Learn How to Build a Startup

If you enjoyed the Introduction to Statistics class from Udacity and if you're thinking of founding your own business, you might want to check out this next course about building a startup. The class will be facilitated by noted educator and entrepreneur Steve Blank. In the course, you will learn "the key steps of the Customer Development process: how to identify and engage the first customers for your product, and how to gather, evaluate and use their feedback to make your product, marketing and business model far stronger." Based on the syllabus, the course will cover key aspects of operations management (product design and development, supply chain management), marketing (market segmentation, marketing strategy), and business strategy. The best part is that you don't have to have any prior knowledge about these topics, although "passion, tenacity, and a willingness to work hard are essential."

The course starts on September 14. See you in class!

Having a Target Price in Making Buy and Sell Decisions

DEAR INVESTOR JUAN

Dear Investor Juan,

After reading almost all your articles I think I am now ready to dabble on stock investing.

I already followed you by having eliminate first my debts and already build an emergency fund. Now to the next step investing.

I will put part of my investment on BDO's UITFs, already have that on the way.

My question really is on stock investing. Is it a wise choice to apply the law of averages in stock investing?

Here's the plan that I currently have on my head, let's take BDO stocks as an example. Currently BDO is priced at Php 61.20 as August 17, 2012. I expect it to grow at least 30% so I expect it's value to rise Php79.56. Now I average the current price and the expected value and it would give me an average of Php70.38.  Now what I am thinking is to buy BDO stocks below the average price. Do you think it is a good approach on stock investing?

Also I am in this in the long run and would be investing on a regular basis. (Most probably every payday). Also should I sell when my expected value is reached and invest in other stocks? Or should I just hold onto it? As I said I'm in for the long run.

Thanks.

Regards,
Anthony


Dear Anthony,

Congratulations for reaching this stage where you can start investing in "risky" securities. Now the fun/exciting/nerve-wracking part begins. :)

Yes, I fully support your approach, and here's why. First, unlike many of us who only have vague notions about how investments or particular stocks will perform in the foreseeable future, you managed to come up with a specific figure, which is important in making objective decisions; how you came up with 30%, though, is another matter altogether. Second, assuming that you can justify the stock price growth of 30%, your proposed rules do make sense: buy as long as the stock price is below your 70.38 "minimum" and sell when it reaches your "optimistic" forecast of 79.56.

Here are a couple of ideas that you might also want to consider in refining your investment plan. First, apart from stock price increases, also consider cash dividends in estimating future returns, particularly for stocks that do pay dividends. Also, investing small amounts frequently will cost you more since brokers charge fixed per-transaction fees. Try asking for a fee schedule from your broker so that you can plan your purchases in such a way as to minimize fees relative to the size of your investment.

I hope you found my comments helpful. The best of luck to you!

Taking the Plunge

This is it. After six years of procrastinating and delaying, I'm finally going to do it.

So why now, after all these years? I don't know. Maybe it's because I feel that years of teaching and taking higher degrees is not enough, that in order to be credible, I also need to be a CFA. Maybe I'm just insecure of the growing number of people around me who have at least passed Level 1 (egad my former students!). Maybe it's because, after teaching two modules of review program (Equities in 2010 and Quantitative Methods just a couple of weeks ago), I feel that now is the best time to take the exam. Maybe it's because I know this will force me to study sub-topics that I'm still unfamiliar with. Or maybe I just want that suffix because my girlfriend already has hers (CISM). Who knows?

Anyway, good luck to me and to others who will also take the exam in December. We have three months to prepare, and I think that should be enough. Feel free to email me questions about the exam, let's try to turn this into one big virtual study group.

Questions about the SMC Preferred Shares Offer

DEAR INVESTOR JUAN

Dear Investor Juan,

It says that the it is a perpetual share hence no maturity or tenor but SMC has call options/early redemption dates:

Series 2A - 3rd to 5th year (7.5% gross or 6.75% net)
Series 2B - 5th to 7th year (7.625% gross or 6.8625% net)
Series 2C - 7th to 10th year (8.0% gross or 7.2% net)

Individual investor tax rate is 10%. 

SMC may or may not redeem the shares during the call option period. If not redeemed, the step up rate is:
-5th yr, higher of a. Dvidend Rate / b. 10yr PDST-F + 3%
-7th yr, higher of a. Dividend Rate / b. Interpolated 15 yr PDST-F + 3%
-10th yr, higher of a. Dividend Rate / b. 20 yr PSDT-F + 3%

What does this mean?

