Saturday, May 29, 2010
Thursday, May 27, 2010
Meralco: 4 Headlines, 1 Day
IN THE NEWS
Yesterday, local papers and cyberspace was littered with news about the country’s biggest and most widely known utility firm. So what’s going on at Meralco, and what does it all mean for investors like you and me?
1. Pangilinan is new president/CEO of Meralco from Inquirer.net
Ending 24 continuous years of Lopez rule, Manila Electric Co. (Meralco) named businessman Manuel V. Pangilinan as its new president and chief executive officer. He is taking over the CEO post from Manuel Lopez, who will remain as a non-executive chair, starting July 1. MVP is expected to usher in a new era of higher cost-efficiency and cash dividend payout for the country’s biggest power retailer.
Pangilinan said he would adhere to two basic principles upon assuming leadership in Meralco. “One is that I want to [preserve] what’s best of Meralco and [second is to] continue those things that are good for Meralco to move forward. With respect to the new Meralco, I don’t see any major change moving forward,” he said.
2. Tanco pledges 4% Meralco stake to MVP from Inquirer.net
Businessman Eusebio H. Tanco has sold his group’s 4-percent stake in Meralco to the group of Manuel V. Pangilinan, giving the power firm’s incoming CEO a more solid foothold in the country’s largest power distributor.
In an interview, Tanco, who among other businesses owns the STI group of schools, said the group had agreed to sell its stake in the power firm to Pangilinan for a “fairly healthy profit.”
3. Power utility expects P11B in net earnings from Inquirer.net
Meralco expects to post P11 billion in core net earnings in 2010, up from last year’s P7 billion, according to incoming president and CEO Manuel V. Pangilinan.
In a briefing following the company’s stockholders’ meeting, Pangilinan said the company was unlikely to match its 2009 performance, when core net earnings more than doubled from that of the previous year. This was partly due to the delay in implementing an increase in the company’s distribution, supply and metering charges in January this year, he explained.
Still, the distribution utility can expect hefty earnings this year due to increased Meralco sales spurred by hot weather, said company chair Manuel M. Lopez. The hot summer months usually raise the consumption levels of Meralco customers due to increased usage of appliances.
“It’s not just the hot weather that has increased Meralco sales, but industry sales have also shot up. There is a lot of activity in the business and industry sectors,” Lopez added.
4. Lopez confirms Meralco PBA bid from The Philippine Star
Meralco confirmed yesterday it was mulling the idea of joining the Philippine Basketball Association as part of its advocacy program.
During the company’s annual stockholders meeting yesterday, Meralco chair and chief executive officer Manolo Lopez said the power utility firm, which used to run a team in the now-defunct MICAA, is in discussion with different groups for the possible acquisition of a PBA franchise.
Sources said Sta. Lucia is one of those ballclubs that the group is negotiating with.
“There’s interest to once again form a basketball team. This is still in its raw stage but definitely there is interest,” Lopez said.
Lopez said it would be Meralco’s shareholders that would shoulder the costs of the company’s participation in the pro-league. “We will not pass on the costs to our consumers that’s for sure. This is more like an advocacy thing for us. The approach taken by management is that part of the income or proceeds would go to a designated charitable institution,” he said.
“Any fears that having a PBA team will mean higher cost of power must be debunked at this stage. It will be absorbed by the shareholders,” Lopez said.
Most teams book the costs as advertising expense since they find the PBA as one of the best marketing avenues for their products.
Investor Implications
Whether you like MVP or not will not seem to matter much because he will just be some sort of an interim president and CEO, at least according to reports; a search committee is being formed to evaluate potential candidates for a permanent president and CEO.
The Tanco share offer to the MVP group will bolster Metro Pacific’s ownership position in the company. Will that be good for Meralco investors? It depends on your opinion of Metro Pacific’s management savvy. How do you evaluate the performance of Maynilad, North Luzon Expressway, and Makati Medical Center, which are some of the more high profile investments of the conglomerate? Maybe your opinion of MVP’s influence and leadership skills will play a more prominent role in this regard.
The 36% increase in profits, from 7 billion to 11 billion pesos this year, should be taken with a grain of salt. While this may lead to a significant one-time boon for investors in the form of higher cash dividends this year, the income increase should play a minimal role in the long run. For a longer-term increase in returns, look for sustainable, systematic improvements in the firm’s operations, as promised by MVP.
Should talks of the firm’s re-entry into the local professional basketball scene be cause for joy or alarm for investors? You heard it from the horse’s mouth: shareholders would shoulder the costs of the company’s participation in the pro-league. How could paying overpriced imports and bratty basketball players be corporate social responsibility? And why the hell would Meralco, a virtual-monopoly in its industry, need to advertise? Yes, I am as dumbfounded and astonished as you are.
Let us let numbers speak for themselves. Exactly one day after these stories were run (today), Meralco loses 3.4% of its stock price, closing at 170 pesos per share at the end of the day’s trading, from 176 pesos yesterday. I’m no oracle, but I portend darker days ahead for Meralco.
