DESPITE lingering global economic concerns, the PSEi (Philippine Stock Exchange Index) sustained its upward momentum and settled closer to 6800 before the November 30 holiday. This then begs the question, is this the beginning of a new bull run, or is it just the usual Santa Claus rally or window dressing? With the latest development, many are becoming interested again in the market.
Investors have suffered a harrowing experience for a couple of years, as out-of-control volatility continues to throw the markets into disarray. People always ask me what the most important thing is when investing. And my usual answer is managing your own risk.
Risk is evident in many forms. For example, different assets have different inherent risks. Not to mention the counterparty risk — this is a risk that can pop up anytime coming from your broker or investment provider. For that, some investors not just diversify their investment to different securities but as well as to other brokers.
The most important lesson I follow in managing my investment is the lesson I learned from a good farmer. In a country like the Philippines, which sits on the storm path, becoming successful in the farming business is not simply about being a good business operator but knowing the art and science behind the business.
We all know the basics of farming — tilling the ground, planting, constant watering and feeding with proper nutrients. But the key to successful farming that guarantees high-quality yield will depend on the effort and attention you will give to your farm. Attention to detail is critical in ensuring you will ensure your ROI and make a lot of profit along the way.
The same thing with managing your portfolio; from time to time, you need to rebalance and evaluate your portfolio and check which securities are worth trimming down. We are experiencing a window dressing season, which calls for healthy rebalancing.
There are many ways to consider when rebalancing; you may use a chart, or like me, you may study the fundamentals of your holdings first by comparing the market value of a stock to its earnings or known as the P/E ratio. The P/E determines the willingness of the market to pay today for a stock based on its past or future earnings. This will determine if the stock is overvalued, fairly valued, or undervalued. Finally, this will answer the question, “Am I buying this stock at a reasonable price?” Knowing this value will tell you which stocks to keep and which you need to let go.
Another thing that you can do is divide the stock price by its book value per share for you to determine its P/B (price-to-book) ratio. A lower P/B indicates that a stock is undervalued. For example, if the P/B of the stock is at 0.7, you are paying 70 cents for a peso worth of assets. On the other hand, if your P/B is higher than one, trimming down is a reasonable consideration, for you are paying more than the company’s actual worth.
And the third consideration is to identify which stocks generate a lot of cash and have a large flow of free money. Free cash remains after the company reinvests itself to keep the business running. So having lots of money indicates that the company has a significant edge over competitors in different aspects of opportunities.
Buying stock might be easier to do than deciding when you need them to let go. That is why you need to have your method for choosing and trimming your portfolio. And if you can master some techniques, you will find that investing can be rewarding when the right choices are made at the right time in the long run. Like farming in the Philippines, wherein we expect a yearly round of typhoons and droughts, getting angry with this phenomenon is a total waste of time and energy. The same thing to the market; a bull run will come but expect that many people will be wiped out after this great hype and flood of income.
To learn more about personal financial planning, attend the Chris’ Cervantes webinar: “Financial Planning for the Fast Changing World.” Register on this link: https://cardinalbuoy.com/seminars/