Dividend payment is quarterly. Does it mean that say I get 500 shares at P37,500 for 5 years, every 3 months within the 5-year period, I will get 682 per quarter?

Henry


Dear Henry,

Yes, the shares are callable, which means SMC has the right, but not the obligation, to buy back the shares from investors on the given dates (even if investors are unwilling). If SMC does not exercise this right, the dividend rate may increase based on the rules you mentioned. "PDST-F" stands for Philippine Dealing System Treasury - Fixing, benchmark interest rates at different maturities/tenors that are computed daily based on the prevailing yields/prices of Treasury bonds.

And you're right, upon closer examination of the prospectus, dividends paid to individuals (who are Philippine citizens) are subject to 10% withholding tax. Domestic corporations will however receive dividends tax free. If you buy 500 Series 2A shares, you are therefore entitled to 6.75% x 37,500 pesos = 2,531.25 pesos per year after tax or 2,531.25/4 = 632.81 pesos per quarter.


***

Dear Investor Juan,

I've seen the prospectus of this investment and its 600 pages long, and as I'm not into accounting, I don't think I will understand most of it.  So I rely on outside intervention.

1.  Accdng to the trust manager in HSBC this is perpetual share, how do I get my capital back? Is it by trading it back to the bank?
2.  If so, does the bank I choose play a big part in whether I will be able to re-sell my shares after 7-yrs, for example. I ask this because minimum investment at HSBC is 750,000 but only 200,000 at BDO.  

Girlie Scout


Dear Girlie Scout,

Like other preferred shares, these will be listed on boards of the PSE, so you can just ask a broker to sell your shares on your behalf.

From the information that you shared, it seems that your choice of bank will only make a difference in terms of the minimum investment that they accept. I'm not sure, but I think the higher minimum for HSBC is due to the limitations imposed on the activities of foreign banks in the Philippines.

Thank You Jesse!

Image from Rappler

Thank you for inspiring us and for showing us how to truly LEAD BY EXAMPLE.

Join the nation in honoring Secretary (and former Naga mayor) Jesse Robredo at Salamat Jesse.

SMC Preferred Shares Offer

DEAR INVESTOR JUAN
IN THE NEWS

Dear Investor Juan,

I'm a frequent reader of your blog. Have you seen these articles?

http://www.interaksyon.com/business/40049/sec-approves-san-miguels-preferred-share-sale

http://business.inquirer.net/76027/sec-approves-san-miguel-preferred-share-offering

It will offer 7.5% to 8% on preferred shares at P75 a par value.

Correct me if I am wrong but this preferred share issue feels more like a bond issue (fixed dividends, has a fixed period etc. etc.) than a stock issue.

I'm doing my own research on these terms cumulative, non-voting, non-participating and non-convertible.

But from what I know preferred shares have priority over common stock if a company goes belly up and they have no voting rights except for situations covered in the penultimate paragraph of section 6 of the corporation code.

Can an ordinary person like me get into this? I'm into UITFs right now and given that this offers a guaranted return I'm tempted to sell my low-yield low-risk UITFs to buy this.

What do you think? Assuming this is available to the public is it a sensible investment?

I hope you can feature this in your blog. San Miguel is one of the most stable blue chips in the country and with a fixed rate of 8% for 10 years this issue beats government 10 year bonds by a pretty sweet margin. I also hope you can help me find out how I can get in on this. As a newbie investor I'm just looking for better yield on my savings just like anybody else.

Thank you.

Randy


Dear Randy,

Details of the issue may be found here.

Thanks for sharing the news with us. You're right, preferred shares are very similar to bonds in that investors receive a fixed and guaranteed (to a degree) periodic income, unlike common stock where dividends are uncertain. The cumulative feature means that any unpaid dividends accumulate and must first be paid by the issuer, in this case San Miguel Corporation (SMC), before it can issue any common stock dividend.