Yesterday, local papers and cyberspace was littered with news about the country’s biggest and most widely known utility firm. So what’s going on at Meralco, and what does it all mean for investors like you and me?
1. Pangilinan is new president/CEO of Meralco from Inquirer.net
Ending 24 continuous years of Lopez rule, Manila Electric Co. (Meralco) named businessman Manuel V. Pangilinan as its new president and chief executive officer. He is taking over the CEO post from Manuel Lopez, who will remain as a non-executive chair, starting July 1. MVP is expected to usher in a new era of higher cost-efficiency and cash dividend payout for the country’s biggest power retailer.
Pangilinan said he would adhere to two basic principles upon assuming leadership in Meralco. “One is that I want to [preserve] what’s best of Meralco and [second is to] continue those things that are good for Meralco to move forward. With respect to the new Meralco, I don’t see any major change moving forward,” he said.
2. Tanco pledges 4% Meralco stake to MVP from Inquirer.net
Businessman Eusebio H. Tanco has sold his group’s 4-percent stake in Meralco to the group of Manuel V. Pangilinan, giving the power firm’s incoming CEO a more solid foothold in the country’s largest power distributor.
In an interview, Tanco, who among other businesses owns the STI group of schools, said the group had agreed to sell its stake in the power firm to Pangilinan for a “fairly healthy profit.”
3. Power utility expects P11B in net earnings from Inquirer.net
Meralco expects to post P11 billion in core net earnings in 2010, up from last year’s P7 billion, according to incoming president and CEO Manuel V. Pangilinan.
In a briefing following the company’s stockholders’ meeting, Pangilinan said the company was unlikely to match its 2009 performance, when core net earnings more than doubled from that of the previous year. This was partly due to the delay in implementing an increase in the company’s distribution, supply and metering charges in January this year, he explained.
Still, the distribution utility can expect hefty earnings this year due to increased Meralco sales spurred by hot weather, said company chair Manuel M. Lopez. The hot summer months usually raise the consumption levels of Meralco customers due to increased usage of appliances.
“It’s not just the hot weather that has increased Meralco sales, but industry sales have also shot up. There is a lot of activity in the business and industry sectors,” Lopez added.
4. Lopez confirms Meralco PBA bid from The Philippine Star
Meralco confirmed yesterday it was mulling the idea of joining the Philippine Basketball Association as part of its advocacy program.
During the company’s annual stockholders meeting yesterday, Meralco chair and chief executive officer Manolo Lopez said the power utility firm, which used to run a team in the now-defunct MICAA, is in discussion with different groups for the possible acquisition of a PBA franchise.
Sources said Sta. Lucia is one of those ballclubs that the group is negotiating with.
“There’s interest to once again form a basketball team. This is still in its raw stage but definitely there is interest,” Lopez said.
Lopez said it would be Meralco’s shareholders that would shoulder the costs of the company’s participation in the pro-league. “We will not pass on the costs to our consumers that’s for sure. This is more like an advocacy thing for us. The approach taken by management is that part of the income or proceeds would go to a designated charitable institution,” he said.
“Any fears that having a PBA team will mean higher cost of power must be debunked at this stage. It will be absorbed by the shareholders,” Lopez said.
Most teams book the costs as advertising expense since they find the PBA as one of the best marketing avenues for their products.
Investor Implications
Whether you like MVP or not will not seem to matter much because he will just be some sort of an interim president and CEO, at least according to reports; a search committee is being formed to evaluate potential candidates for a permanent president and CEO.
The Tanco share offer to the MVP group will bolster Metro Pacific’s ownership position in the company. Will that be good for Meralco investors? It depends on your opinion of Metro Pacific’s management savvy. How do you evaluate the performance of Maynilad, North Luzon Expressway, and Makati Medical Center, which are some of the more high profile investments of the conglomerate? Maybe your opinion of MVP’s influence and leadership skills will play a more prominent role in this regard.
The 36% increase in profits, from 7 billion to 11 billion pesos this year, should be taken with a grain of salt. While this may lead to a significant one-time boon for investors in the form of higher cash dividends this year, the income increase should play a minimal role in the long run. For a longer-term increase in returns, look for sustainable, systematic improvements in the firm’s operations, as promised by MVP.
Should talks of the firm’s re-entry into the local professional basketball scene be cause for joy or alarm for investors? You heard it from the horse’s mouth: shareholders would shoulder the costs of the company’s participation in the pro-league. How could paying overpriced imports and bratty basketball players be corporate social responsibility? And why the hell would Meralco, a virtual-monopoly in its industry, need to advertise? Yes, I am as dumbfounded and astonished as you are.
Let us let numbers speak for themselves. Exactly one day after these stories were run (today), Meralco loses 3.4% of its stock price, closing at 170 pesos per share at the end of the day’s trading, from 176 pesos yesterday. I’m no oracle, but I portend darker days ahead for Meralco.
