The Worst Way to Waste 1,340 Pesos in Two Hours

There's no better way to spend the holidays than to watch a movie your girlfriend whom you have not seen in four months. Right?

Well, that's unless said girlfriend loves horror movies AND it's the last week of the year. In which case, it's highly likely that you'll end up watching something as horrible as Dalaw. And why am I so grossly disappointed by this experience, you might ask? Let me count the ways.

1. Like most modern Filipino horror flicks, Dalaw uses this neat trick of loudly playing a Psycho-ish sound effect every time it wants to make some mundane scene seem scary, over and over and over again
2. What's sadder is that the strategy in #1 seemed to work like a charm for a great majority of movie goers
3. The acting was tacky and uninspired (read: Kris Aquino)
4. The special effects were anything but special
5. Voice dubbing
6. The numerous aspiring movie critics and directors in the audience who kept on making commentaries and figuring out plot twists
7. How my girlfriend became totally miffed when she caught me nodding off a couple of times in the middle of the film

Why 1,340 pesos? 340 pesos for the two movie tickets, and 1,000 pesos for two hours of my life wasted, assuming I'm worth 500 pesos an hour.

On the upside, maybe this is just a sign of a better new year since things couldn't possibly be any worse, could they?

Cheers!

Holiday Mailbag

DEAR INVESTOR JUAN

Dear Investor Juan,

Good day, I've always wanted to invest in foreign stocks, however I don't know how. Then, I discovered dividend reinvestment plans (DRIP) wherein you can invest in stocks that reinvests dividends. I understand foreign stocks offer DRIPs.

Would you know how I can apply for a DRIP account? Hope you can assist me step by step.

I don't have any account overseas.

Thank you for your help.
She


Dear She,

There are two main advantages of the DRIP: one, the company you buy the stock from automatically allocates stock to you so you don't through a broker/middleman and you avoid brokerage fees; two, you get to automatically increase your stock holdings even if you don't have enough cash to meet the minimum required investment amount.

I'm not sure if listed firms in the Philippines offer DRIPs, but the good news is that investments with DRIP-like features are widely available to all investors: equity mutual funds and UITFs automatically reinvest all dividend income, apart from a small cash amount reserved for administrative/management expenses.


***

Dear Investor Juan,

Can you please explain the Retail Treasury Bond portion of this website (http://www.bdo.com.ph/Personal/DepositsInvestments/IAS/GovernmentSecurities.asp) like you would to a 7-year old child. What would it mean to me if I have 1 million pesos to invest? How much will I get how often?

Thanx,
Confused


Dear Confused,

Like we talked about in past posts here and here, Treasury securities (Treasury bills, which are short term, and Treasury bonds, which are long term) are debt offered by the government to the investing public. These investments are considered "risk-free" or safe because there's almost no chance that the government will not be able to pay its loans to its creditors.

Retail Treasury bonds are just plain-vanilla Treasury bonds that are denominated in much more affordable amounts (i.e., 5,000 pesos) compared to the typical minimum buy-in of 100,000 pesos (please see bottom portion of the website you mentioned).

As BDO rarely updates its website, all the rates we see on the page are from issues as far back as 2001, and are thus not indicative of prevailing market rates (if you check the Bureau of the Treasury's website, you'll see that current interest rates are significantly lower). But using the 4-year RTB featured on the website as an example, if you invest 1 million pesos you'll receive 142,500 pesos in interest or coupon payments per year less 20% withholding tax, or 114,000 pesos per year.


***

Dear Investor Juan,

How do we invest in ETFs? Do we have to go to Hong Kong just to do this?

Anonymous


Dear Anonymous,

Unfortunately, now, the answer is yes since ETFs are not yet available in the Philippines. But according to a good source (a fund manager-friend who works in one of the country's top banks), we'll soon see ETFs introduced in the Philippine Stock Exchange, so let's just sit back and wait. :)

The Perfect Gift

It came with 10 centavos and this message from the manufacturer:

“May your purse or wallet never be empty and your heart always full.”

I would have loved it more if it had been full of cash instead; unfortunately for me, my girlfriend is stingier than I am (I love you honey ;)).

But then I remembered: a fat wallet does not necessarily equate to sound financial decision making.

Here’s to good, bountiful times shared among friends and loved ones. Cheers everyone! Happy holidays!

Investing in Singapore, Part 2: The Devil is in the Details

DEAR INVESTOR JUAN

Just to recap, in Part 1 we pretty much established the following things:

1. 50,000 pesos should be enough to start investing.
2. Invest in the long term.
3. Investing in a business in the Philippines is not advisable if you're working/living abroad.
4. If you're working/living abroad, better just invest where you are (in Jay's case, Singapore) so you can be more hands on.

Now we're ready to go into the nitty-gritty of investing in a more developed Asian market like Singapore.

5. Next step? Open an Internet banking account with your bank, in your case Jay, DBS. One important advantage of investing in countries like Singapore is convenience; Singaporean banks allow depositors to invest using a single bank account with an Internet banking service, unlike banks in the Philippines where investments can only be done over-the-counter, or with a separate trading account like in the case of BPI Trade.

6. Check out the the available investments. Looking at the investments page of the DBS website, we see that the bank offers three product types to individual investors: unit trusts, structured deposits, and treasury products.

Unit trusts are the same as the UITFs we have in the Philippines, and you'll find a more informative and user-friendly list from DBS's Asset Management website.

Structured deposits are derivative investments whose value depend on underlying assets, like bonds or stocks. Basically, it's a bet that the price of some asset, or anything that fluctuates like foreign exchange rates or interest rates, will move a certain way.

What DBS refers to as "treasury products" actually covers a diverse group of securities like currencies (the real thing), currency-linked investments (derivative investments, just like structured deposits), and government and corporate bonds.

7. So many, so complicated. What to choose? Since you're just starting out, I suggest that you stick with the more traditional investment funds offered by DBS, those that are invested in stocks, bonds, or a combination of both. Derivatives like structured deposits and currency-linked investments are too risky and complicated, in my opinion, for ordinary folk like you and I. And one important investment advice we can get from Warren Buffet is to never invest in something you don't understand.