Also, you're right, preferred shareholders have a higher priority claim than common stockholders over the assets of the firm if it goes through bankruptcy proceedings, but lower priority than creditors. Therefore, a direct comparison with corporate bonds isn't exactly appropriate, but for a large and stable firm like SMC it may be practical. So yes, the 7.5% to 8% dividend rate (gross of 10% withholding tax for individuals) seems attractive compared to current corporate bond yields, especially since all taxes and duties applied to dividend payments shall be borne by SMC, according to the offer prospectus above (page 32 under "Taxation"). (EDIT: Dividends paid to individuals (who are Philippine citizens) are subject to 10% withholding tax. Domestic corporations will however receive dividends tax free. Thanks Henry.)

For your other concerns, yes it is available to the public, and yes, I do think it is a sensible investment. You can apply for an allotment through any PSE stock broker like Citisec Online (which has provided me with some valuable information regarding this issue). The minimum investment amount is 37,500 pesos, with additional amounts in multiples of 7,500 pesos. Take note, though, that while the stated last day of the offered period is September 14, 2012, you can only submit your application through Citisec Online until August 22, 2012, 3:30pm.

I hope I was able to sufficiently answer your questions. Good luck!

Making Investment Decisions Based on Data, Part 2: The Efficient Portfolio Frontier

PERSONAL FINANCE 101

This post is a follow up to this post about choosing between mutually exclusive investments by simultaneously considering return and risk using the Sharpe ratio. This time, we will consider investing in two securities simultaneously and learn how to find the mix that leads to the best return for a given level of risk.

For "fairness," this time we will use the historical daily NAVPUs of BPI's equity and fixed income (bond) funds (which you can download here), which I copied from UITF.com.ph. I used the NAVPUs from the same period that we used in Part 1 (January 2 to August 24, 2012) so that you can compare the funds provided by the two banks in terms of expected return and risk, if you want to. Applying the procedure described in Part 1 will result in the following statistics for the BPI data (please note that the BDO counterparts of these BPI UITFs both have higher expected returns and lower risk for the same period, so make of that what you will). In this example, as with the BDO UITFs, the BPI fixed income fund is theoretically preferable than the equity fund because of the Sharpe ratio, despite having a lower expected return.

	Equity fund	Fixed income fund
Expected return (daily)	0.0743%	0.0155%
Risk (standard deviation)	1.7260%	0.2814%
Sharpe ratio	0.04305	0.05524

But what if we can invest in both funds (i.e., BPI equity and fixed income funds). What mix of these two UITFs will give us the highest expected return for a given level of risk?

The Efficient Portfolio Frontier

Say X1 is the proportion (or percentage) of your "investable" funds or portfolio that is invested in the equity fund and X2 is the proportion that is invested in the fixed income fund. Additionally, say the equity fund and the fixed income fund have expected returns of R1 and R2, respectively, and standard deviations (risk) of S1 and S2, respectively. Then, the expected return of your portfolio, R, is just the weighted average of R1 and R2, or

R = X1(R1) + X2(R2)

And the variance (or standard deviation squared) of your portfolio, S^2, is given by

S^2 = (X1^2)(S1^2) + (X2^2)(S2^2) + 2(X1)(X2)(S12)

Where S12 is the covariance between the two funds (applying the COVAR function in Excel to our data, we get 0.3442%^2).

With X1 + X2 = 1 (100% of your portfolio is invested in the two funds), we can express X1 and X2 in terms of R, R1, and R2

X1 = (R - R2)/(R1 - R2)
X2 = (R - R1)/(R2 - R1)

And substitute these into the equation for S^2

S^2 = {[(R - R2)/(R1 - R2)]^2}(S1^2) + {[(R - R1)/(R2 - R1)]^2}(S2^2) + 2[(R - R2)(R1 - R)/(R1 - R2)^2](S12)

Which we can simplify into:

[(R1 - R2)^2]S^2 = (S1^2 + S2^2 - 2S12)R^2 + 2[(R1 + R2)S12 - R2S1^2 - R1S2^2]R + (R2^2)(S1^2) + (R1^2)(S2^2) - 2R1R2S12

or

(R1 - R2)S = sqrt {(S1^2 + S2^2 - 2S12)R^2 + 2[(R1 + R2)S12 - R2S1^2 - R1S2^2]R + (R2^2)(S1^2) + (R1^2)(S2^2) - 2R1R2S12}

Using the following values that we have already computed,

R1 = 0.0743
R2 = 0.0155
S1 = 1.726
S2 = 0.2814
S12 = 0.3442

We get the equation

0.0588S = sqrt (2.37R^2 - 0.04254R + 0.000362)

We can use the free application "Graph" to plot this equation (with R on the vertical axis and S on the horizontal axis) and get this hyperbolic (green) curve which is called the Efficient Portfolio Frontier:

Points on the Efficient Portfolio Frontier represent different combinations of our two assets (BPI's equity and fixed income UITFs). If we assume that investors don't like standard deviation (everything else equal), then they should only consider portfolios above and to the right of the "minimum variance portfolio" (at R = 0.008982 and S = 0.2226, which we get by differentiating S with respect to R and setting dS/dR to 0).

