Citibank Charge Slips Can Now Be Used as Cash (Almost!)

Image from Citibank Philippines

All of us have had our fair share of movies subsidized by 1,500-peso charge slips with Citibank's "Free Movie Ticket" promo (we all know it ain't completely free), which has been going on since last year. While this promo has been a boon to movie lovers like you and I, the very limited life of the "Free Movie Tickets" (one month) has resulted in several wasted opportunities for some of us. Also, the reward loses some, if not most, of its value when we are "forced" to use it to watch a movie that we would not otherwise watch had it not been for the ticket subsidy.

So imagine my pleasant surprise when I got this text message from Citibank a few days ago:

"Your rewards, your choice! Get P100 off at Mercury Drugstore, Rustans Dept Store & Supermarket, Shell, Shopwise, SSI stores or get a P100 movie pass. Submit valid single-receipt charge slip worth at least P1,500 at partner merchants to redeem."

Wow. With this promo, we don't have to force ourselves to watch shitty movies like Eclipse and The Last Airbender anymore just to avail of the reward.

I took a quick look at the website of Citibank Philippines to get the promo details, and this is what I got:

"Have the freedom to choose how you want to be rewarded.

Just spend at least P1,500 on your Citi Card and exchange your charge slip for a movie pass worth P100 at partner cinemas or P100 off at participating Shell stations, Rustan's Supermarkets, Shopwise, Mercury Drug branches, Rustan's Department Stores or at Stores Specialists, Inc. (SSI) stores. You may exchange up to 2 charge slips per day."

Now that we can use our credit card charge slips for more practical items like groceries, gas, and medicine, the true value of the reward moves closer to its monetary equivalent. In other words, the reward now practically becomes an outright 6.67% discount on purchases; well, that is if you make sure your credit card purchases are in denominations of 1,500 pesos. I bought something from Rustan's department store earlier for 5,000 pesos and the cashier lady refused to split the bill into several charge slips. I was able to do it in Landmark Trinoma though. :)

Kudos to Citibank for this consumer-friendly reward promotion.

By the way, I'm not in any way related to Citibank. I'm just an ordinary credit card user trying to get the most of what the system allows.

See the promo terms and conditions here. Unfortunately, it only runs up to October 31, 2010. But I'm sure those fellows will extend this thing, if they know what's good for them (and us!).

10 Things You Need to Know About Procrastination

IN THE NEWS from Psychology Today

Image from The Doghouse Diaries

How many times have we seen ourselves stare at the computer monitor, going over Google Reader feeds and Digg posts, taking care of our Farmville farm or simply going over our Facebook news feed, spending hours on end to ultimately accomplish nothing. Procrastination is unproductive action or simple inaction; it is deferring something that needs to be done for other inconsequential things. It is is the single biggest reason why people fail in their careers and in life: it's why people get dumped, get demoted, don't get a raise, don't get promoted, get fired, file for separation or divorce, grow old alone, and die a miserable death. It's like a cancer that slowly gnaws at our productivity, and eventually our potential for financial success. Here are a few important things that you need to know about procrastination before it eats you alive...

1. Twenty percent of people identify themselves as chronic procrastinators. For them procrastination is a lifestyle, albeit a maladaptive one. And it cuts across all domains of their life. They don't pay bills on time. They miss opportunities for buying tickets to concerts. They don't cash gift certificates or checks. They file income tax returns late. They leave their Christmas shopping until Christmas eve.

2. It's not trivial, although most people don't take it seriously as a problem. It represents a profound problem of self-regulation.

3. Procrastination is not a problem of time management or of planning. Procrastinators are not different in their ability to estimate time, although they are more optimistic than others.

4. Procrastinators are made not born. Procrastination is learned in the family milieu, but not directly. It is one response to an authoritarian parenting style. Having a harsh, controlling father keeps children from developing the ability to regulate themselves, from internalizing their own intentions and then learning to act on them. Procrastination can even be a form of rebellion, one of the few forms available under such circumstances. What's more, under those household conditions, procrastinators turn more to friends than to parents for support, and their friends may reinforce procrastination because they tend to be tolerant of their excuses.