In choosing the best fund for you, you can start by looking at the fact sheets from the DBS Asset Management website, like this one for the MyHome Fund - HomeSteady fund (sounds tailor-made for you, ain't it, Jay?). It turns out that there's nothing special about the fund, except the name: it's just an 80/20 combination of a Singapore stock index ETF and bond index ETF (in case you missed the article about ETFs, click here). This means, instead of paying 3% up front and 0.5% every year for a fancy-sounding investment fund, you can actually brew your own combo by investing in the ABF Singapore Bond Index Fund and DBS Singapore STI ETF on your own, at whatever proportion that suits your fancy (just remember the rule of thumb: higher risk, higher return if you invest all in stocks) with significantly lower fees.

These two index ETFs are cheap, good-enough funds to start with; all the others are too expensive, in my opinion. When you do get the hang of investing and are willing to take on more risk, then you can start investing in individual stocks by opening a DBS Vickers Online account, which will also give you access to investments in other markets like Hong Kong, Canada, and the US. Then, as they say, the world will have become your oyster. :)

One last thing. Since you're an account holder, you can always ask the DBS customer service reps questions about the specifics of opening accounts and investing in funds. Don't hesitate to take advantage of what you're entitled to.

PDIC Takes Over Pasig-based Rural Bank

IN THE NEWS from Inquirer.net

Image from Philstar Online. Happier days for FCB

Finally, here's the official public confirmation--five days after the fact.

"First Country Bank, a microfinance bank founded by a former education official, was padlocked by banking regulators due to insolvency (when firms owe more than they own) and recently taken over by the state-owned Philippine Deposit Insurance Corp. (Friday, December 10, to be exact)" Comments in parentheses are mine.

The article further makes the following observation:

"Other banking sources said that prior to the bank’s collapse, it was aggressively trying to boost liquidity by offering hefty interest rates.

Based on the bank’s website, for instance, First Country was offering a 10-percent annual interest rate for time deposits held for at least a year. This was despite the fact that benchmark 25-year bond yields have fallen below 10 percent a year. The website was also emphatic in pointing out that it was operating under the authority of the Bangko Sentral ng Pilipinas and had even placed the BSP logo right beside the contact person for those wishing to place money in its savings, time deposits and investment products."

Now that sounds like a very insightful comment; unfortunately it's one based on perfect hindsight and is thus utterly useless to investors who had already been duped by the bank. This insight would have been more helpful had it been published before the collapse, and not after.

Let's hope mainstream media follows up the story and and bears more of the burden of protecting innocent and misinformed investors. Yeah, right now that's pretty much all we can do: hope.

Breaking Bad News: First Country Bank Now Under PDIC Control

I just received this heads up from our good friend who, himself, is a depositor of First Country Bank.

I am a regular poster here. the FCB has been taken over by PDIC just this morning, so i am ready to wait for my claims

This is terrible, terrible news, mostly for investors whose trust in Philippine institutions is shaky enough as it is, and innocent Filipinos who would have to ultimately shoulder the costs of this "perfect crime". Depositors actually do not really bear full risk since deposits are insured by the PDIC; they'll lose sleep some nights, for sure, and most probably be hassled by delayed claims, but in the end they'll get back their deposit, with interest, and be okay.

If you or someone you know is a depositor of the bank, be sure to file your claims as soon as you can. I'll make updates as soon as I get them. Also, please do post comments whenever you hear something new.

I hope the higher ups, people we recently voted for, do something about this madness soon. And may the owners and managers of First Country Bank and everyone else who is involved in this bullshit (I'm thinking this would not have gone on this long without the participation of crooks from the BSP and the PDIC and some other government units) rot in hell.

Investing in Singapore, Part 1: First Things First

DEAR INVESTOR JUAN

Juan dude,

"You're so money!" - Swingers

Got to read some of your articles and found them enlightening, haha. So, here I am hoping for a dash of your opinion bro.. Ok here's my situation. I am 28, an engineer working in Singapore and I recently got to think of getting my feet wet on the "investment thing". For now, it's baby steps though. So I'm gonna need an insider's point of view on this... As they say, engineering and accounting, do mix well like oil and water, so help me through it bro. Question is how do I start? For now, I am willing to break my piggy bank of 50,000 pesos for investment. Long term or short term? I'm thinking of maybe around 6 months? If it's longer-term, maybe a lesser figure then. At first I'm thinking of starting up a microbusiness, considering the amount, but then, since I am based here in Singapore, I think it's out of the question already. So my next idea is to invest through the bank. UITFs? Money market funds, equity funds? What do you think? My knowledge regarding this is so minimal, that my understanding of it is... one's higher risk/higher profit, and the other ones lesser risk/gain, hehe.. (Tama ba?) and I think I'm open for higher risk, hehe... Another thing is since I'm in Singapore, is it possible to start an account locally there (BDO? Internet banking?), or would I have to invest with a local bank here (DBS is my trusted bank here. I did look through their trust investments, but I can't really make any decision about it); you might wanna check it out too, if you have the luxury of time, 'cos I can't seem to understand or decide if it's worth it.

To sum it up, I'm still clueless, but ready to jump in, hehe...  So, appreciate to hear from you pare, privately, or publicly.

Salamat,

Jay


Yo, Jay, dude! :)

Nice to hear from you, and even better to know that you have decided to "get your feet wet" and invest. That's a very, very good first step, believe me; a lot of people have trouble even getting past that.

You have a handful of concerns, so let me go through them one by one so that I won't miss anything.

1. Amount? 50,000 pesos is enough money to start with. With 50,000 pesos, you can invest in most available funds, and even individual stocks, both in the Philippines and in Singapore. But it does not mean you should end there. Try to set aside 5 to 10% of your monthly salary in a savings account and invest whenever you accumulate 50,000 pesos or thereabouts.

2. Short or long term? Definitely long term, regardless of the size of your investment. Why? I'm sure you neither have the time nor the patience to actively play the investment game; don't get me wrong, most of us wouldn't. The best thing to do, in my opinion, is invest, close your eyes, and cash out at the opportune time (when you get married, decide to buy a new house, retire, etc.). Remember, the longer you wait, the higher the chance your investment will have grown appreciably, and that's a fact.

