6 Criteria You Can Use to Pick Winning Stocks (Part 1)

First, some qualifications and disclosure. Most of you know that I'm not really too keen on stock picking since I'm more of a passive, long-run, fully-diversified kind of investor; most of what I know about screening stocks and fundamental analysis, I've learned through formal training and self study in the past five years. But since I arrived in Hong Kong six months ago, I've had an opportunity to apply investing theory to a richer sample of stocks traded in the Hong Kong Stock Exchange. Therefore, everything that you see here is a result of both what I have learned as a student and teacher of finance, and as an investor in the past six months.

Having said that, most likely, other investors would not agree with some or even all of my points. Also, these criteria may only be used filter stocks from the population of stocks available to investors (~250 stocks listed in the Philippine Stock Exchange), which is just one dimension of the stock investment decision; this post does not talk about investment horizons or the timing decision, for example. The main objectives of this approach are to consistently earn higher returns than the appropriate benchmark (e.g., the PSEi) and not to get wiped out during market shocks (e.g., financial crises). If you're aiming to earn 5 or 10 times your investment in a few days or weeks, this approach is not for you. Finally, for what it's worth, from October 29, 2010, when I first bought shares of a HK stock, to the end of this day's trading, my portfolio is down by 0.8%, after costs; in the same period, the Hang Seng Index benchmark is up 1.04% and the PSEi down by 11.8%.

1. Stock quality

Avoid mining stocks where stock price movements are heavily dependent on speculation and not on performance; it means the only way to win is to have first access to high quality information, something the average investor does not have (and is illegal, anyway). Investing in these kinds of stocks may give you a better chance of earning higher returns, but you're also more likely to lose your shirt in times of crisis. Stick with component stocks of the PSEi, and a few others that you know have actual businesses; all the rest are trash. Read annual reports at least once, just to familiarize yourself with an unknown stock. The unavailability of the latest annual reports of a particular company on the PSE website is a definite red flag, a possible sign of lack of transparency and straightforwardness.

2. Profitability

Stick to stocks with business models that work (or make sense) and have been consistently profitable during "normal" times (i.e., not recessions or crises). Yes, you would have to know the bare essentials of business management and understanding annual reports and financial statements (you can start by reading some of our past posts).

3. Dividends

Constant, stable dividends tell you that the company is capable of sustainable profitability. It's also a significant and reliable source of returns for investors. Theoretically, there is an inverse relationship between dividends and growth: low or no dividends may mean the firm is using its earnings to fund expansion projects for additional value. But this only works if there are value-adding uses for earnings, like for new product development in a high-tech industry or expansion a new, unsaturated market. So unless the firm is Apple or Google, most probably "low or no dividends" just means "low or no profit."


Click here for Part 2

A Test of Testicular Fortitude

We've heard it over and over again, in this blog and in other venues, from both struggling amateurs and tried and tested professionals: buy low and sell high. With what has been happening in the middle east since this past weekend, now is the perfect time to test whether we have what it takes to stay true to this deceptively straightforward investment advice.

Unless you've been hiding under a rock these past few weeks, you should know that parts of Northern Africa and the Middle East have been ravaged by protests that eventually turned into full-blown revolutions. The ending of decades-long rule in Tunisia and Egypt seemed to have inspired similar populist mass actions in Libya, Bahrain, Yemen, and reportedly other countries in the region. But Libya's case is turning out to be a cause for more concern, and not only because of the government's violent and ruthless handling of the unrest: the political instability in the country, one of the world's biggest producers of oil, threatens the global supply, and this fear has almost instantaneously cascaded into financial markets around the world.

Since Friday's close, the PSEi benchmark has been down 3.13 %; other global equity benchmarks like the Hang Seng Index in Hong Kong and the S&P500 in the US are down 4.21% and 2.65%, respectively. Even if you just own what are widely considered "reliable" and "stable" stocks, most likely you're down at least 5% this week, and that's excluding fees and taxes. A case in point: San Miguel Pure Foods is down 10% just in today's trading. If you have taken such a loss in the past four days, most probably you're seriously considering selling your shares to "cut your losses," if you haven't already. And that's something you should not do if you believe that "buy low, sell high" advice.