5. Procrastination predicts higher levels of consumption of alcohol among those people who drink. Procrastinators drink more than they intend to—a manifestation of generalized problems in self-regulation. That is over and above the effect of avoidant coping styles that underlie procrastination and lead to disengagement via substance abuse.

6. Procrastinators tell lies to themselves. Such as, "I'll feel more like doing this tomorrow." Or "I work best under pressure." But in fact they do not get the urge the next day or work best under pressure. In addition, they protect their sense of self by saying "this isn't important." Another big lie procrastinators indulge is that time pressure makes them more creative. Unfortunately they do not turn out to be more creative; they only feel that way. They squander their resources.

7. Procrastinators actively look for distractions, particularly ones that don't take a lot of commitment on their part. Checking e-mail is almost perfect for this purpose. They distract themselves as a way of regulating their emotions such as fear of failure.

8. There's more than one flavor of procrastination. People procrastinate for different reasons. Psychologists identify three basic types of procrastinators:

• Arousal types, or thrill-seekers, who wait to the last minute for the euphoric rush.
• Avoiders, who may be avoiding fear of failure or even fear of success, but in either case are very concerned with what others think of them; they would rather have others think they lack effort than ability.
• Decisional procrastinators, who cannot make a decision. Not making a decision absolves procrastinators of responsibility for the outcome of events.

9. There are big costs to procrastination. Health is one. Just over the course of a single academic term, procrastinating college students had such evidence of compromised immune systems as more colds and flu, more gastrointestinal problems. And they had insomnia. In addition, procrastination has a high cost to others as well as oneself; it shifts the burden of responsibilities onto others, who become resentful. Procrastination destroys teamwork in theworkplace and private relationships.

10. Procrastinators can change their behavior—but doing so consumes a lot of psychic energy. And it doesn't necessarily mean one feels transformed internally. It can be done with highly structured cognitive behavioral therapy.

PSEi: Quo Vadis?

Okay, so here's what I have been constantly talking about this past month. No, it does not involve a newfangled way of using technical analysis, or any kind of investment analysis tool for that matter. What it is is an observation of how the local stock market, as measured by the PSEi, has been behaving these past few months, and how this observation, coupled with reasoning, a few suppositions, and a couple of guesses, leads to some sort of an investment strategy.

Image from Bloomberg.com

These colored, squiggly lines are the line graphs of four stock indices in the past six months. These four indices are:

• Philippine Stock Exchange Index or PSEi (PCOMP:IND) - YELLOW
• S&P 500 Index for the New York Stock Exchange (SPX:IND) - GREEN
• Hang Seng Index for the Hong Kong Stock Exchange (HSI:IND) - ORANGE
• FTSE 100 Index for the London Stock Exchange (UKX:IND) - RED

The vertical axis measures the percent change in the indices, which can also be interpreted as the percentage return of an investment made in these indices six months ago.

Two things you might notice from the graph at first glance:

1. Investing in the S&P 500, Hang Seng Index, and FTSE 100 indices six months ago would have left you a few percentage points poorer, while an investment in the PSEi would have resulted in a 13% gain in the same time frame.
2. Up until early May, the four indices have been generally moving in the same direction.

This divergence in trend of the PSEi is odd because the Philippine economy has traditionally been highly coupled with or dependent on the US economy: local imports continue to be heavily dependent on US demand, and the general economy on US direct investments and other forms of capital inflow. This significant, albeit short term, departure from long-term trends may mean any or all of the following things:

1. The beginning of the divergence almost perfectly coincides with the 2010 presidential elections, which suggests that it has a lot to do with the confidence of the nation and the rest of the world in the new Aquino government.
2. The Philippine economy is starting to have stronger economic fundamentals.
3. The Philippine economy is starting to depend less on the US and other developed economies.
4. Foreign investors are fleeing developed markets and heading towards more underdeveloped markets like ours.

I think most of us would agree with the veracity of the above reasons, to varying degrees. But it does not mean the trend will continue and we should invest in the local stock market now.

Based on several accounts, the worst is far from over for the US stock market: many economists and analysts still believe that we have not seen rock bottom yet, and that the US economy still has not fully recovered from the 2008 financial crisis. So, if we assume that the US economy will continue its downward spiral, does it make sense to believe that the local bourse will continue its current upward trend as well?