3. Microbusiness? Like a franchise or something? One thing that kind of investment requires is time, yours or someone else's. I've actually been thinking of the doing same thing: I've playing around with a business idea or two this past year, but I know that all of that will have to wait for either me to come back to the Philippines, or find a suitable and capable business partner who can manage the business in my stead. So until you find a way to resolve this issue, like me, you'll have to stick with investments you can easily manage while you're there.

4. Philippines or Singapore? Even before coming here, I've been looking for ways to manage investments in the Philippines (specifically, in UITFs) while I'm in Hong Kong; suffice it to say, I was not able to find one. There are advantages to investing in Philippine funds: fees are lower and the entire system is significantly more conservative than what they have in the US, Hong Kong, and Singapore, so we are somewhat less affected by global financial crises, like what happened in 2008.

Of course, there are also valuable advantages to investing in more developed markets like Hong Kong and Singapore. Unfortunately, I now have to go back to studying, so I will have to talk about all of these things in Part 2. :)

Answers for Thursdee, Part 2: BPI Family's Plan Ahead Time Deposit, T-Bills, and Bonds

DEAR INVESTOR JUAN

As promised, here are my answers to the rest of Thursdee's questions.

2. We were supposed to place 100,000 pesos in BPI Family's Plan Ahead account. Have you heard of this? It indicated 4.5% monthly income but the money would be locked for 5 years. Is this a good investment?

BPI Family's Plan Ahead account is basically a five-year time deposit product that is also offered by other banks, albeit at different interest rates. Five-year time deposits are attractive to some investors because interest income from these accounts are tax-free (the 20% tax is waived by law); of course, the caveat is that you won't be able to use your money for five years, which is a considerable amount of time to give up access to capital for most people.

We see the following details about the product from BPI's website:

Now we see why you thought this investment would provide a "monthly income" of 4.5%, or 54% per year, a figure that's closer to what loan sharks charge than what actually exists in "formal" markets; 4.5% is actually a yearly and not a monthly rate. The label "monthly" just means interest will be paid to you every month, amounting to 0.375% of your investment, instead of every year. 

This practice of misleading depositors, inadvertently or not, actually borders on being unethical, not just for BPI but other banks as well; I just say "borders" because because the bank actually does say in its website that the rate is an annual rate, although in a not-so-obvious way.

That being said, it does not necessarily mean that Plan Ahead is a bad product. But try to shop around for better rates from other, similarly reputable banks. Or if you have no qualms about investing in rural banks and are willing to completely place your trust in the Philippine Deposit Insurance Corporation (which insures bank deposits of up to 500 thousand pesos), they you may consider investing in these five-year deposits, most of which feature rates that are twice as high as that offered by BPI and other commercial banks.

3. Can you tell me more about Treasury bills and bonds? Is it really risk-free. I read also from one of the websites I came about during my "research" that it provides higher yield than time deposit accounts. Should we invest our 100,000 here instead of BPI's five-year time deposit?

Treasury bills or T-bills are short-term (one year or less) debt instruments offered by the government to investors; it basically represents what the government borrows from the investing public. Treasury securities (including Treasury bonds which are long-term) are considered "risk-free" only in the sense that it's impossible for the government to not be able to pay what it owes; as a last resort, the government can always just print money to pay off its debt, but of course while devaluing the currency at the same time. So strictly, treasuries are not really completely risk free since what investors earn can actually lose purchasing power, most likely from inflation. Still, since they are regarded as safe investments, they offer the lowest possible returns among available investment instruments (remember the high risk, high return rule).

A bond is just a generic type of long-term debt instrument that is sold by the government (Treasury bonds) or corporations (corporate bonds). Corporate bonds are riskier than government securities because it's entirely possible for corporate issuers to default on their debt (since they don't have an option to print their own money), and thus provide higher returns than Treasury securities. The last time I checked, annual returns on corporate bonds are in the range of 5 to 6% per year, after tax.

Both T-bills and bonds are sold by most banks and other brokers, albeit at higher minimum required investment amounts than other investment instruments. But there are alternatives for retail investors like you and I. If you want a safe investment similar to T-bills, you can always just invest in a time deposit account, or even a money market fund (mutual or UITF) so you won't sacrifice liquidity (meaning you can always sell your holdings at no or low cost). If you're comfortable with the additional risk of bonds (which significantly less than what you'll get from investing in stocks), then you can just invest in bond funds.

I hope you're satisfied with my answers to your questions, Thursdee. Happy investing and good luck. :)

Study Break

FINANCIAL TUMBLR-ISM

The problem with being a student (again!) is that you never seem to run out of student-things to do. In the next couple of weeks, I'll be busy preparing for three final exams, one project presentation (on Saturday!), and a term paper.

I've been busy working on a couple of these requirements these past few days, so I didn't have time to prepare anything worthwhile for today. So I'll just leave you with a little nugget of financial wisdom I picked up from the good ol' interwebs.

I'll be back on Monday with a fresh, new post. That's a guarantee. :)

Answers for Thursdee, Part 1: First Metro Save and Learn Equity Fund

DEAR INVESTOR JUAN

First Metro Save and Learn Equity Fund, Inc.(FMSLEQT:PM, red) outperforming BDO's Equity UITF (EPCIBEQ:PM, green) and the benchmark PSEi (PCOMP:IND, orange) in the last 12 months

Dear Investor Juan,

First and foremost, let me just say how very informative your blog is to those of us who can't understand investment language.

My family has accumulated modest savings this year which we initially intended to invest in a time deposit account and a balanced fund. I've been doing my research, but sadly, my math-averse brain can only take so much information. It's so difficult for me to understand the banking world's jargon. Thankfully, I came across your blog before my math-averse brain crashed. So now, we've decided to invest 50,000 pesos in an equity fund, most probably in BDO. I still have several questions to ask though.

[questions printed below]

I do hope you'd reply to my queries to save my overworked brain from further damage. Thanks again and may you be blessed for helping us who can't afford to pay financial advisors!

Thursdee


Dear Thursdee,

Thanks for the compliment. I live to serve. :)

Now, on to your questions.

1. Before reading your blog, I was actually "studying" the NAVPS performance table on the Investment Company Association of the Philippines (ICAP) website. I noticed that First Metro Asset Management, Inc.'s (FAMI) First Metro Save and Learn Equity Fund has the highest percentage returns among all the other funds. And also, the funds managed by banks are not listed there. Is it advisable to invest directly with FAMI than through a bank? How do I go about doing that?

