Originally published in FT Facebook Group last March 19, 2015. It gets hard to view old articles that I post in Facebook so I’ll slowly transfer some posts which people liked more than a hundred times to “memorialize” them.
The Purpose of Investing:
If your purpose of investing is to get rich quickly, then a different strategy is needed than that of the person who wants to accumulate wealth over a time period.
Getting rich quickly is not as likely and carries with it a much higher degree of risk because this is a function of time and selection.
Hopefully you will agree that the creation of wealth comes from businesses earning money. They generate earnings; they either plow it or give it to you as cash dividends.
It is safe to say that there is no asset that is a better long term investment than stocks. You’re better off buying at least the PSEI than cash. However; there is a fallacy that if you buy a quality stock; that you will definitely make money.
Just ask what happened to the mwc or mpi or meralco investors; they will share to you that buy and hold doesn’t work. You need to have a selective process that assumes you bought winners such as the URC, Ali, bdo, DNL. But what if you did the wrong thing?
Stocks don’t always go up- even bluechips. If you purchase them at the wrong time; you could lose 80% of your investment. Yes; blue chips can fall that much especially in a bear market.
If you chose hotshot concept stocks; your money will have never returned. Some have lost 85% and never came back to the previous highs they’ve done.
If a stock gives up 20-30% in one day; that crack is only the beginning. (2go “investors” who didn’t get to sell when it even rallied from 10-8 back to 10 have to force themselves to know that this will not get back to 10.)
Momentum plays are greater fool games. That’s the heart and soul of that game: people seek whatever is moving and listen to juicy provocative stories then buy the stock; with a parabolic up move; others get hyped and hence these companies break badly. No tiny moves for rapid moves.
Chasing high fliers are usually as bad as catching them when they become falling daggers. There is no such thing as a “buy the dip” strategy for conceptual high fliers. When they are done; they are simply done.
Being successful then is about clear intentions with your purpose. What is your time frame? In the heat of the moment; you will see stocks you wish you owned but if today’s darlings have no significant earnings to sustain the prices; they turn into dogs.
Maintain your focus on reality.
The best longterm success is through compounding of interest.
Even if you can just make 10% but consistently every year; magic happens when that’s consistent.
The difference of 15% and 20% average return every year is millions and millions away. They aren’t just a few percent different. Consistency is important.
A bull market doesn’t bail out every investment error we make.
The only way to make a killing is to develop an approach of finding companies that will outperform the market to reward yourself and the investors. The next important thing is to identify the most important time when these stocks will rally.
Consciously and deliberately avoid dreamy stocks as they have always become the downfall of so many investors. Do not chase big thrills – they are destined to be spills.
Return to the fundamentals of value. Return to earnings visibility.
There are only two reasons for a stock to go up. Stories and rumors and possibly some manipulation – positive publicity catches public fancy – at some point higher prices drive higher prices. A feeding frenzy feeds upon itself.
If it’s a balloon of hot air; it bursts that’s why 10 can go 5 or 2.
Do not underestimate how greed can fuel a stock to rise.
The second reason why stocks advance is simply huge money making capability. Make lots of money and the stock price will rise.
Consistency of growth of money ( earnings) makes the stock highly desirable.
So you have a choice ; buy stocks on whims of news, stories of fancy or actual business conditions .
Quarterly increases of earnings will spur more buying
When you look for discounts; make sure they meet this condition : price is down but earnings is up.
This is positive fundamental divergence
Buy in the face of price weakness when earnings is growing faster than expected.
That will set up a buy signal.
The significance of price charts comes not from looking at prices but from looking at what causes prices to move; which is by and large, earnings.
Obviously stay away from high debt companies.
Additionally ; make sure the owner is buying the shares. If the owner is selling; stay away!
Every trend when gone too far will evoke it’s reversal. – Heraclitus
When we are in an excessively bullish zone; learn to sell.
When we are in an excessively bearish zone; learn to buy.
Overcrowding or highly popular stocks are susceptible to reversals. We shall see if it happens for DNL URC Just as what happened with JFC.
Remember only two reasons for stocks to rise;
1.) hype and hope
2.) value and value only
Hype and hope stocks can rise spectacularly but crash in an equally spectacular decline.
Due to the little history on ipos ; these are also essentially concept stocks and can change quickly based on people’s imaginations.
Opportunity abounds; always has and always will.
Now value will not be enough to create a bull market; money is what fuels the rallies.
More money – More easy money will fuel a bull market.
If everyone is out of money; we will consolidate or fall because there’s no money who will buy higher.
That’s why; fed being dovish (easy money policies) should be a very good thing and why you may still invest in the Philippine stock market.