Here is where my suppositions and conjectures enter the picture. At the heart of it, we all know that we're still not completely independent of the US economy and its inputs to ours; this means the moment US stock markets enter deep bear territory, the local stock market is sure to follow. Also, deep inside we know that local stock prices cannot indefinitely continue to pursue its rebellious upward course, farther and farther away from US stocks which are going in the opposite direction. Finally, while I share the same confidence and optimism most of our countrymen feel about this new government, I'm still not convinced that it will be able to successfully shake things up in a short period of time. According to this article, while it is generally acknowledged that the new administration will not drive significant reforms and policy direction, the removal of political uncertainty has become enough reason to boost the performance of the stock market. Which means this run is driven less by fundamentals and more by the irrational exuberance of investors. Which means what we have here is just another bubble that's bound to burst in our faces any time now.

I'm not saying the PSEi will stop rising, far from it. In fact, because of articles like this, I'm betting that investors will become even more exuberant and perhaps drive the PSEi to its pre-crisis high of 3,800+. What I'm saying is that once it reaches this mark, it's not going to go anywhere but down. So be ready to sell your shares then. Of course, it could always turn out that I'll lose my bet and eat my words.

But seriously, be very very mindful of what's happening in the US: no matter what other people say, no matter how confident investors around you seem, we simply cannot completely isolate ourselves from what's happening down there. Just please remember that.

Technical Analysis (Part 2)

Image from Zazzle.co.nz

In previous posts, we've seen how I've attacked technical analysis by citing empirical evidence that debunk some of its underlying assumptions or by relying on what I like to refer to as simple financial common sense. After doing additional research for this post, though, I have realized that I may have focused too much on the weaknesses of the method and failed to highlight some of its merits. Again, I hope to remedy that lapse with this post.

Strengths

1. Technical analysis does not rely on accounting information.

Unlike fundamental analysis, technical analysis exclusively uses historical market prices and trading volumes in making investment decisions and abstracts away from accounting information from financial statements. According to Generally Accepted Accounting Principles (GAAP), firms enjoy a certain degree of freedom in choosing from among several available methods in measuring and reporting important financial variables like earnings, expenses, assets and liabilities; of course these firms can (and do) always choose the approach that shows the best financial results on paper. This flexibility in interpreting and applying accounting rules and principles can be (and is) used by managers to mask the weak financial status of their firms, as we've seen in the cases of Enron and WorldCom this past decade. In the Philippines, it is common practice for firms to have different sets of financial statements for different audiences, usually one for the SEC, one for the BIR, and one for internal decision making. This lack of transparency and consistency in financial reporting thus makes decisions that are heavily based on accounting information doubtful, at best.

2. Technical analysis considers intangible and nonquantifiable factors that don't appear in financial statements.

Another disadvantage of using financial statements in making investment decisions is that these documents rarely reflect the effects of subjective factors that are difficult to quantify, like manpower skill, management expertise, and brand equity, among others. According to technical analysis, asset prices continuously reflect how buyers and sellers view the firm in terms of all possible sources of information; thus, using historical prices in forecasting future stock movements would tend to be more reliable and complete than using accounting data.

3. Fundamental analysis may be able to tell you "what to buy", but it cannot tell you "when to buy."

Fundamental analysis allows investors to identify assets that are underpriced, or those whose intrinsic worth is greater than the price determined by supply and demand. Unfortunately, it ends here, since fundamental analysis cannot say when the best time to buy these underpriced assets is, or when market prices will eventually catch up with intrinsic value.

Conversely, fundamental analysis goes beyond coming up with buy or sell recommendations since it is supposed to able to identify the exact moment when long run prices will change, and thus provide investors with an optimal timing recommendation.

Weaknesses

Most of the challenges to technical analysis in literature comes from the efficient market hypothesis (EMH). But since I firmly believe that EMH is just another by-product of the now-defunct school of rational-investor economics (here I go again with my bold and audacious statements), I'll veer away from these arguments and look at more pragmatic points from other sources.