Why should you not sell your stocks when everybody else is selling his or hers? That's precisely the reason: everyone reacting to something the same way is "mob mentality," an overreaction caused primarily by panic and fear. In fact, not only should you not sell, but if you have enough cojones, you should actually buy. Even if there's some truth to the concerns over the supply of oil, it's not enough reason to change the  fundamentals of a business. That Gaddafi is a complete douchebag doesn't make Purefoods hotdogs any less tasty, doesn't make the company worth 10% less in one day; even if Purefoods raises its prices in reaction to higher input costs brought about by the higher price of oil, people will keep on buying their TJ's. In any case, I bet my bottom dollar that the powers-that-be will devise and implement newfangled strategies that will eventually bring back the stability of oil prices and financial markets.

A more straightforward reason why you should fight what your urges tell you to do is that whatever losses you have incurred now are only paper losses and will only turn into actual, realized losses when you do sell. You did not invest to lose, did you?

I know that to "buy low, sell high" is easier said than done, but do it we must, no matter how difficult or counterintuitive it may seem.

One caveat before we end. If you have information that the price of your stock will only go further down and never ever recover, then by all means, sell. If you have an inkling that what has been happening will eventually result in the utter ruin of your company, sell. But in most cases, what has been happening this week, and will probably continue to happen in the coming weeks, is something markets can and will recover from. If not, then a losing investment should be the least of our concerns.

Investing with Mixed Objectives

DEAR INVESTOR JUAN

Dear Investor Juan,

Hi! Man, I've just stumbled upon your blog and I'm hooked up to it in just a few minutes of reading! Anyways, me and my dad are looking for the best way to invest and so far of what I've read, MFs and UITFs are the best way to go with regards to returns and risks. I'm really new to investing and have no knowledge whatsoever regarding finance (Programmer/Call center agent here). What I want is to diversify our investments in the sense that we will have long-term, low-risk investments that will not be touched but also have high-risk, short-term investments that will allow us to get income on a monthly or a quarterly basis. Personally, I'm thinking UITFs, Retail Treasury Bonds and stocks. Though I'm also curious about the Equity Fund :D My dad is thinking of time deposit (Veterans has this promo where they also include health insurance, 1m will net about 5k a month according to their website) but we'll need to invest about 2m to get at least 10k a month for our needs (not even half of what we spend in a month). Though we can afford that investment, I personally don't want to put all our eggs in one basket. what do you think? thanks in advance!

Kating Kati na maginvest,
Niel


Dear Niel,

From what you're saying, you and your dad want to invest together and share one portfolio, am I right? That explains your mixed investment goal of achieving high growth, which is typically associated with younger investors like you, and periodic income, presumably for your dad's or the entire family's spending needs. So given your situation and needs, here's what I propose.

30% in an equity UITF

An equity fund, on its own, should be able to address your need for both growth and income: it has the best potential for high long-term returns among all commonly available investments, and its liquidity gives you access to income by redeeming units whenever you need or want to. In terms of risk, I still say it's better than picking individual stocks because you'll be investing in companies from different industries, although there's always a chance that unit prices will go down considerably with a shock or event that can affect the entire market, at any point in the future.

30% in cash

This is something I learned from Mark Cuban recently. Not only can you use an ample cash balance as a reliable cushion in times of financial emergencies, you can also use it to take advantage of attractive investment opportunities that become available from time to time, like when bubbles burst and everyone panics and pushes stock prices to unjustifiable lows.

40% in Philippine Veterans Bank's Advantage Plus deposit

This is what your dad is considering. It is is a tax-exempt, 5-year time deposit that bears an interest rate of around 6% per year (or around 7% if you count the accompanying life/accident/health insurance, which I roughly value at 6,000 pesos per year). It's the same flavor of investment those rural banks became infamous for, but the interest rate is considerably lower and closer to prevailing market rates. And partly because of this, I believe there's very little chance that PVB will fail. Still, just to play it safe, you might want to limit your exposure to 500,000 pesos, which is the maximum covered by PDIC.

What sets this apart from other similar long-term time deposits is that it gives you access to your earnings even before the investment matures, a feature that partially answers your need for periodic income while providing modest returns and capital preservation at the same time.