Monday, May 24, 2010
7 Ways of Recession-Proofing Your Life (Part 2)
Image from roystonrobertson.co.uk
4. Invest and exploit poor market conditions.
Perhaps the best way to turn a situation as shitty as a recession into gold is to exploit it. A recession provides enterprising investors with a rare opportunity to beef up their investment portfolio: remember that stock prices fall to all-time lows during market crashes. So if you take the stock investment mantra, “buy low, sell high,” to heart, you should realize that a recession is the perfect time to buy stocks. The problem is that buying stocks whose prices have fallen considerably and while everyone else is desperately selling is counter-intuitive; doing something that’s the exact opposite of what the rest of the herd is doing simply goes against basic human nature.
One of the keys to being a successful investor is to have enough will and testicular fortitude (figuratively, of course) to go against the tide and buy when everyone else is selling (and in other situations, sell when everybody else is buying). A lot of people have lost money during the financial crisis of 2008 precisely because they buckled under the pressure of “cutting their losses” and subsequently sold their stocks at prices way below the purchase price; you need to understand that this is the only way you’ll actually lose money during a market crash and that the second best way of dealing with the situation (the best being to buy more shares) is to do nothing at all and just incur “paper losses” that really don’t mean anything and that will go away once the market eventually gets back on its feet.
5. Diversify.
The thing about a recession is that it affects various industries or firms differently: some are less negatively affected than others, while some even thrive during economic downturns (see “Join a recession-proof industry” in #6). The challenge lies in identifying which stocks will perform better than others in a recession, a task best left in the hands of so-called professional fund managers
For us mortals, the best way to go would be to diversify and spread our investment across various firms, industries, and securities that behave differently to minimize risk and possible losses from a downturn. Diversification does not just involve investing in different stocks: for diversification to be more effective, you’ll have to put your money in various asset classes as well. For example, investing in real estate and savings deposits will ensure that a part of your holdings will remain intact during a recession, even when you lose some value with your other investments.
6. Join a recession-proof industry.
As we discussed in #5, some industries are less affected by a recession than others, and others, more. To protect your earning power, your best move would be to enter and pursue a career in an industry that is not (completely) susceptible to the negative effects of a market crash. Think about products and services that are considered essential and which are not entirely dependent on the spending power of individuals: industries like education, energy and utilities, telecommunications, and health care would come to mind, just to name a few.
During the crisis two years ago, applications to the university I’m working for has continued to grow, showing that parents don’t skimp on their children’s education even when they are forced to cut back spending and proving that education is, indeed, a recession-proof industry.
7. Cut back on the mochas.
Mochas taste good, especially if you buy them from Seattle’s Best or Coffee Bean and Tea Leaf. But at 150 pesos a cup, too many mochas will cost you an arm and a leg in the long run (see #22 of this list), money that could have gone to your emergency instead. But it’s not really just about coffee, it’s about living within your means and leaning more towards saving than consuming. That cup of Joe is just the tip of the iceberg: you start with not caring enough to pay 150 pesos for a cup of coffee and soon enough you’ll see yourself max out your credit card for a new high-tech gadget that you don’t need. Cutting back on the mochas means avoiding the credit pit-trap and getting into a frame of mind where every peso matters; because during a recession, every peso does matter, even to those of us who think it doesn’t.
So will it happen? Will the stock market crash this year? I’m not really sure; I guess no one can ever really be sure. The best thing for us to do in the face of all the uncertainty is to brace ourselves and be as prepared as we possibly can. This list should hopefully serve as an adequate first step to becoming recession-proof; the next step is all up to you.
Click here for Part 1.
Friday, May 21, 2010
7 Ways of Recession-Proofing Your Life (Part 1)
Image from Morris Creative
Have you ever noticed how more and more difficult it has become to find empty tables at popular cafes around the metro? My friend and I experienced this as we were having coffee in one of the more popular cafés in Trinoma last week. We talked about how these places seem to be always filled to the rafters, which is a surprising sign that we Filipinos are not as hard up as we think we are.
But what if the forecast of some analysts about a stock market crash materializes and reaches our economic shores? What can you do to protect yourself from a financial crisis? Here is a list of ways to “recession-proof” your life.
1. Do “sideline” work and earn extra income.
My real life hero when it comes to managing personal and family finances is my mom, who was able to support a family with five children almost single-handedly. I still remember how she did sideline work like buying and selling jewelry, providing tutorial services, and accepting odd catering jobs to supplement her meager income as a pre-school teacher. The best way to protect yourself and your family from a financial downturn is by increasing your disposable income by exploiting every opportunity that comes your way; unfortunately the problem usually isn’t the dearth of such opportunities, but a combination of our laziness and our disgustingly low standard for contentment. If you need extra cash, for example, and you have a decent grasp of the English language, give me a buzz and I’ll hook you up with a friend who employs part-time writers for his search engine optimization business.
2. Build an emergency fund.
Perhaps the most important thing that you should prepare for in a recession is the possibility of being laid-off or demoted. An emergency fund will ensure that you’ll have enough money for daily expenses until you get back on your feet. One popular rule of thumb for the fund amount is six months worth of your net income, invested in a principal-protected, liquid vehicle like bank deposits that are insured by the Philippine Deposit Insurance Corporation for up to 500,000 pesos.