1. Technical analysis is limited to assets that are actively traded in public markets.

Unlisted private firms and the underdeveloped real estate and bond markets in the country would not be able to provide real time prices that technical analysis needs. This is where fundamental analysis comes in, since the concepts and tools used by this approach (i.e. free cash flow projections, time value of money, the cost of capital, etc.) may be applied to to any kind of asset.

2. Technical analysis involves several concepts and rules, some of which contradict each other, that may be interpreted differently by different analysts.

That's why two technicians looking at the same data set may come up with two completely different conclusions. Go figure!

3. Empirical evidence from recent studies show that active investment strategies like fundamental and technical analysis don't work.

Or at least, they are not conclusively or consistently better than passive investment strategies.

Yeah, yeah, you'll tell me about this person you know who knows someone who knows someone who was able to make a killing by picking stocks. You know what, even if this person is able to consistently beat the market index, net of all transaction fees and taxes, for, say, thirty consecutive years using any stock picking method, it's still no evidence that the market can be consistently beaten by active fund management. This is what that write-up about lucky fund managers tell us; it's what that S&P study about past performance shows.

Wait, these arguments sound eerily like they come from the school of EMH... don't they? While we commonly associate EMH with passive fund management and behavioral finance and irrational decision making with active fund management, these connections are not written in stone. While empirical evidence shows that active investment management is not conclusively superior to passive investing, it does not necessarily mean that markets are efficient and investors are rational.

The Verdict

So is technical analysis better than fundamental analysis, or is it the other way around? In my opinion, we cannot really say that one is better than the other, since it usually really depends on the situation, or what kind of asset we are considering to include in our portfolio. In most cases, we shouldn't even be choosing between the two since many active fund managers choose to apply some sort of combination of these two approaches. Still, to me, making investment decisions based on historical prices alone just sounds soooo wrong. Investing in stocks is really just buying a piece of a business, right? Doesn't it make sense to know other things about the business you're buying aside from its price?

One very important thing that I learned from all this talk (and all the reading I've done) is that technical analysis is not completely worthless as some irresponsible personal finance blog facilitators contend. I completely agree that financial statements, especially in developing economies like the Philippines and particularly for micro, small, and medium enterprises, are ultimately unreliable. I've always believed that most investors are far from being rational, just as the market is far from being efficient, and that leaves some room for those who know what they're doing to make a bit more money than passive index funds. I also agree with Martha that past performance should have some bearing in making investment decisions, despite the results of that recent study. In my next post, I'll even try to use some of these technical analysis concepts to figure out and try to explain what's going on in the local stock market right now and why I think stocks are currently overpriced.

Let me end by sharing this little nugget of wisdom from Warren Buffet about technical analysis:

"I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer."

Tell me, how the fuck does one argue against that?


Click here for Part 1.

Technical Analysis (Part 1)

A Standard Setup of Technical Analysts:

The PSEi 6-Month OHLC Chart with Bollinger Bands and Volume

Image from Bloomberg.com

Back in April, our good friend Ange talked about a well known investment approach called fundamental analysis, which involves comparing a company's true or intrinsic worth to its current market value and making the appropriate investment decision based on this comparison. The estimate of the company's intrinsic value comes from an analysis of the firm's fundamentals, reflected by key financial measures like profitability and operational efficiency, and the economy and industry within which the firm operates.

In contrast to fundamental analysis, technical analysis involves the use of historical market data to predict future prices, which leads to making buy and sell decisions at the appropriate time. Unlike fundamental analysis, technical analysis exclusively uses direct market information like past price and volume trends and shies away from macroeconomic, industry, and firm-specific variables.

Some of you may have witnessed the eternal debate that has been going on between Ange and I all across this blog, with her and active investing on one side, and me and passive investing on the other. In these discussions, I have emphasized my skepticism about technical analysis, based on both traditional and recent findings in the field. But as I was gathering materials in preparation for this post, I have discovered that I might have irresponsibly made some premature conclusions about technical analysis, a lapse which I hope to redress in this post.

Underlying Assumptions

Technical analysis is founded on these core assumptions:

1. The market value of any good or service is determined solely by the interaction of supply and demand.

2. Supply and demand are governed by numerous rational and irrational factors, including economic variables and opinions, moods, and guesses of investors and other market participants. The market weighs all these factors continually and automatically.