FAMI's equity fund has indeed been significantly outperforming other mutual funds in its class, and actually even UITFs and the PSEi, in the past five years.

This kind of sustained "strong" performance is rare in the fund management industry, where success is attributed to luck, as several noteworthy studies in the US show. And while I would tend to agree to the idea that past performance matters little in choosing investment funds, I may have to make an exception with FAMI's equity fund: significantly outperforming the benchmark and other funds in the same class continuously for five years does point more towards skill than luck.

And don't think FAMI does not know that.

In discussing UITFs in previous posts, we often talked about management, trust, or custodian fees that could serve as one basis in choosing a fund. While mutual funds and UITFs are basically the same, one important difference is that the former charges sales load fees on top of the basic management fee, making mutual funds more expensive than UITFs. 

Take FAMI's equity fund as an example. It charges a front-end sales load of 0.5 to 2% of the invested amount, on top of a 1.75% per year management fee. Of course that extra fee may be well worth it if the fund can give you 50% higher returns, but as I always say, nothing in making investments is certain.

The funds listed on the ICAP website are all mutual funds, and you won't find any UITFs there. UITFs are offered by banks, and mutual funds by other financial institutions like insurance companies and bank affiliates, although some funds like the ALFM funds of Ayala Life can also be purchased from BPI. Also, while UITFs may only be purchased from the bank of your choice, you can buy mutual funds also through authorized agents or sales representatives.

If you're really interested in investing in FAMI's First Metro Save and Learn Equity Fund, you would have to accomplish some forms and follow these instructions from the company's website.

By the way, if you want to compare the performance of different funds with graphs (and without the math), just like I do here, you can go to Bloomberg.com and use the site's interactive chart. You can find the "Bloomberg ticker" of the fund using the search bar at the upper right corner of the page.

Part 2 for your other two questions in my next post.

Capital Budgeting Part 2: The Net Present Value Rule

PERSONAL FINANCE 101

In Part 1, we talked about a situation where you, as the owner of Cheeky Chicken, are thinking of buying a new chicken deep fryer worth 4 million pesos and is expected to bring in additional profits of 1 million pesos per year; "additional" means if you already earn 2 million pesos with your existing set up, you expect to earn a total of 3 million pesos per year with the new machine. In making capital budgeting decisions, you should not focus on your total earnings (3 million), but rather on the additional or incremental cash flows you expect the investment to generate.

To better visualize the situation, let's summarize the cash flows into a table. The negative 4,000,000 cash flow just means that it is a cash outflow and Year 0 means today or now.

As we explained briefly in Part 1, we can't just add the future cash inflows and compare the sum to the required investment because of time value of money: we have to convert all the cash flows to a common time reference, given the rate of return of a comparable alternative investment, before we can compare the costs of the investment (cash outflows) to its benefits (cash inflows). And the easiest way to do this would be to determine how each cash flow is worth today by getting its present value.

For example, if you can earn 5% per year on an alternative investment, compounded annually, how much would you need now to have 1 million pesos by the end of the year? If you answer 952,381 pesos, you're right; you get that by dividing the future value, which is 1,000,000, by 1 plus the rate of return, or 1.05. So, we say that 952,381 is the present value of the 1,000,000 cash flow in Year 1; alternatively, we can say that we need to invest 952,381 today at 5% per year to have 1,000,000 by the end of the year.

How about the present value of 1,000,000 in Year 2? The 1,000,ooo in Year 3? As many of you might have already figured out, we can get the present value (PV) of any future amount (FV) in period t, given a rate of return r, with the following equation:

Which gives us present values of 907,029 and 863,838 to the cash flows in Years 2 and 3, respectively.

If you're allergic to this kind of math (who isn't, right?), then there's always Excel.

Notice that farther away in the future a cash flow is, the lower its present value; this is just consistent with our definition of time value of money, that earlier cash flows are more valuable than later cash flows.

Finally, to be able to decide whether it's a good idea to buy that new fryer or not, just add the present values of all the cash flows and get the net present value or NPV of the investment.

A positive NPV means the benefits of an investment outweigh the costs, considering time value of money, so you should accept or go through with the investment; a negative NPV means you will be better off investing in the alternative investment instead. In our Cheeky Chicken example, since the deep-fryer has an NPV of positive 329,477 pesos, then it makes good economic sense to pursue the venture; buying the machine would provide an additional value of 329,477 pesos, on top of 5% per year which is some sort of benchmark return.

As fundamentally sound as the NPV rule is, it's not fool proof. Basically, it depends on two very important inputs:

1. The future incremental cash flows the investment or project is expected to generate.
2. The rate of return of a comparable, alternative investment.

Therefore, the reliability of your NPV calculation is just as good as your estimates of these two inputs, and as they say, garbage in, garbage out. In practice, these two inputs are not easy to estimate accurately; still, you should be able to come up with reasonable assumptions that will make your computations more believable.

Do you think this is too much trouble for a piece of kitchen equipment? Actually, while most books recommend the use of NPV in capital budgeting, most businesses use other, more informal alternative criteria. And that's what we will talk about in Part 3.

Ten Questions For Mark Cuban

We all know him as the hot-headed and very hands-on owner of the Dallas Mavericks. What most of us don't know is that Mark Cuban is a self-made billionaire, being one of the lucky few who were able to ride the dot.com wave and luckier still for being able to cash out just before the bubble burst. Here is the Forbes interview that will teach us a few things about how to build and keep a fortune.

1. What personality trait was the key to your success?

I worked hard and smarter than most people in the businesses I have been in.

2. What financial advice do you have for someone who is newly rich?

Cash is king.

3. How do you choose a money manager or investment advisor?

Someone who I can trust, has an idea every now and then, but most importantly can efficiently research my ideas and make the investments I ask them to make.

4. Talk about the most offbeat advice you followed.

I create offbeat advice; I don't follow it. I rarely take third-party advice on my investments.

