a lotto ticket every month and hope he/she wins the jack pot? You probably have other ideas yourself.

How about this? You can save $2000 ($167 per month) every year can you not? If you can and you invest every one of them in the stock market, by the time your child is 45 years old, he or she would be a millionaire, $1.2 million in his stock account to be exact. Assuming you had your child when you were 30 years old, you would probably even be alive at 75 years old to see your child enjoy his/her million.

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In coming out with that estimate, I assumed a yearly return including dividends in the US stock market of 10%, the average return over almost 100 years.  Of course there will be some volatility in the US stock market returns from year to year ( such as this year the S&P 500 earned almost 30%), but I think in the next 50 years an average return of 10% including dividends is probably reasonable.

Who knows, you might even be lucky to find an investment manager that can beat the averages by 5% each year. They do exist, it is not farfetched. Beating the averages is every investment manager’s goal, and there are hundreds of them trying to do that. If you earn 15% return every year, your child will have a lot more, $5.4 million to be exact.

What about this? You probably know that Warren Buffett is by far the most successful investor in history. He is the second richest person in the world with a net worth of $60 billion (that is billion). A $10,000 investment in his fund in 1966 would be worth $300 million now for a yearly return of about 25% over 47 years!

If you find a person like that to take care of your portfolio and duplicate Warren Buffett’s performance, your child’s stock account would be worth a whopping $118 million! By then even you would be extremely wealthy, assuming your child gives you some of his money.

So what are you waiting for? Start saving and start investing in the stock market now and see your child become a millionaire. It is important to start early. If you wait until your child is 12 years old, instead of a stock portfolio worth $1.2 million at age 45 as I described earlier, your child will only have $490 thousand. Not bad. But not being a millionaire, your child will probably not be happy.