3. Be debt-free.
High interest charges on some kinds of debt like credit card balances will only put additional strain on your already stretched finances. For example, a credit card balance of 100,000 pesos will cost you 3,500 pesos on interest alone; even if you pay the minimum required amount due religiously, it will take years or even decades to lower your balance to more manageable levels. The best way to avoid this credit card trap is to suck it in while it’s still early and pay significantly more than the minimum amount due.
Also avoid other kinds of debt, like car or housing loans, during a recession. Even if interest rates for these kinds of debt are significantly less (around 10% annual percentage rate or APR) than those for credit cards (around 42% APR), the significantly higher loan amounts translate to equally higher monthly payments. For example, if you decide to buy a brand new Honda City worth 750,000 pesos and borrow the amount for 5 years with a down payment of 20%, you’ll have to cough up close to 14,000 per month. Coincidentally, you’ll have to pay almost the same amount if you decide to buy a condominium worth 1.5 million pesos by getting a 30-year housing loan from Pag-Ibig. 14,000 pesos is a lot of money for most of us, high enough that having to pay the sum every month in a recession is tantamount to committing financial suicide.
Ya gotta love that new Honda City
Click here for Part 2.
Wednesday, May 19, 2010
US Stock Market Crash Predictions (And What They All Mean For Us)
IN THE NEWS
Two recent, independent reports predict a US stock market crash this year.
In the May 13 Fortune article entitled, “Are stocks about to crash?”, Gluskin Sheff economist David Rosenberg cites high stock prices and rising volatility amid a still-weak economy as signs of an impending stock market crash. Rosenberg has gained some credibility in the past few years for being one of the few who was able to foresee the recession in 2007, even before the full extent of the financial meltdown became clear. He further suggests to clients that “it's time to take chips off the table and brace for the breakdown.”
In a separate article in Daily Finance on May 15 entitled “Why the Stock Market Could Crash This Year”, Charles Hugh Smith lists vulnerable global corporate profits and the US economy’s shaky fundamentals as the primary reasons for the stock market’s crash this year.
The article points out that the weakening of major developing economies like China and the increasing strength of the US dollar against other currencies will continue to put pressure on the profitability of big US firms who are heavily reliant on overseas revenues.
The article also cites a decades-old analysis of the stock market crash and the resulting Great Depression in 1929. Just before the crash, the stock market reached record highs amid a “fundamentally unsound” economy as shown by these “critical weaknesses” that were identified in the study:
1. Unequal distribution of income
2. Poor corporate structure
3. Poor banking structure
4. The dubious state of the foreign trade balance
5. The poor state of economic intelligence
The article argues that given the connection between these five issues and the stock market crash, and after establishing that all five indicators are true today, a stock market crash is imminent this year.
What does this all mean for the Philippine stock market and your stock investments? Our economy, for good or bad, is still heavily reliant on the US economy. Looking at the comparison between the PSEi (PCOMP, yellow) and the S&P 500 Index (SPX, green) in the past three years in the image below, we can very clearly see how closely the former tracks the latter; also note how changes in the PSEi tend to be more pronounced (greater increases and decreases) than changes in the S&P 500. What this means is that if you believe all the arguments presented by the two articles and you’re convinced that the US stock market will crash this year, then you should sell all of your local stocks because what will happen to the Philippine stock market will be much worse.
Two recent, independent reports predict a US stock market crash this year.
In the May 13 Fortune article entitled, “Are stocks about to crash?”, Gluskin Sheff economist David Rosenberg cites high stock prices and rising volatility amid a still-weak economy as signs of an impending stock market crash. Rosenberg has gained some credibility in the past few years for being one of the few who was able to foresee the recession in 2007, even before the full extent of the financial meltdown became clear. He further suggests to clients that “it's time to take chips off the table and brace for the breakdown.”
In a separate article in Daily Finance on May 15 entitled “Why the Stock Market Could Crash This Year”, Charles Hugh Smith lists vulnerable global corporate profits and the US economy’s shaky fundamentals as the primary reasons for the stock market’s crash this year.
The article points out that the weakening of major developing economies like China and the increasing strength of the US dollar against other currencies will continue to put pressure on the profitability of big US firms who are heavily reliant on overseas revenues.
The article also cites a decades-old analysis of the stock market crash and the resulting Great Depression in 1929. Just before the crash, the stock market reached record highs amid a “fundamentally unsound” economy as shown by these “critical weaknesses” that were identified in the study:
1. Unequal distribution of income
2. Poor corporate structure
3. Poor banking structure
4. The dubious state of the foreign trade balance
5. The poor state of economic intelligence
The article argues that given the connection between these five issues and the stock market crash, and after establishing that all five indicators are true today, a stock market crash is imminent this year.
What does this all mean for the Philippine stock market and your stock investments? Our economy, for good or bad, is still heavily reliant on the US economy. Looking at the comparison between the PSEi (PCOMP, yellow) and the S&P 500 Index (SPX, green) in the past three years in the image below, we can very clearly see how closely the former tracks the latter; also note how changes in the PSEi tend to be more pronounced (greater increases and decreases) than changes in the S&P 500. What this means is that if you believe all the arguments presented by the two articles and you’re convinced that the US stock market will crash this year, then you should sell all of your local stocks because what will happen to the Philippine stock market will be much worse.