5. What do you think are the biggest obstacles to job creation in America?

Complexity. You can't just start a company. You can't just take an idea and run with it, like you used to be able to. You have to have lawyers and accountants to make sure you have lived up to all the local, regional, state and national "administrivia" that is required of you. And once you get started you have to keep up with the administrivia. All of which is a huge inhibitor to business formation and a huge capital drain for any entrepreneur who is starting with sweat equity. The first cities to create friction-free enterprise zones will get a lot of entrepreneurial traction.

To help fix the economy, I would require any public company laying off more than 1,000 employees at a time, or in aggregate for a single year, to put the details up for a shareholder vote.

I'm guessing that most shareholders realize that losing a penny a share or two in earnings is less expensive than the cost to them in taxes to cover the cost of more people joining the ranks of the unemployed.

6. Who is your hero, and why?

My dad. He made me believe in myself.

7. What are the unforeseen downsides to success? 

You become a target for extortionists who are looking for skins on the wall or easy money. I spend far too much time and money crushing all the nuisance suits that are filed. If you try to make me a skin on your wall or an easy payout, I will do everything in my power to bring justice to the situation. No matter how long it takes or how much it costs.

8. What book should every entrepreneur read?

The Fountainhead.

9. You have $100,000--where do you put it?

First I pay off all my credit card debt and evaluate paying off any other debt I have. What I have left I put in the bank.

Then I try to create as much transactional value as possible from that cash. I look at my annual budgets for everything and anything, and I look to see where I can save the most money on those items. Saving 30% to 50% buying in bulk--replenishable items from toothpaste to soup, or whatever I use a lot of--is the best guaranteed return on investment you can get anywhere. Then whatever I have left I keep in the bank and let it earn nothing. Why? Because then its available for when I get a good opportunity.

Every five years or so there is a bubble bursting or amazing deals available because of a change in the economy. Anyone who just kept their cash in the bank rather than in stocks over the past five to 10 years could be buying the home of their dreams for half price in most of the country. They earned good money in half the past 10 years on the cash, and even though they aren't making much now, they have the transactional value available to them. Plus they have cash to invest if the market craters and, most importantly, they sleep great at night. Cash is king--and works far better than Ambien when you want a good night's sleep every night.

10. Name one experience every entrepreneur-to-be must have.

Coming home and having the lights turned off because you couldn't afford to pay the bills. It's incredibly motivating and humbling.

Jollibee - Mang Inasal Update

IN THE NEWS from Inquirer.net

If you take a brief look at our front page, you'll see that our Mang Inasal post about a month ago is now the most viewed post on this blog. So, since we all clearly still haven't had enough of this "match made in heaven," here's the latest on the Jollibee-Mang Inasal acquisition.

Don't get your hopes up, it's nothing much, really: it's just that this news article press release confirms that money has already changed hands and that the deal is now official. Mr. Edgar "Injap" Sia is now 1.55 billion pesos richer, and on November 22 he can add 1.15 billion pesos more to his stash; the remaining 300 million or 10 percent of the purchase price will be withheld and paid over the next three years as "assurance for indemnification against the seller’s representations and warranties," whatever that fancy phrase means.

All this is really not very interesting, as we all had been pretty much certain that the deal will push through. So to add a little spice to this post, let's take a closer look at how Jollibee (JFC) justifies the purchase to the investing public, how the deal "is estimated to add at least 5 percent to JFC’s worldwide sales, 5 percent to total revenues and 7 percent to net operating income attributable to parent equity holders." (By the way, if you check out that article a month ago, you'll notice that JFC has already made this exact same statement then, which may mean countless things that I'll leave up to you to think about.)

A 7% increase in operating income (earnings before interest and taxes) roughly translates to an increase in net profit and dividends of 5% (7% x (1 - 30%) = 4.9%, where 30% is the corporate tax rate) from present levels. Just before the announcement, on October 15, JFC had a total market capitalization (just a fancy term for market value) of around 90 billion pesos; the expected 5% increase in profit and dividends should then result in an increase in value of 5% of 90 billion or 4.5 billion pesos, 50% higher than the acquisition price of 3 billion pesos. So, on paper, if we believe JFC's pronouncement that its purchase of the majority stake at Mang Inasal will result in a 7% increase in operating profit, then the deal makes perfect (and handsomely profitable) economic sense for Jollibee.

But what do investors think? Well, since that extraordinary jump in stock price from 89.80 to 97 just after the announcement was made, there had been no sign that investors believed the deal would provide 1.5 billion pesos (4.5 billion - 3 billion) of additional value to the firm; in fact, the stock is now even a few points lower than the pre-announcement price, closing at 87 pesos in today's trading. A sign that investors don't like the deal? Or don't like the deal enough to wait for the promised gains to materialize?

But maybe you'd want look at it this way, instead. If you think it makes sense that Mang Inasal would increase Jollibee's total sales by 5% or operating profit by 7%, just as JFC announced, then Jollibee at 87 pesos is a bargain, and if you buy now you stand to gain around 5% when the stock reaches its "true" price of 91.50 per share.

What do you think? Just look at all these interesting possibilities. Isn't investing fun? :)

Capital Budgeting Part 1: Making Long-term Investment Decisions for Your Business

PERSONAL FINANCE 101

Capital budgeting is the decision-making process with respect to investments in long-term assets--machinery and equipment, vehicles, and real property--with the purpose of enhancing the value of a business. Some examples of capital budgeting decisions include:

• The development and introduction of a new product to the market
• Replacing an old piece of equipment with a newer model
• Expanding production capacity

These decisions are "long term" since they cannot be "unmade" without incurring significant losses. And since these investments usually entail a huge amount of capital, it pays to know the best way of making such decisions.

The central idea in capital budgeting is to weigh the costs associated with the purchase against the expected benefits. Apart from the actual cost of the asset in question, like, say, an expensive deep fryer for your fried chicken business, other "costs" of the investment include transportation and installation (if they're not yet included in the sticker price of the machine) and investments in materials or inventory needed to make use of the asset (an increase in your inventory of dressed chicken). The benefits of the investment come from the additional cash flows you expect the asset to deliver in the future (maybe you're considering buying the new fryer because it can cook more chicken faster, which you estimate can boost your sales and cash flows significantly). In performing cost-benefit analysis, if the benefits of the asset in question outweigh the costs, then buying it would make economic sense; if it’s the other way around, if costs outweigh the benefits, then you would be better off spending your money on other value-boosting investments.