So that's it, a mix of equities, cash, and long-term time deposit for your mixed investment objectives. Feel free to play around with the actual proportions as these are just based on rules of thumb.

Happy investing!

Credit Card Numbers Game

Have you ever wondered what the sixteen numbers on your credit card stand for? While it's helpful (albeit understandably troublesome) to memorize these numbers, knowing what they stand for will give you some useful information about a credit card, not the least of which is whether the card is fake or not.

"Happy Valentine's Day" = "Ad Hype Spent Vainly"

In other words, isn't Valentine's Day just another marketing ploy used by businesses to make money out of the "emoness" of the common person? My single friends, who rightfully feel that they have nothing to do with this so-called occasion, are none too pleased that they're still adversely affected, what with sudden increases in prices of various goods and services, the ghastly traffic in select areas around the metro, and the additional pressure to find one's "meaningful other" whenever this dreaded day nears.

Which doesn't mean couples have it any easier: not even the most cynical among us can escape the pressure to do something extra "sweet and thoughtful" for our loved ones; imagine how much more challenging it is for me, with more than 1,000 kilometers between me and my girlfriend. But thanks to the Internet, the help of a friend, and a couple of creative and enterprising young ladies, my girlfriend and I managed to share something special this Valentine's Day: a custom-made "LDR Cake" courtesy of The Cake Shack.

I know it's not the same as actually being there, but it's something that made my girlfriend and I very happy nonetheless. Which brings us back to Valentine's Day being just about the money -- well, come to think of it, maybe there's really nothing wrong with that. Maybe it's good that there's The Cake Shack -- and Hallmark, the flower vendors in Dangwa, all those fancy restaurants, and all other people and business that make money from Valentine's Day -- that we can turn to whenever we have trouble expressing ourselves, or are simply physically unable to be with our loved ones.

In the end, everything's fine because we all know that there's more to "Happy Valentine's Day" than "Ad Hype Spent Vainly." Get it?

MVP Offers to Buy MRT for $1.1B

IN THE NEWS from Inquirer.net

Local infrastructure giant Metro Pacific Investments Corp. (MPIC), headed by Manuel V. Pangilinan, has offered to buy the government’s stake in the Metro Rail Transit (MRT) 3 train line traversing EDSA for $1.1 billion. The acquisition will give the group 100% ownership of the company that holds the right to operate and manage the train line until 2025.

MPIC said it planned to spend $300 million to increase the MRT’s capacity to 700,000 passengers, a day from the current 350,000 a day, in two to three years.

What's in it for the government to accept the proposal? Plain-vanilla cash. First, the proceeds of the sale will be used to settle the government’s outstanding debt to MRT Corp. bond holders, resulting in interest savings. Second, the government stands to save $150 million in annual subsidies if it accepted the proposal.

What's in it for MVP? Like MPIC's other investments in utilities and transportation (Maynilad, Manila North Tollways, and Meralco), MRT has the potential of becoming a fat cash cow, with a service demand for which is bound to go nowhere but up, and whose price can be easily controlled, especially by one who knows how to push the right regulatory buttons. MVP doesn't even have to completely fix the bureaucratic and operational mess left by the previous owners, as in the case of Maynilad and Meralco, to turn a handsome profit.

What's in it for us? Well, as tax payers we would all indirectly benefit when the government finally stops hemorrhaging money from that orifice. Directly, as commuters, we should expect to enjoy better service resulting from both an anticipated change in management and increase in capacity. Unfortunately, these benefits, like all good things in life, come at a high price, with the up to 100% fare increase just around the corner.

The bottom line is that the privatization of the MRT is something that should happen, and happen soon, regardless of the who the "white knight" is. One of the keys to economic development is a well-planned and efficient transportation system, an unmistakable trait of the more developed economies in the region (Hong Kong, Singapore, Taiwan, etc..). Ultimately, it should be the government's responsibility to deliver such a system, but when the government is as stupid, greedy, and inutile as ours, we have no other recourse but to turn to private enterprises. Yeah, we may have to pay more for what is universally considered a basic social service, but in my opinion 30 pesos is a small price to pay for being able to avoid facing this at the beginning of each day.