3. Disregarding minor fluctuations, the prices for individual securities and the overall value of the market tend to move in trends, which persist for appreciable lengths of time.

4. Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts, no matter why they occur, can be detected sooner or later in the action of the market itself.

The first two assumptions are actually consistent with fundamental analysis, which also uses the market-driven value of an asset like common stock in making investment decisions. And since the market price of any asset reflects both rational and irrational factors, it's natural to assume that this value and the asset's theoretical, "rational" intrinsic value should diverge at some point.

The next two assumptions imply that past price movements tend to repeat in the future, which is exactly the opposite of what this recent finding of Standard and Poor's suggests. This belief is partly based on the idea that new information about a particular stock does not come to the market instantaneously at one point in time, as what the efficient market hypothesis prescribes, but rather over a period of time. The argument is that information comes from different sources in "chunks" that are released at different times, and that different kinds of investors would have different degrees of access to these pieces of information; it makes sense that institutional investors and market professionals would have better and more timely access to new information than average investors who rely on secondary sources like mass media. This implies that to the technical analyst or technician, price adjustments based on new information would be more gradual than abrupt, and that this lag or delay could be exploited by an appropriately timed investment decision.


Click here for Part 2

5 Richest Persons in the Philippines in 2010

IN THE NEWS from Forbes.com

1. Henry Sy

Key businesses: SM Prime Holdings, SM Investments Corporation, Banco de Oro Universal Bank
Net worth: $5 billion
Age: 85

2. Lucio Tan

Key businesses: Fortune Tobacco, Asia Brewery, Philippine Airlines

Net worth: $2.1 billion

Age: 76

3. John Gokongwei Jr.

Key businesses: JG Summit, Cebu Pacific Air, Sun Cellular

Net worth: $1.5 billion

Age: 83

4. Jaime Zobel de Ayala

Key businesses: Ayala Corporation, Ayala Land, Globe Telecom

Net worth: $1.4 billion

Age: 76

5. Andrew Tan

Key businesses: Alliance Global Group, Resort World
Net worth: $1.2 billion
Age: 58

For the full list of Forbes' 40 Richest Persons in the Philippines, click here.

So when do you think we'll see our names on this list? ;)


Photos from Forbes.com.

"First Country Bank" Part 2: A Deeper Look

DEAR INVESTOR JUAN

If you take another look at website and the offers, the banks tries to reassure its potential customers and build its reputation with two things: that First Country is authorized by the Bangko Sentral ng Pilipinas or BSP and that the 10% annual after-tax yield offer is covered by the Philippine Deposit Insurance Corporation or PDIC. So if you're thinking of investing in the bank's instruments, the next logical thing to do would be to check the veracity of these claims.

A Deeper Look

First, let's try to check if the bank, indeed, is an authorized and registered bank of the BSP. On the BSP's website, you'll find this section where you can look the details of a particular bank. Entering "First Country Bank" on the search field yields this result:

Hmm... interesting. So there's no such thing as "First Country Bank" in the BSP's directory. Let's try another search string, this time just "First Country":

So this time we get a result, but not for "First Country Bank" but for "First Country Rural Bank, Inc." Well, the name difference should not really be an issue, if we assume these two banks are one and the same. After all, it's common practice for small and medium businesses to use a brand name that's slightly different from the name of the entity registered with government agencies. But it is also highly understandable if some people view this inconsistency as some sort of red flag.

But are "First Country Bank" and "First Country Rural Bank, Inc." really one and the same bank? If we compare the details of the "Contact Us" page on First Country's website to the bank details in the BSP search results:

We see that both are in Pasig City and have (more or less) the same address. Some of the telephone numbers are the same, although the email addresses are different. Given all that we've seen so far, I'm betting that "First Country Bank" is indeed the same as "First Country Rural Bank, Inc.", but again with the inconsistencies!

Also, we see another name linked to the bank from the BSP directory, this time the bank's president. A quick search shows us that this president is also the president of a pre-need plan company named First Country Plans, Inc., which coincidentally has the same address as First Country Bank. So are the bank and the pre-need firm related? They share the same president, share the same name... What do you think? And rural banks and pre-need firms? Haven't we all heard this before?