Unfortunately, of you really want to make the best decision for your business, you will have to complicate things a bit. In a previous post, we talked about time value of money: the idea that receiving money earlier is better, and vice versa. This notion complicates the cost benefit approach we discussed above; since cash received earlier is more valuable that that received at a later date, we can't just add all the future monetary benefits of an investment because they usually occur at different times. Which means, if you expect your new fryer to provide additional cash flows of 1 million pesos per year in the next five years, the benefit of the investment is not 1 million x 5 years = 5 million pesos because, with time value of money, the first million you'll receive is more valuable than the one you'll receive in five years. 

To better understand this concept, let's take a look at a specific example. Say, you're the owner of Cheeky Chicken, and you operate a small chain of fried chicken restaurants in the country. You're thinking of adding new capacity to your restaurants, and you're interested in buying a new deep fryer--the latest model--for 4 million pesos. Based on you rough estimates, the new fryer can bring in additional cash flows of 1 million pesos a year in the next five years, after which the machine will be fully depreciated and useless.

Without time value of money, the decision to buy the machine or not seems very uncomplicated: comparing the machine cost of 4 million pesos to the total benefit worth 5 million pesos clearly shouts buy. But what if you know you that can also invest your 4 million pesos in a fund that pays 5% per year? Now the decision to buy the machine or not is not so simple anymore, since now you have an alternative use for your capital that may provide better benefits. So how can we use this new information to make the right decision?

Those of you who still remember a bit of your high school math may be thinking along these lines: if we invest 4 million pesos at 5% per year, interest compounded annually (meaning interest also earns interest every year), that will give us 4 x (1.05)^5 or around 5.1 million pesos after five years, which is higher than the 5 million peso total benefit provided by the machine, which makes not buying the machine the right decision, right?

Well, almost, but not quite. While we have considered time value of money to evaluate the next best use for our capital (investing in the fund), we failed to use it with the benefits of the machine. Remember: with time value of money, earlier cash flows are worth more than those that come later, so the machine does not really provide a net benefit of 5 million pesos. So how exactly can we do this the right way? Well, you'll have to wait for Part 2 to find out. ;) 

4 Questions About REITs Answered

INVESTMENT SPOTLIGHT

In a previous post, we caught a brief glimpse of Real Estate Investment Trusts or REITs and how it gives "small" investors a more affordable way of investing in real estate. Recently, the Philippine Stock Exchange released a primer about this new investment vehicle that's about to enter our market. Here are some of the more important things you need to know about REITs.

1. What exactly is it?

A Real Estate Investment Trust (REIT, pronounced as “reet”)  is a stock corporation created for the purpose of owning and managing income-generating real estate such as office buildings, residential condominiums, shopping centers, hotels, warehouses, hospitals, airports, and tollways. The Philippine REIT, under Republic Act No. 9856, otherwise known as the REIT Act of 2009, requires REITs to list its shares of stock on the Philippine Stock Exchange or PSE. The REIT distributes 90% of its distributable income to investors in the form of regular dividends and receives special tax considerations as an incentive.

REITs allow investors--especially small or retail investors--to participate in the ownership of one or more income-generating real estate. For property developers, REITs provide to ready capital which may be immediately used to finance new projects and investments.

2. What are the allowed activities and investments of REITs?

REITs are allowed to make investments in the following:

• Real estate;
• Real estate-related assets;
• Managed funds, debt, securities, and listed share issued by local or foreign non-property corporations;
• Government securities (issued in the Philippines and others);
• Cash and its equivalent; and
• Similar investments (see REIT Act IRR).

3. How do investors earn from owning REIT shares?

Owning REIT shares is like owning a hybrid fixed income and equity security. Since REITs have access only to a limited number and specific types of investments, earnings distribution in the form of dividends should be more reliable and stable than dividends paid by stock companies. Also, since REIT shares are freely traded in the market, investors can also benefit from capital appreciation when there is high demand for the shares.

4. What are the other advantages of investing in REITs?

Through REITs, investments in real estate become more affordable to small or retail investors. And since there is (presumably) a ready market for REIT shares, investments in REITs are more liquid than direct investments in real property.

Finally, because REITs offer features that are distinct from traditional investments like bonds and stocks, they can enhance an investor's portfolio through more effective diversification.

4 Simple Ways of being More Confident of Your Future Finances

A recent study in the United States reveals that specific financial decisions and behavior can help uplift an individual's or family's feelings of economic security, especially during financial crises and recessions. Based on the results of a survey of more than 9,000 respondents over a two-year period, behavior that revolve around financial planning and a more disciplined approach to debt and savings was found to foster a feeling of economic security and optimism about the future.

1. Save more, regularly. Among the survey respondents, 44% of those who saved the most from month to month described themselves as “very” or “extremely” optimistic about their future finances. And 40% of those having the highest savings balances expressed similar optimism. But even among those with the lowest savings balance, 57% of those who consistently put money into savings also expressed optimism about their financial future. These findings show that financial optimism does not depend on how much one has already accumulated in savings--rather, it’s the practice of saving, itself, that creates an emotional lift.

2. Pay off your short-term debt. Carrying too much credit card debt and personal loan balances can greatly reduce an individual's or family's optimism about their future finances. In the survey, only about 35% of survey participants said they feel “very” or “extremely” financially secure from month to month, and only about 34% expressed optimism for their financial future. But among those with high short-term debt, expressions of financial optimism went down to 20%. What’s more, those most concerned about their debt are more likely to feel financially “stretched” from month to month--and are the least likely to make saving and investing a priority.

3. Increase your savings-to-debt ratio. One of the most important results of the study is that an individual or family can have some debt and still feel financially secure--as long as they’re disciplined in their approach to savings and diligent in their payment of debt. The savings-to-debt ratio thus appears to be a very important contributor to feelings of financial optimism, since as one’s savings-to-debt ratio increases, feelings of financial security increase, and feelings of being financially “stretched” decrease.