At this point we still face an infinite number of combinations of the two funds, and the choice of a particular mix ultimately rests on the investor's expectation for returns and attitude towards risk. In Part 3, I will show that if we include another factor in our analysis, we can come up with a truly optimal portfolio that all investors should choose.

The Universe is Angry

I just arrived in Manila. I have to be here for a few days to gather data for my dissertation and to facilitate the first of two classes for the CFA review that were assigned to me.

I spent two hours in the airport waiting for a cab. I'm wet, I'm tired, and I'm hungry. My internet connection is wonky, so I can't finish the post that I had originally planned to publish today. But I know that I have no reason to complain as thousands of our countrymen are in a much, much worse predicament as I am.

Given how the rains have hardly abated since early this morning, those of us who are in the relative safety and comfort of our homes can't really do anything at this moment but wait and hope for things get better tomorrow. As soon as we are able to, however, we have a responsibility to do what we can for those who are not as fortunate as we are. There's no doubt in my mind and in my heart that that we all will get though this with our heads held high, as we always have.

Stay safe, everyone.

More Reasons to be Optimistic about the Philippine Economy (?)

IN THE NEWS from PhilStar Online

It's not often that one comes across this much good news about the Philippines in one day. Just posting these excerpts in case you missed them.

Stock market rises to unprecedented heights

The Philippine stock market is making its mark as one of the hottest emerging markets in the world, having outperformed many of its regional rivals this year on the back of rosier macroeconomic fundamentals, a resilient corporate sector as well as government’s resolve in stamping out corruption. An improved fiscal situation, a growing middle class, stabilizing political situation and vast natural resources have likewise brought the Philippines back on the radar of foreign investors.

In the first half of the year, the Philippine Stock Exchange index (PSEi) vaulted to new all-time highs 19 times, rising 20 percent to close at 5,246.41 by the end of June. Last July 5, the PSEi shot to a new record high of 5,369.98. The PSEi has gained around 25 percent this year, making it the top performing market in Asia, outpacing bourses in Singapore, Indonesia, Malaysia, Thailand, Vietnam, Hong Kong, India and China, among others. After a sharp rally, local stocks have gotten costly compared to other Asian stocks, making some investors reluctant to stick around. The PSEi, trading at nearly 16 times projected annual earnings or nearly double South Korea’s 8.3 times, is now showing signs of topping out. It is now down by more than four percent from a record reached earlier this month as the euro zone’s debt crisis has worsened. (Emphasis is mine - IJ)

Phl on its way to achieving investment grade rating

The Philippines is on its way to achieving an investment grade rating from international rating agencies amid the reforms undertaken by the administration of President Aquino who is in the first half of his six-year term. Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said rating agencies led by Standard and Poor’s (S&P), Moody’s Investor Service, and Fitch Ratings have recognized the efforts undertaken by the Philippines. This came after S&P upgraded the country’s credit rating to one notch below investment grade on a stable outlook, putting the agency’s assessment on the country at par with that of Fitch that also rates the Philippines a notch below investment grade. Moody’s, on the other hand, rates the country’s sovereign debt at two notches below investment grade but recently upgraded the country’s outlook to positive from stable, paving the way for a favorable action within the next 12 months to 18 months. If the Philippines is granted investment status, this would translate to lower borrowing costs and further attract more investments into the country.

The Philippines has obtained eight positive credit rating actions from S&P, Moody’s, and Fitch since President Aquino assumed office in June 2010. This enabled the Philippines to attain its highest credit rating in 13 years at one notch below investment grade.

Investor confidence in Phl rises: P-Noy's good governance pays off

The Philippines has seen renewed investor confidence over the past few months largely due to the Aquino administration’s good governance thrust. While greater investor confidence in the country is a reason to celebrate, this also means the government must continue to work hard to implement reforms to sustain the momentum.