Image from Bloomberg.com
Monday, May 17, 2010
4 Things You Need to Know About Investment Risk
PERSONAL FINANCE 101
Many of us make investment decisions solely based on potential future returns; in playing the stock market game, for example, we are lured by the promise of generous investment rewards while ignoring the very real possibility of incurring losses. Investment risk is a factor or criteria that we often take for granted but should always consider in making any financial decision. Here are some important things that you need to know about investment risk.
1. Investment risk is the possibility of losing money in an investment. For some of us, it's not even the possibility of losing money, but rather the chance that we'll earn less than what we originally expected. While a finance person may point out that there are many other kinds of risk out there, the risk of a loss or a lower return is at the heart of everything and is the thing that all investors are most concerned about. Risk defined this way has two components: the possibility of a loss, measured with probability; and the extent of the possible loss, as measured by expected investment losses. Virtually all investment vehicles bear this kind of risk to a certain degree: from “risk-free” Treasury securities (which are not really risk free in the true sense of the phrase) to highly risky derivative instruments (what Warrant Buffet likes to refer to as “financial weapons of mass destruction”) like the dreaded CDOs or collateralized debt obligations, which were at the center of the financial crisis two years ago. Knowing this reality will lead to better informed (although not always correct) financial decisions.
2. Risk as the volatility of investment returns. A traditional way of measuring investment risk is by looking at the volatility of a stock’s (or any investment’s) historical returns. If you remember your college statistics, then you should know that the most widely used measure of data volatility is the standard deviation: the higher this quantity is, the more dispersed (or volatile) the underlying data or measurements are. The math part may not really be very important to most investors (although if you’re really serious about making informed financial decisions you should force yourself to (re)learn this and other statistical topics) since simply taking a look at stock price charts will clearly show how volatile stocks are relative to each other. In the image below, judging from how prices have gone up and down this past year, we see that the stock price of Geograce Resources Philippines Inc. (GEO) is significantly more volatile than that of Far Eastern University (FEU) and even than the PSEi (PCOMP) benchmark. The general rule is that the more volatile historical stock prices are (the sharper and more frequent price fluctuations are), the riskier the stock is and the higher the probability that you’ll lose money if you invest in the stock.
3. The tradeoff between risk and return. Frequent and steep spikes in stock prices are what some speculative investors actually look for; intuitively, the higher the probability of a loss (as indicated by these price spikes), the higher the chance of making a killing with the stock. In finance, it is a widely held and accepted belief that riskier investments also lead to higher potential gains, or simply “the higher the risk, the higher the return.” This financial truism may be clearly seen with evidence from the 100+ year history of financial markets in the US. In the image below, we see that in the past 100 or so years, risky common stock investments have significantly outperformed corporate bonds and risk-free Treasury bills in the same period. This is what “we” mean when we say that in the long run (which does not mean five years), riskier investments will result in greater returns than safer investments.
4. Diversify to minimize investment risk. Diversification is an investment strategy that is designed to reduce risk by spreading capital across many investments. Diversification works by investing in instruments that behave differently and so are affected by extraneous factors differently, so that when an event adversely affects one industry or firm, your investments in other unaffected (or less affected) industries or firms will cushion the the loss. An oft-quoted (and much maligned) analogy used to describe diversification goes like: “Do not put all your eggs in only one basket.” We all know what’s bound to happen to your eggs when that basket falls, don’t we?
So how do ordinary people like us achieve diversification? The science of determining an optimal portfolio which gives us the best return at a given level of risk (or the biggest bang for our buck, if you prefer) from a universe of available investments involves applying the fun and wonderful concepts of operations research, particularly linear programming.
Fortunately, diversified portfolio funds (things that we keep on talking about here and here) are very readily and inexpensively available to us, so we really don’t have to do any hard math to achieve diversification; knowing how it works and how it can be in our best interest to diversify our holdings is a good start in managing the risk of our investments.
Knowing what investment risk is and how it affects our investment choices is a critical part of making informed investment decisions. Understanding the tradeoff that exists between risk and return will help us choose investments that will lead to the biggest bang for our investment buck.
Many of us make investment decisions solely based on potential future returns; in playing the stock market game, for example, we are lured by the promise of generous investment rewards while ignoring the very real possibility of incurring losses. Investment risk is a factor or criteria that we often take for granted but should always consider in making any financial decision. Here are some important things that you need to know about investment risk.