Image courtesy of Hap

Is Now a Good Time to Invest in Stocks?

DEAR INVESTOR JUAN

Dear Investor Juan,

Hello sir, great blog! I'm new to investing, and I'm considering investing in BDO UITFs. Considering their great performance last year, I was wondering if this means there's nowhere to go but down from here? Sorry if it might seem like a stupid question, but I'm just worried that investing now would just be the equivalent of buying high then selling low later. Do UITFs work that way? Or would fund managers work behind the scenes by hunting and investing on low-priced stocks that can still go up, and keep this trend going?

Thanks and more power!

Anonymous


Dear Anonymous,

The most widely believed explanation for the great run which started in September of last year and pushed the PSEi to a high of around 4,400 in early November is the surge of "hot money", a huge sum foreign capital that flows in and out of local markets. The problem with hot money is that, unlike more permanent forms of capital inflows like foreign direct investments or FDIs (when foreign investors actually invest in real assets like real property, offices, and buildings or form actual businesses), the speed at which it can enter and leave markets can result in "bubbles" that can wipe out smaller investors when they burst.

In the last quarter of 2010, big foreign investors became tired of the slow recovery of the US from the financial crisis and the instability of financial markets in Europe, and decided to move a huge amount of capital from those markets to developing economies in Asia like the Philippines and Indonesia. Perhaps the strongest evidence that the rapid rise in stock prices in Manila in that period was due to hot money, and not because Philippine companies all of a sudden became more profitable and fundamentally sound, is that the same thing was happening to our Southeast Asian neighbors at the same time, sometimes at even at higher growth rates.

What has happened since December of last year is that these foreign investors have started to become more confident of the US economy, and so have decided to pull out of our markets and reinvest in US companies. The graph below clearly shows that since early December when US stocks, represented by the S&P 500 Index, have started to rally, Philippine (PSEi) and Indonesian (JCI) stocks have followed an opposite, downward trend.

So is now a good time to invest in Philippine equities, in general? Yes, I think so, since prices are now at a more sustainable level. Is it the best time to invest in equities now? That, I am not so sure of. It's possible that the outflow of foreign capital from the market will continue to depress prices, but I think it's highly unlikely; the actual performance and prospects of Philippine companies should be enough to justify the stock price gains last year and possible further increases this year. Also, the long run relationship between the US stocks and Philippine stocks is positive, so despite the inverse relationship we are seeing now, US and Philippine stocks should eventually move in the same direction.

As for your other question, yes, strictly UITFs are actively managed funds where fund managers can and should adjust the composition of the fund to maximize returns for unit holders (that's what unit holders pay the management fee for), subject of course to general constraints defined by the kind of fund (for example, 80% of equity funds should be invested in stocks and 20% in fixed income instruments, while balanced funds should have a 60/40 mix, or however the funds are defined in the fund fact sheet). But what actually happens is that UITF fund managers invest conservatively and, more often than not, just invest in large, stable, "blue-chip" companies, which is a good thing for investors, in my opinion, since it reduces volatility (big, sudden movements of the NAVPU) and results in funds that closely resemble the benchmark PSEi.

So go ahead and invest, Anonymous. Good luck. :)

7 Values that Make Chinese-Filipino Businesses Successful

STUFF I LEARNED FROM S. Gordon Redding's "The Spirit of Chinese Capitalism"

If there's one thing we know, one thing we are sure of, about business, it's that the Chinese are very good at it. If you take a look at Forbes' list of richest Filipinos in 2010, you'll find that 7 out of 10 are of Chinese descent. Ask anyone you know to name a successful businessperson, it's almost certain that that person will quote a Chinese name. And this phenomenon is not exclusive to the Philippines--we see it in other countries in the region as well, what with Dhanin Chearavanont of Thailand, Robert Kuok of Malaysia, Sudono Salim of Indonesia, just to name a few.

So it's not surprising to hear many aspiring entrepreneurs ask, "What makes these successful Chinese businessmen and families tick?" And with today being the Second Day of the Lunar New Year celebrations, it's as good a time as any to try to answer this question.