Let's now take a look at the PDIC coverage of First Country's 10% per year deposit. If you check out PDIC's website, the first thing you'll see is this statement:

MAXIMUM DEPOSIT INSURANCE FOR EACH DEPOSITOR: P500,000

Which means if your balance is 1 million pesos and the bank goes under, you'll only get half of your money back. And it does not matter how many accounts you have with a bank, you still only get a maximum of 500,000 per bank. 

Fortunately, as per that ad on First Country's website, the offer is open to deposits worth at least 100,000 pesos. So if you just deposit any amount up to P500,000, you'll be entitled to both the 10% yield and be PDIC coverage at the same time. 

But we have to remember that PDIC coverage does not guarantee that the bank will not run away with your money. If the bank does do something a-la-Legacy, best case is you will be inconvenienced with having to wait to get your money back; worst case is you'll lose your deposit and subsequently suffer a heart attack.

The Verdict

Perhaps the most important thing we can get from the PDIC that can help us decide whether to invest in First Country or not would be this "Bank Deposits Advisory" document on the website, which includes the following reminders:

• The rate of interest paid by banks to deposits and other terms and conditions vary among banks.
• It is best to deposit in a bank offering rates generally comparable with those of other banks.
• The higher the rates, the higher the risk.
• Offers that sound too good to be true may not be true at all.

For debt investments like bank deposits, bonds, and notes, the foremost determinant of investment risk would be the trustworthiness of the borrower. Ask yourself: is the bank capable of paying its financial obligations to you? And even if it is, what's the chance that the bank will fuck you over and run with your money instead, as some of these greedy motherfuckers are wont to do?

So, will I deposit 100,000 pesos in First Country Bank to earn 10% per year tax free for five years? Hell no. I'd rather buy a bond paying 7.5% per year after taxes, at least I'll sleep more soundly. And I don't really care much for the PDIC coverage, not when it takes them up to a year to give the depositors' money back, as Henry pointed out earlier.

I'm not saying First Country is a fraud: it may very well be that the bank's legit and all that. But all the inconsistencies and the red flags, coupled with the nightmarish experience of thousands of depositors with rural banks and pre-need plans these past few years, have made me skeptical and cynical of these kinds of offers and furious at the all the people who permit and support this irresponsible and malicious economic practice.

So, no Henry. I don't think investing in First Country Bank's offer is such a good idea. Personally, I think it's simply too good to be true.

Click here for Part 1: A Closer Look.

"First Country Bank" Part 1: A Closer Look

DEAR INVESTOR JUAN

Dear Investor Juan,

What do you think of the 5 years time deposit, 10% interest tax-free offer of First Country Bank. You can check out their website at www.firstcountryfinancial.com.

Thanks.


Henry

Hi Henry!

Wow, that's a very good offer. It beats all available time deposit rates of all commercial banks, and even yields on similarly-tenored bonds, hands down. At first glance, the offer looks too good to be true; so good, in fact, that it deserves a second, closer look.

A Closer Look

This is the first time I've heard of "First Country Bank," so before we discuss "what I think" of the offer, I have to check out the website first:

Wow. It looks nice, doesn't it? It has a familiar and homey feel to it... something one feels when one looks at a blog site... Maybe, just maybe, that's just exactly what it is!

If you take a look at the upper-right hand corner of the image, you'll see a WordPress search bar, which should be enough evidence that it is a blog. If you want further evidence, take a look at the bottom of the page and you'll see another reference to WordPress (that Ocean Mist theme looks mighty crisp, though ;)).

But if you want unassailable evidence that what we have here is a blog masquerading as a commercial site, try googling "First Country Bank" and the top result you'll see is http://firstcountrybank.wordpress.com/.

Okay, now that we have already established that, so what? It does not necessarily mean that the bank is a fraud, does it? Well, no, of course not. It can mean any one of several things, like maybe the bank's just trying to control its marketing and advertising spending. But whatever the reason, First Country would do well to come up with a more professional-looking website, especially if that website is the bank's primary means of introduction to its potential customers.