1. Investment risk is the possibility of losing money in an investment. For some of us, it's not even the possibility of losing money, but rather the chance that we'll earn less than what we originally expected. While a finance person may point out that there are many other kinds of risk out there, the risk of a loss or a lower return is at the heart of everything and is the thing that all investors are most concerned about. Risk defined this way has two components: the possibility of a loss, measured with probability; and the extent of the possible loss, as measured by expected investment losses. Virtually all investment vehicles bear this kind of risk to a certain degree: from “risk-free” Treasury securities (which are not really risk free in the true sense of the phrase) to highly risky derivative instruments (what Warrant Buffet likes to refer to as “financial weapons of mass destruction”) like the dreaded CDOs or collateralized debt obligations, which were at the center of the financial crisis two years ago. Knowing this reality will lead to better informed (although not always correct) financial decisions.
2. Risk as the volatility of investment returns. A traditional way of measuring investment risk is by looking at the volatility of a stock’s (or any investment’s) historical returns. If you remember your college statistics, then you should know that the most widely used measure of data volatility is the standard deviation: the higher this quantity is, the more dispersed (or volatile) the underlying data or measurements are. The math part may not really be very important to most investors (although if you’re really serious about making informed financial decisions you should force yourself to (re)learn this and other statistical topics) since simply taking a look at stock price charts will clearly show how volatile stocks are relative to each other. In the image below, judging from how prices have gone up and down this past year, we see that the stock price of Geograce Resources Philippines Inc. (GEO) is significantly more volatile than that of Far Eastern University (FEU) and even than the PSEi (PCOMP) benchmark. The general rule is that the more volatile historical stock prices are (the sharper and more frequent price fluctuations are), the riskier the stock is and the higher the probability that you’ll lose money if you invest in the stock.
Image from Bloomberg.com
3. The tradeoff between risk and return. Frequent and steep spikes in stock prices are what some speculative investors actually look for; intuitively, the higher the probability of a loss (as indicated by these price spikes), the higher the chance of making a killing with the stock. In finance, it is a widely held and accepted belief that riskier investments also lead to higher potential gains, or simply “the higher the risk, the higher the return.” This financial truism may be clearly seen with evidence from the 100+ year history of financial markets in the US. In the image below, we see that in the past 100 or so years, risky common stock investments have significantly outperformed corporate bonds and risk-free Treasury bills in the same period. This is what “we” mean when we say that in the long run (which does not mean five years), riskier investments will result in greater returns than safer investments.
Image from Fundamentals of Financial Management, 4th Ed.
So how do ordinary people like us achieve diversification? The science of determining an optimal portfolio which gives us the best return at a given level of risk (or the biggest bang for our buck, if you prefer) from a universe of available investments involves applying the fun and wonderful concepts of operations research, particularly linear programming.
Fortunately, diversified portfolio funds (things that we keep on talking about here and here) are very readily and inexpensively available to us, so we really don’t have to do any hard math to achieve diversification; knowing how it works and how it can be in our best interest to diversify our holdings is a good start in managing the risk of our investments.
Knowing what investment risk is and how it affects our investment choices is a critical part of making informed investment decisions. Understanding the tradeoff that exists between risk and return will help us choose investments that will lead to the biggest bang for our investment buck.
Monday, May 10, 2010
Jollibee Makes Two Key Acquisitions
IN THE NEWS from Inquirer.net
Amid slowing local growth, fast food giant Jollibee Foods Corporation (JFC) undertakes two key acquisitions to increase its presence in the Chinese market and diversify its local offerings.
To bolster its foothold in the mainland China market, Jollibee has recently entered a deal with Guangxi Zong Kai Food and Beverage Investment Co. Ltd. (GZK) for the eventual joint ownership of San Pin Wang, a chain of 34 restaurants selling low-priced beef noodles. A RMB 30 million ($4.39 million) investment gives JFC a 55% stake in the fast food chain, which has outlets in Nanning and Liuzhou, Guang Xi Zhuang Minority Autonomous Region in the People’s Republic of China. The joint venture is expected to be fully operational by January 2011.
The acquisition also provides another vehicle for the company’s growth in the fast-growing Chinese market, in addition to Yonghe King and Hong Zhuang, Chinese fast food brands that Jollibee already currently owns and operates.
In a separate report, JFC has recently acquired the master franchise for a Korean specialty coffee and Italian ice cream chain. Caffe Ti-Amo (which literally means “Coffee I Love You”) franchise, owned by Caffe Ti-Amo Korea Co. Ltd., was established in Korea in 2006 and currently operates 269 stores in the Republic of Korea.
The joint venture, which will have an initial capital of P10 million, would develop and build a business around gelato and coffee in the Philippines, with the first “Ti-Amo” store to open in The Annex at SM North Edsa.
Analysts said JFC’s entry into this new format was meant to diversify its brand offering and capture opportunities from a growing demand for gourmet coffee shops popularized by brands like Starbucks and The Coffee Bean and Tea Leaf. However, this new brand is seen offering a more affordable alternative to these foreign as well as homegrown cafe brands.
Amid slowing local growth, fast food giant Jollibee Foods Corporation (JFC) undertakes two key acquisitions to increase its presence in the Chinese market and diversify its local offerings.