I say "try" because there is no one, clear cut answer. But one of the more popular schools of thought is that it's all about the culture--Chinese culture in particular--and the beliefs and values that come with it. And with that, let's go through this list from Gordon Redding's seminal work that can help us better understand what separates Overseas Chinese businesses from all the others.

1. Collectivism and familism. Among the Chinese, there is a greater emphasis on an individual's connections and relationships with others than the individual in isolation, and that the only essential and most important grouping within which this individual exists is the family.

2. Limited and bounded trust. Of course the Chinese know that the family is surrounded by people on the outside that it needs to coexist and interact with: an extended network consisting of relatives, friends, and business partners, and society-at-large, which includes everyone else. Within these two societal spheres, the Chinese follow a simple rule: trust family absolutely; your friends and acquaintances to the degree that mutual dependence has been established and face invested in them; with everybody else, no assumption about goodwill.

3. Guanxi or personal connections, which is clearly an offshoot of the two items above. It is widely believed that this network of connections is one important source of competitive advantage, an exclusive asset that Overseas Chinese use to get ahead in business.

4. Hsiao or filial piety. Absolute obedience to the father, the head of the family. It comes from a set of rules about deference that define important relationships within the family, with the five most important ones being (in descending order of importance): father-son, husband-wife, elder brother-younger brother, ruler-subject (or boss-subordinate), and as well as hierarchical distinctions.

5. Work ethic and hard work. In a society where each family is dependent on its own resources for survival, and where each individual is in turn dependent on family support for so much in life, the person who is not working as hard as he or she might for the common good will come under intense social pressure.

6. Money, frugality and pragmatism. Money-mindedness is often attributed to Southern Chinese, the regional group where most Chinese-Filipino families originate from. In these families, children are taught early to value money and not be easily deprived of it, and to bargain. Also, unlike in conservative Western thinking in the olden days, to the Chinese the pursuit of riches is seen as being respectable. Of course, historically, frugality is the result of "being so poor for so long" for many of the first generation of Chinese immigrants, and has eventually become a matter of pragmatism for later generations.

7. Li, or good manners and gentlemanly conduct. With the concept of collectivism and familism above, it results in the importance of "face," how the behavior of an individual may affect not only his or her reputation, but the social standing of the entire family as well.

One Year and Counting :)

Logo mock-up by my student, Gui

Who would've thought we'll last this long?

It wouldn't have been possible without the help of friends, old and new: all those who made comments, asked questions, and made discussions informative and lively (Tin, Henry, Jade, and Anonymous, just to name a few); all those who shared their experiences and wisdom with posts and contributions (Kat, Ange, Billy, Hap, and Sedfrey); all my friends, colleagues, and students for the support; all those who follow, subscribe to, and share links from this blog; all those who patiently spend a few minutes, nine times each month, reading my posts; and finally, my girlfriend who is always there to inspire and support me in every thing I do.

To everyone, my sincerest THANK YOU. Here's to another informative and prosperous year ahead of us...

...and a quick look at the year that has been.

Key statistics: 7,257 unique visitors, 26,401 pageviews, 13,648 visits from 86 countries

Most popular lists

5. 5 Richest Persons in the Philippines in 2010

4. 6 Things You Need to Know About Investing in Stocks

3. 4 Things You Need to Know About Investment Risk

2. 6 Questions About UITFs Answered

1. 9 Things You Have to Know About Legalizing Your Business

Most commented posts 

5. A Conversation with Sam and 6 Reasons Why an MBA is Good for You (Part 2)

4. 4 Things You Need to Know Before You Invest Your Hard-earned Money (Part 2)

3. UITF Head-to-Head: BDO vs. BPI

2. Earl's Dilemma

1. "First Country Bank" Part 2: A Deeper Look

Most viewed posts 

5. 9 Things You Have to Know About Legalizing Your Business (Part 1 of 3)

4. 9 Things You Have to Know About Legalizing Your Business (Part 3 of 3)

3. "First Country Bank" Part 2: A Deeper Look

2. UITF Head-to-Head: BDO vs. BPI

1. UITF Triple Threat: BDO vs. BPI vs. Metrobank!