4. Come up with--and stick to--a financial plan. The survey shows that individuals and families having a financial plan are more likely to have a high savings-to-debt ratio than those without a plan. And this is consistent across all incomes, indicating that a family earning $50,000 per year can achieve the same level of financial optimism and confidence as a family earning $100,000 per year or more--if it is managing money according to a sound financial plan. 45% of survey respondents with a financial plan reported feeling “very” or “extremely” secure financially, compared to 31% of respondents without a plan. Finally, persons having a financial plan expressed significantly more confidence in dealing with financial matters than those without a plan, and they reported greater confidence in their ability to retire comfortably.

The message is simple: save more, pay off your debt, and take control of your finances by living by a financial plan, even a simple one. Visiting Investor Juan regularly is a good first step, and we'll always be here to support you the moment you take your next.

5 Unbelievable Benefits of Taking a Nap

All of us have experienced first-hand the irresistible wile of the afternoon nap. When I was still teaching at the Ateneo, I was often assigned after-lunch classes; I'm sure you can imagine how challenging it had been for me to make my students focus on our lesson as they faced an often losing fight against midday drowsiness. But according to several studies, it may be best if we all just give in to the temptation and just sleep when we feel like it. Here are some of the most important reasons why:

1. Napping relieves you of stress. That's the most direct and obvious benefit. Taking a short nap when you feel tired or stressful is the best way to recharge your body and mind.

2. Your mind gets prepped to learn more things. The part of the brain that receives and stores new information may be likened to a 90's hard drive that you need to defragment from time to time. Around eight hours after waking up in the morning, the brain gets cluttered with all kinds of stuff; taking a nap at this time is just like defragmenting your hard drive, removing the clutter and providing room for new information.

3. Your memory gets refreshed and you become smarter. Many of us believe that the best way to prepare for an exam is to take in copious amounts of caffeine to fend off sleep and hit the books. But in an experiment performed at University of California San Diego involving two groups, one given a caffeine pill and the other asked to take a nap, the sleep group performed significantly better in memory-related tasks than the other group. This just means the trip to Starbucks for a group study all-nighter with your friends may be the more expensive and ineffective alternative to staying home and sleeping early.

4. You get to be more alert and productive. Taking a short afternoon nap, especially after a poor night of sleep, will make you feel more alert afterwards. Soon after, you'll find yourself in a better mood and better suited to perform different kinds of tasks, both mental and physical.

5. Naps make you more healthy. Two studies housed at the Sleep and Psychological Disorder Laboratory at University of California Berkeley show that getting a good amount of sleep is tied to a better immune system and metabolic control. In another study involving 23,681 individuals living in Greece, researchers found that those who took naps several times a week had a significantly lower risk of heart disease.

5 Things You Need to Know About Exchange Traded Funds

INVESTMENT SPOTLIGHT

On Friday, I decided to buy Hong Kong securities for the first time. Most of you know that I'm an ardent opponent of stock picking, so to put my money where my mouth is, I decided to go by the way of diversified investment funds. Like all other commercial banks in Hong Kong, Hang Seng Bank, where I decided to open and maintain an account, offers a more exhaustive and thorough list of securities and investment services than the banks in the Philippines. For my particular investment preference, aside from open-ended investment funds (which are basically the same as the mutual funds and UITFs we have back home), Hong Kong banks and other financial institutions also offer exchange traded funds or ETFs, which is something we don't have in the Philippines.

On Friday, I bought 100 shares of Hang Seng Bank's Hang Seng Index ETF (stock code 2833) at the prevailing market price of 233.20 HKD per share. At the end of today's trading, the stock closed at 240.00 HKD per share, netting me gross paper gains of 680 HKD over the weekend, or 3,772.67 pesos. Not bad at all, but of course that's mostly due to luck than anything else.

So what are these ETFs, and why are they so popular in a lot of markets around the world? And how are they different from the more familiar mutual funds and UITFs that we have in the Philippines?

1. ETFs are investment funds that can be traded in stock exchanges, unlike mutual funds and UITFs that may only be sold by and redeemed through financial institutions like banks. Also, ETFs are closed-ended, with a fixed number of outstanding shares available, unlike open-ended mutual funds and UITFs; this is what makes trading ETFs in stock markets possible.

2. ETFs are also invested in underlying securities like stocks, bonds, and other instruments, like other investment funds. The ETF I purchased tracks the Hang Seng Index of the Hong Kong stock exchange, and is thus invested in the component stocks of that index.


3. ETF share prices are determined by the market. The share price of ETFs are driven by supply and demand forces, unlike open-ended funds whose net asset values (NAV) are computed at the end of each trading day. Therefore, while a lot of ETFs are designed to closely follow the movement of certain indexes, ETF returns can still deviate significantly from the performance of the underlying assets or index.

4. ETFs are much cheaper than other investment funds. While a lot of open-ended investment funds in Hong Kong charge around 3% per year in fees, ETFs are just covered by the usual trading charges, which amount to just around 0.6% per transaction. Therefore, if you are a firm believer of passive over active investment, then ETFs are the way to go since you won't have to pay for high management fees.

5. ETFs pay dividends to shareholders, unlike mutual funds and UITFs that reinvest all gains back into the fund. For example, the HSI ETF I bought has a historical dividend yield (dividends divided by the share price) of 2% per year. This yield makes up a portion of the total returns earned by investors, on top of capital gains when the share price appreciates.

It's unfortunate that ETFs are not available to investors in the Philippines; the funny/frustrating thing is that an ETF based on Philippine stocks has already been made available in international exchanges for international investors, but it's not available to us poor Investor Juans. Still, there are rumors that ETFs will soon be introduced in the Philippines. Would you be interested in buying some when they do become available?

How Diversification Works

In previous posts, we discussed how diversification--or investing in different kinds of assets--can reduce risk, and how we can use this strategy to protect ourselves in times of recession or economic crises. By employing diversification and "putting our eggs in different baskets" we can reduce the variability or fluctuations in the returns of our investment portfolio. But how exactly does diversification do this?

Let's take a look at this simple example. The following table shows the yields (in sacks per month) of four types of crops under different rainfall levels.