On the "About Us" page of the website, we see that the bank's primary thrust is to be "a catalyst in uplifting the lives of the unsung heroes of our country" by providing "relevant and innovative financial services to underserved niche markets at a fair return to [the bank's] shareholders and depositors." Well, that sounds noble, and doable enough. We also see that the bank plans to provide these "fair" returns through microfinancing, or as I understand it, by lending money to individuals or small businesses without collateral.

We also see the bank's board of directors, accomplished individuals, all, with very respectable resumes. Unfortunately, I'm not really familiar with any of them. I tried googling the names, but apart from finding out that some of them have active Facebook accounts, not much else came out of doing that.

So moving on, let's now take a closer look at the offer:

 

So this is what Henry was talking about: 10% per year, 100,000 pesos minimum deposit required, tax-exempt for 5 years, and even covered by PDIC! Which basically means if you deposit 100,000 now, you'll get around 160,000 after only five years! Now that's un-fucking-believable!

And even if you can't afford a five-year investment horizon, the bank has several other alternatives that are almost as attractive:

Again, these rates and terms are.. just... AWESOME.

Unfortunately, there remains this persistent, nagging feeling that things can't be as easy and simple as this; I still believe there's no such thing as a free lunch, which is precisely what this offer is being advertised as. So before you whip out your wallets and start running to Ortigas to open an account (I'm looking at you, Sam), let's delve deeper and try to find out as much as we can about "First Country Bank."

Click here for Part 2: A Deeper Look 

Alternative Investments: A Primer (Part 1)

A GUEST POST by Billy Sy

If you were invested in equities during the “meltdown” of 2007/2008, what could you have done to improve your position? You could have sold everything and moved to bonds or cash, or just stayed in equities and hoped for the best. The first option probably wasn’t all that enticing: bond yields were plummeting at that time, and cash deposit interest rates were also going down as central banks slashed interest rates in a concerted effort to thwart the meltdown. More so, because of the high gas prices, inflation was higher than bonds or cash yields, and equities, well, you know how it went. Looking back, don’t you wish you had more options than you actually had?

Investing takes many forms; we should already be familiar with instruments like cash deposits, bonds, and equities. But in today’s rapidly changing financial world, investing in more complex financial instruments is becoming more and more common, and even necessary, to reduce risk and/or maximize profits. Diversification is still a very good idea, and having more options at your disposal will ultimately benefit you and your wallet in the long run.

This first part of three will introduce you to investment products, ranging from “common” investments to more complex instruments that are readily available to retail investors. Aside from the already familiar equity investments, we will also take a look at Exchange Traded Funds (ETFs), options, forex, contracts of differences, and hedge funds, among others. While this article does not, in any way, presume to be authoritative, at the very least it should pique your interest enough to make you want to read more about these investment alternatives, and perhaps eventually invest. At any rate, I will go ahead and say that past performance is not indicative of future results, and that I do not guarantee any kind of profits by investing in some of the examples I have provided.

Introduction

In more developed and mature markets, alternatives other than the usual cash deposits, bonds, and stocks are available to individual investors. Some instruments, like options, allow you to hedge or reduce your risk by capping your maximum profits while providing “downside” protection. Downside protection means that you are protected, to a certain degree, if the market goes down, but at the expense of capping some of the gains you might have in case it go up. Other instruments allow you to profit while the market is in the red (shorting). These instruments have always been available in mature markets, but unfortunately unavailable here in the Philippines.

There are several reasons why we don’t have these instruments here: lack of liquidity, lack of investors, and fundamentally, lack of a good investing environment and plenty of local economic issues. As such, to be able to access these investment products, you need to convert a portion of your portfolio into another currency like USD or EURO. For the sake of simplicity, I will use USD as my “other currency” for the rest of the article. Once you have your new currency, you can have access to a broader range of investment products that will enable you to profit from any direction the market is going. Take note though that investing in any instrument not denominated in your base currency (that is, the Philippine Peso) is subject to something called currency risk, or the risk that your assets will lose some value because of fluctuations in exchange rate.

I’m interested, so where do I go?