To bolster its foothold in the mainland China market, Jollibee has recently entered a deal with Guangxi Zong Kai Food and Beverage Investment Co. Ltd. (GZK) for the eventual joint ownership of San Pin Wang, a chain of 34 restaurants selling low-priced beef noodles. A RMB 30 million ($4.39 million) investment gives JFC a 55% stake in the fast food chain, which has outlets in Nanning and Liuzhou, Guang Xi Zhuang Minority Autonomous Region in the People’s Republic of China. The joint venture is expected to be fully operational by January 2011.
The acquisition also provides another vehicle for the company’s growth in the fast-growing Chinese market, in addition to Yonghe King and Hong Zhuang, Chinese fast food brands that Jollibee already currently owns and operates.
In a separate report, JFC has recently acquired the master franchise for a Korean specialty coffee and Italian ice cream chain. Caffe Ti-Amo (which literally means “Coffee I Love You”) franchise, owned by Caffe Ti-Amo Korea Co. Ltd., was established in Korea in 2006 and currently operates 269 stores in the Republic of Korea.
The joint venture, which will have an initial capital of P10 million, would develop and build a business around gelato and coffee in the Philippines, with the first “Ti-Amo” store to open in The Annex at SM North Edsa.
Analysts said JFC’s entry into this new format was meant to diversify its brand offering and capture opportunities from a growing demand for gourmet coffee shops popularized by brands like Starbucks and The Coffee Bean and Tea Leaf. However, this new brand is seen offering a more affordable alternative to these foreign as well as homegrown cafe brands.
Wednesday, May 5, 2010
6 Investment Alternatives That Are Within Your Budget (Part 2)
DEAR INVESTOR JUAN
4. Diversified portfolio funds
Diversification works by investing in different kinds of securities in various industries with the goal of reducing or minimizing risk. By “putting your eggs in more than one basket,” you avoid complete and utter ruin when an event adversely affects a specific asset class or industry. And the easiest and most cost-effective way of achieving diversification is by investing in diversified funds like unit investment trust funds and mutual funds.
I’ve already exhaustively discussed unit investment trust funds in two previous posts (here and here). UITFs and mutual funds are basically the same thing, although the organization (a UITF is an investment provided by banks, while a mutual fund is an independent corporate entity regulated by the SEC) and participation (UITF participation involves buying shares of the fund, while mutual fund participation involves buying shares of stock of the mutual fund) are different.
All types of UITFs and mutual funds are basically already diversified, although some are more diversified than others. Money market funds and equity funds are invested in different individual securities in the same asset class, so they are diversified within an asset class (marketable securities or stocks) but not across asset classes. “Balanced” UITFs or mutual funds typically consist of 50% bonds and 50% stocks, which means the funds cover a broader scope of assets and are therefore better diversified. But for these funds, even if diversification is able to reduce risk considerably, there’s still a very real chance of principal loss because of the significant exposure to highly volatile stocks.
5. Stocks
I’ve already written a primer about stock investing and there are several posts about stock investing strategies (here, here, and here). If you want an already diversified portfolio of stocks, you can always just invest in equity UITFs or mutual funds; some investors, though, find the thrill and challenge of investing in individual stocks more appealing. Your 100,000 is more than enough to let you invest in up to 20 stocks, so you can still achieve diversification if you want to do it on your own.
6. Business Franchise
Franchising provides investors with access to “turnkey” small businesses. There are two important roles in franchise transactions: the franchisor is the owner and operator of the business that is being franchised; you, the investor, are the franchisee who will pay for the right to operate the business and use brands and trademarks and other things related to the enterprise.
Why do you even have to invest in a franchise (and spend more money) when you can do it on your own? Generally, investing in a franchise is more convenient and less risky than starting from scratch and putting up a similar business on your own; ideally, the business should already have an established market and strong brand equity before the franchisor offers the franchise to outside investors.
But like other investments, franchises are no sure win: the success of the venture also highly depends on factors like your management skills, the strength and behavior of the market in your chosen location, and the soundness of the business model of your franchise. And unlike the other investment vehicles we’ve discussed earlier, which are more or less passive in nature, running a franchise business will eat up a significant portion of your time. But for the additional risk and hassle, the profit potential is also significantly higher.
For 100,000 pesos, you can buy a modest food stall or water refilling station franchise. Just make sure that the business plan of the franchisor is solid and that the business model makes sense.
So there you have it Alex, six investment alternatives that are within your budget. So where should you put your hard earned money?
As in all things, it depends. It depends on your personal peculiarities, tastes, and circumstances. In a future post, I’ll talk about these factors and considerations in greater detail. For now, knowing what’s out there will have to do.
Click here for Part 1.
4. Diversified portfolio funds
Diversification works by investing in different kinds of securities in various industries with the goal of reducing or minimizing risk. By “putting your eggs in more than one basket,” you avoid complete and utter ruin when an event adversely affects a specific asset class or industry. And the easiest and most cost-effective way of achieving diversification is by investing in diversified funds like unit investment trust funds and mutual funds.
I’ve already exhaustively discussed unit investment trust funds in two previous posts (here and here). UITFs and mutual funds are basically the same thing, although the organization (a UITF is an investment provided by banks, while a mutual fund is an independent corporate entity regulated by the SEC) and participation (UITF participation involves buying shares of the fund, while mutual fund participation involves buying shares of stock of the mutual fund) are different.