Crop Type	Rainfall Levels (inches)
	< 20	20 to 30	30 to 50	> 50
Wheat	30	40	30	0
Oats	60	20	10	0
Corn	25	25	25	25
Soybeans	0	30	50	90

In the table, we see that each of the four crops, taken in isolation, produce varying yields in different rainfall levels. For example, since oats thrive in a low rainfall environment, we can produce more sacks when the rainfall level is low than in very wet weather (60 sacks when the rainfall level is under 20 inches compared to zero sack when the rainfall level is more than 50 inches); the variability of oat yields can be described as ranging from zero to 60 sacks. The yield for wheat, in contrast, just ranges from zero to a maximum of 40 sacks. Since the yield for wheat has a narrower range than the yield for oats, we can say that wheat yields are less variable than the yield for oats. But among the four crops, we can see that corn provides the least variable yield, with 25 sacks regardless of the weather; because there is less variability and uncertainty in the yield of corn, and because there is no chance of zero yield whatever the weather is, we can say that corn is the safest or least risky crop.

So does this make corn our best option? Well, not necessarily: remember, we are not limited to planting just one crop since we can always divide our resources among several crops. For example, if we allocate our resources equally among wheat, oats, and soybeans, we can compute for our total yield by getting the average yield of the three crops under each rainfall level:

Rainfall < 20 inches: yield = (30 + 60 + 0)/3 = 30 sacks
Rainfall 20 to 30 inches: yield = (40 + 20 + 30)/3 = 30 sacks
Rainfall 30 to 50 inches: yield = (30 + 10 + 50) = 30 sacks
Rainfall > 50 inches: yield = (0 + 0 + 90))/3 = 30 sacks

We see here that by planting different crops, the variability of the yields is reduced to zero, and that under any rainfall condition, we yield 30 sacks: this is diversification in action. By planting crops that behave differently under the different rainfall scenarios, we were able to minimize risk. If the rainfall level is going to be low, we can rely on wheat and oats since these crops thrive in dry environments; if the weather is going to be wet, we can count on soybeans to deliver for us. So no matter what happens, no matter how the weather turns out, our bases are covered and we are assured of yielding 30 sacks of crops, which is even better than if we plant the equally safe corn.

We can think of these crops as different assets or investment vehicles (e.g., stocks, real estate, bonds, bank deposits, T-bills, etc.), the yields as the returns on our investment, and the variability of the yields as investment risk. Diversification can reduce the risk of our investments--without sacrificing returns--the same way it worked by planting wheat, oats, and soybeans. Using the example above, we can now identify two requirements for diversification to work:

1. Invest in several securities. Adding securities to our investment portfolio (collection of investments) reduces the risk of the portfolio as a whole.

2. Invest in securities that do not move together, or behave differently. Diversification will only work if the assets we invest in do not move in tandem under different scenarios or economic conditions. This relationship between asset returns is referred to as correlation. For diversification to work, we need to invest in assets that have negative or low correlation.

Listing Day Decisions for the Cebu Pacific IPO

DEAR INVESTOR JUAN

Dear Investor Juan,

My dad and I were able to buy 3,000 Cebu Pacific shares at 125 pesos per share. One of my friends suggested that we sell our shares on the first day of trading (October 26, tomorrow) and just decide on a target price. I just want to ask what you think about this: should I sell on opening day, or should I hold on to the shares for the long term? Thanks sir!

Karl


Dear Karl,

First of all, congratulations to you and your dad for being able to get hold of those much-demanded Cebu Pacific shares. Tomorrow's the first day of trading, so you should be eagerly anticipating what will happen, and how this will affect your decision whether to sell or not?

Extraordinary listing day returns have been well-documented in markets around the world. In the Philippines, University of the Philippines professor Roy C. Ybañez (one of my former finance professors in the MBA program) studied the listing day returns of 43 IPOs from 1989 to 1993. Prof. Ybañez found that these stocks exhibited an average excess return of 40% on listing day, on top of the benchmark return posted by the market index. I'm not aware of any more recent, follow-up study regarding listing day returns for IPOs in the Philippines, but I'm pretty sure that a majority of IPOs since 1993 have reflected comparable excess returns on listing day.

Based on the tremendous demand for Cebu Pacific shares, even way before the subscription period ended, I think it's safe to say that the stock price will rise significantly on the first day of trading tomorrow. But since I don't know enough about the actual level of demand for the stock or the intrinsic worth of the business, I really can't specify the extent to which this will happen. But for the sake of discussion, let's suppose that right in the middle of trading (9:30am to 12:10pm), the stock price rises to 150 pesos. That's a 20% increase in the stock price, which means your 375,000 peso investment will then be worth 450,000, for an easy profit of 75,000 pesos (gross of taxes and fees) if you sell the stock at that exact moment. Not bad for a few days "work", if we count the days between listing day and the day you bought your shares.

So why would you not sell the stock if it reaches 150 pesos per share? Well, maybe you're thinking that if you just wait a couple more minutes, the stock price might reach 160. How about 200 the next day? Heck, it may even reach 300 pesos at the end of the week. Since these are all very real possibilities, any hesitation to sell would not be misplaced. Still, given that the stock price has already risen by 20%, the longer you delay selling and realizing that gain, the higher the chance that you'll lose it, or even part of your investment. So basically your choice is between a sure return of 20% (or 75,000 for your 375,000) on the one hand, and the possibility of a higher return or a loss on the other. The problem with the second option is that it is fraught with uncertainties, like how high or low the stock price will go (return/payoffs), the chance that it will go up or down to a particular level (probabilities), and the exact moment when this price would be reached (timing). Because of this, a lot of people would choose the sure payoff over the gamble, even if the upside potential of the latter is very high, or even theoretically unlimited.

So, what have we learned here? First, that it won't be unreasonable to expect the stock price of Cebu Pacific to significantly increase tomorrow, given how past IPOs have behaved on listing day and the high demand for the Cebu Pacific stock. Second, we've seen how it makes sense to "cash in" on a sure thing, rather than delay the sale and face a lot of uncertainties. If you think both these things make sense, then your friend is right, it would be best if you just sell the stock tomorrow the moment you reach your target price. And that is something you would have to determine for yourself. Is 20% high enough for you, or will you be willing to wait for 30%? Or maybe 10% will do? Whatever that number is, you would do well to relay your sell instructions to your broker early tomorrow morning: you might miss the boat altogether if you just scramble to call your broker at the exact moment your target price is reached.

This is really exciting. I think a lot of us will just spend all of tomorrow morning sitting in front of our computers to watch how things will unfold in real time. Good luck, Karl! We're all rooting for you. :)