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Month: December 2016

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: They assume that a low priced stock suggests a smaller company and therefore 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. 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: The size of a company is not a function of the stock price, but of market capitalization (the total value of...

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ETF of Philippine Stocks

As we all know, the outlook on the Philippine economy has been looking bright lately, culminating in upgrades of the Philippine sovereign debt to investment grade and the Philippine stock market remaining hot. This has created interest among Filipinos now residing outside the Philippines to investment in the Philippine stock market. However, most are turned off by having to go through the effort of opening a Philippine broker account and depositing money and trading in pesos. For Filipinos in the United States, fret not. There is an ETF that you can invest in and in the process participate in any up moves in Philippine stocks, the iShares MSCI Philippines ETF (symbol: EPHE). As an ETF, it is traded like individual stocks throughout the day. Like mutual funds, it allows diversification because it is a basket of Philippine company stocks. Unlike mutual funds, however, it does not charge sales load, purchase fees or redemption fees so its expenses are usually lower. The basket of stocks that compose EPHE does not duplicate the Philippine Stock Exchange (PSE) Index, however.  Although it could have, the sponsors of EPHE probably believed they can outperform the market.  A comparison of the 10 largest holdings of EPHE with its weights in the PSE index shows the following: Some of the glaring differences are the following: PLDT is underweighted significantly in EPHE (6.7% vs 12.0%). SMPH...

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Exchange Traded Funds, Now In The Philippines

Indeed Exchange Traded Funds (ETFs) are finally here. Several weeks ago, the SEC announced the approval of market making provisions of the Philippine Stock Exchange (PSE) rules on ETFs, making possible the start of ETF trading by September 2013. This is a significant development in quite awhile, because it will now allow investors in the Philippines to also benefit from the same experience that US investors have had for 20 years now. ETFs in the US have grown in popularity and have gathered assets at a rapid pace. What are exchange traded funds and how do they work? Like mutual funds, ETFs will allow investing in an index or any basket of stocks that the organizers offer. However, ETF’s has some advantages over mutual funds such as: Trading flexibility. Mutual funds are traded only once, at the end of the day. ETFs are traded like individual stocks in the exchanges throughout the day. Lower Cost. Mutual funds charge redemption fees, purchase fees or sales loads when you join. ETFs do not, a significant savings. This translates in better performance. It is not clear what basket of stocks will the developed, but my guess is there will be one that tries to duplicate the performance of the PSE index, and various ones that will try to mimic the performance of various industries such as banks, property companies, mining stocks, etc. Of...

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The Risk of Catching a Falling Knife

Not a surprise. My posting yesterday to start nibbling and buy more when the market goes down, was met with intense skepticism by many.  One even suggested my advice is like “catching a falling knife”, referring to a common saying in Wall Street where people could end up going bankrupt as the correction could turn out to be much longer and deeper. In fact, the market promptly going down by 182 points or down 3.05% to 5789 today did not seem to help.  Well, I take that back. I think it did help. After all, those that took my advice would have bought at a much lower prices than the prices the day before. Nevertheless, let me offer more perspective on my call: Again, I did not say out right buy, I did say nibble and buy more when the market goes down. I recognize the market could go lower, for the reasons I stated. To me I would rather be early than late. Although it is indeed not advisable to “catch a falling knife”, I believe such caution is more serious when you are trading in the foreign exchange market and when you are using significant leverage. When buying a stock, you are buying a share in the future growth and earnings generated by very competent professional managers of the company. There is significant value in your purchase....

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Start Nibbling, Buy More If The Market Goes Down

On June 19th, I suggested, hold do not buy yet. Since then the market went down further by more than 500 points. Based on the action yesterday, however, where the PSE index walloped 211 points or 3.41%, my suggestion now is,  start buying. Fire off some of your ammunition, but not all at once. Although I do not believe the market will go much lower, it is possible it might indeed go lower. I say buy because my technical indicators now say buy. Although it is not foolproof and should be treated as such, it has had a good record for me. However, it is still prudent to be cautious. Although the market is not as expensive now as it was last week, it is still on the expensive side. More importantly, as the market can get extended on its up move, it can do so as well on its down move. Furthermore, we are unfortunately in the mercy of foreign investors. And it is because of this possibility that it is prudent to keep some of your powder dry so you can take advantage of better prices when the market goes down some more. Remember it is next to impossible to pick the exact short term bottom, you just want to increase your chances you do your purchases near it so that it is more likely the next...

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