You go to the US, where all the action is. It is home to the New York Stock Exchange (NYSE), and the NASDAQ, two of the biggest exchanges in the world, which boast a combined 6000+ listed stocks. These stocks include common names like Procter & Gamble, small penny stocks, car manufacturers, logistics companies, and even overseas companies like our very own PLDT (which is listed on the NYSE). Prominent companies that have a significant global presence would have naturally diversified revenue streams reflected in their stock prices. Buying FedEx’s stock, for example, provides you with a natural hedge against risk since the company does not rely on its US operations alone, but also on its extensive global network. Many of these “global” companies are listed on American exchanges, some of which provide more income potential through dividends than growth. Of course there are exceptions like Apple, Inc., whose groundbreaking products like the iPhone and the iPad fueled the almost 100% increase in the stock’s price in the last 12 months.

But with thousands of stocks to choose from, which one should you invest in? The answer is really up to you. Some industries are better suited for growth than others, such as Biotechnology and Healthcare. You can look at Yahoo! Finance which offers very good information and up-to-the-minute news about an industry or specific companies. It also provides handy ratios such as earnings per share (EPS) and price-to-earnings ratio (P/E), among others. You can also go to EDGAR Online to get Financial Statements of listed companies.

Another very interesting investment instrument available in the US is the Exchange Traded Fund or ETF. In a mutual fund or UITF, the fund manager pools and invests money into instruments of his or her own choosing. The value of the fund is measured as Net Asset Value (NAV) or Net Asset Value per Unit (NAVPU), and is determined by the value of the underlying assets. The value of ETFs on the other hand, is freely determined by supply and demand forces, just like common stock traded in exchanges like the NYSE or the PSE: you then earn when the price of the ETF rises, and lose when it falls.

ETFs have become hugely popular, and have thus spawned many different kinds and variants. The most popular ETF, the QQQQ (PowerShares QQQ Trust), tracks the NASDAQ 100 List, which consist of the 100 largest and most actively traded companies on the NASDAQ. Since the NASDAQ is tech heavy, this ETF is a good investment if you are looking for long-term growth prospects in the tech industry. Other kinds of ETFs are more “exotic”, like the ones traded by ProShares. Some of their ETFs track gold, oil, or other commodities, sometimes even a basket of commodities. They have ETFs that double the daily return of several indexes, or even double the inverse of those indexes or commodities. Buying into these inverse ETFs is an easy way to short an index, without actually having to select the shares and apply for broker approval on shorting.

Investor Juan frequently suggests buying index funds, which is an excellent idea: index funds are low cost and are diversified among Philippine companies. But how about investing in not just Philippine stocks, but stocks all around the world? iShares is another company specializing in ETFs, and they have the S&P Global 100 Index Fund which tracks the performance of the S&P Global 100 Index, which consists of the world’s 100 highly liquid and globalized companies. Or how about China? If you’ve always wanted to invest in the Chinese stock exchange but didn’t know exactly how, you can buy one of their ETFs that track Chinese stock performance.

To sum it up, ETFs are cheap and usually not-actively-managed funds that can be easily bought by a retail investor. You just need a broker, and there are many to choose from. Look for one that allows “Non Resident Alien” investors. You should also consider going to discount online brokers and not to full-service brokers because of usually lower commissions, and you probably don’t need a broker-assisted trade anyway (do everything online!). You should also compare commissions: some have free trades per month if you fall under a certain category, so be sure to check it out.

You can open accounts at ETrade, TDAmeritrade, Fidelity, Schwab. These companies are members of SIPC (Securities Investor Protection Corporation) which is like the FDIC for your brokerage account. They usually cover $500,000 per account, but most have coverage in excess of $1 million. Take note that they do not cover your account against trading loses. They will only protect your account should your broker go under. Some of these discount brokers are even listed companies so they should be generally safe.


To be continued… (next: short selling, options, forex, etc.) 

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Billy graduated from Ateneo de Manila University’s Management Engineering program in 2008. He's the current operations head of Helix Technologies Inc., a local IT solutions firm, and also the manager of his family's manufacturing business. He built his investment experience from the ground up, doing small investments here and there, although his short stint at AB Capital Securities definitely helped.