All types of UITFs and mutual funds are basically already diversified, although some are more diversified than others. Money market funds and equity funds are invested in different individual securities in the same asset class, so they are diversified within an asset class (marketable securities or stocks) but not across asset classes. “Balanced” UITFs or mutual funds typically consist of 50% bonds and 50% stocks, which means the funds cover a broader scope of assets and are therefore better diversified. But for these funds, even if diversification is able to reduce risk considerably, there’s still a very real chance of principal loss because of the significant exposure to highly volatile stocks.
5. Stocks
I’ve already written a primer about stock investing and there are several posts about stock investing strategies (here, here, and here). If you want an already diversified portfolio of stocks, you can always just invest in equity UITFs or mutual funds; some investors, though, find the thrill and challenge of investing in individual stocks more appealing. Your 100,000 is more than enough to let you invest in up to 20 stocks, so you can still achieve diversification if you want to do it on your own.
6. Business Franchise
Franchising provides investors with access to “turnkey” small businesses. There are two important roles in franchise transactions: the franchisor is the owner and operator of the business that is being franchised; you, the investor, are the franchisee who will pay for the right to operate the business and use brands and trademarks and other things related to the enterprise.
Why do you even have to invest in a franchise (and spend more money) when you can do it on your own? Generally, investing in a franchise is more convenient and less risky than starting from scratch and putting up a similar business on your own; ideally, the business should already have an established market and strong brand equity before the franchisor offers the franchise to outside investors.
But like other investments, franchises are no sure win: the success of the venture also highly depends on factors like your management skills, the strength and behavior of the market in your chosen location, and the soundness of the business model of your franchise. And unlike the other investment vehicles we’ve discussed earlier, which are more or less passive in nature, running a franchise business will eat up a significant portion of your time. But for the additional risk and hassle, the profit potential is also significantly higher.
For 100,000 pesos, you can buy a modest food stall or water refilling station franchise. Just make sure that the business plan of the franchisor is solid and that the business model makes sense.
So there you have it Alex, six investment alternatives that are within your budget. So where should you put your hard earned money?
As in all things, it depends. It depends on your personal peculiarities, tastes, and circumstances. In a future post, I’ll talk about these factors and considerations in greater detail. For now, knowing what’s out there will have to do.
Click here for Part 1.
Monday, May 3, 2010
6 Investment Alternatives That Are Within Your Budget (Part 1)
Dear Investor Juan
Dear Investor Juan,
Dear Investor Juan,
Hi there, I’ve been reading your blog for quite some time and I find it very interesting. I just want to ask, if you only have about 100,000 pesos, where would you invest it?
Alex
Hi Alex!
Regardless of the amount that you’re planning to invest, the best investment vehicle for you depends on factors like your investment objective (are you looking for long-run growth or periodic income?), risk appetite (are you risk averse or risk seeking?), and investment horizon (are you investing in the short or long term?). I will discuss these factors in greater detail in a future post, but for now, I’ll just give you a list of some of the most readily available investment instruments which generally yield better than bank savings deposits and are within your budget. Items in the list are arranged from lowest to highest risk.
1. Treasury securities
Treasury or government securities are debt instruments issued by the government to the investing public; because there’s zero chance that the government will default, they are also referred to as risk-free securities. The three main flavors of treasury securities are Treasury bills (T-bills), Treasury bonds and Retail Treasury bonds; these types generally differ in terms of tenor or investment duration (from 91 days for T-bills to 25 years for Treasury bonds), annual interest (from 4% for T-bills and up to around 10% for Treasury bonds), and denomination (from 5,000 pesos for Retail Treasuries to 500,000 for both T-bills and Treasury bonds). Most banks are authorized by the government regulators to issue and trade the securities; for example, Banco de Oro offers all flavors within your budget of 100,000 (you can just visit the company’s website for details).
2. Bank time deposits
Bank time deposits provide better yields than savings deposits but not by much. For 100,000 pesos, annual interest ranges from 2% to 2.7% for most banks, depending on the tenor (7 days to one year). Personally, it does not make a lot of sense to invest in time deposits, especially since all of us have access to less risky Treasury securities that offer better returns.
3. Corporate bonds
Corporate bonds are long-term debt issued by corporations and can be traded publicly. Bondholders receive periodic coupon payments (semi-annually or annually, based on a typically fixed coupon interest rate) and the original investment or par value at the bond’s maturity date (usually 7 years or more from the date of issue). Corporate bonds are considered riskier than government securities since there’s always a chance that the issuing corporation will default on the debt, but at the same time bonds are less risky than stocks since the issuing company is obliged to pay bond interest at the risk of incurring heavy penalty charges when it defaults. Local corporate bond issues are underwritten (facilitated) by most local banks and are sometimes available at affordable denominations (as low as 10,000 pesos). Coupon rates range anywhere from 7% to 10% per year, depending on the credit rating of the issuing company and interest rate levels at the time of the issue, among other things.
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