Thursday, April 28, 2011

my stock picks for 2011

My approach to buying stocks is the same as buying most other things: Buy quality ones that are on sale. Otherwise known as value investing, this involves buying stocks that are currently priced below its fair value. I have 3 criteria when buying stocks:

1. priced at 10% discount to its fair value
2. company has been in business for a considerable amount of time
3. it sells an important product or service

As to coming up with its fair value, I use Graham's number which involves multiplying (earnings per share) x (book value per share) x (22.5), then getting the square root of the result. So far I have only examined stocks in the PSEi which lists 30 stocks. Among those listed, only 3 meet my criteria:

1. JGS - ideal price at P24.5
2. RLC - ideal price at P13.5
3. URC - ideal price at P37.5

It is interesting to note that these companies are Gokongwei led and as of today, they sell for P24.1, P13.08 and P37.0 respectively. As long as these stocks remain below my ideal price, I will buy them. Once they go up beyond the margin of safety, I may have to evaluate other stocks outside the PSEi and see if there are bargains to be found.

When do I sell? I will only sell my stocks when I turn 65 or if the company is being mismanaged or if it becomes severely overvalued by the market. Happy investing!

Friday, April 15, 2011

Kiyosaki's new rules of money

I stumbled upon Robert Kiyosaki's new rules of money presentation and would like to share it with you. Here's a summary:
1. Academic and professional education isn't enough anymore, get financial education.
2. Work on getting more of your income from business and investments rather than from employment.
3. Hedge against inflation by buying gold, silver and oil.
4. Asset is defined as something that puts money in your pocket while liability gets money out of your pocket. Accumulate more assets than liabilities.
5. Accumulate good debt such as getting a loan for a rental property while the tenant pays for it. Avoid bad debt or consumer debt.
6. Have something to sell.
7. Don't park money for the long term. Move it around.
8. Focus. Don't diversify. He doesn't invest in mutual funds.

Wednesday, April 13, 2011

notes about investing

1. pay off debts and have an emergency fund before investing
2. higher returns would involve more risk, but risk can be minimized by studying the investment before putting your money
3. don't lose money, if the investment is falling, opt out at the early stages and lose a little. don't be hopeful that it will bounce back. this is very true for stocks.
4. don't be greedy. don't pool all your investments into the best performing asset
5. be vigilant. monitor the performance of each investment. if it doesn't perform, stay with cash
6. invest in educating yourself. you never lose with this one
7. make sure you understand the difference between investing and speculating
8. if you don't understand it, don't place your money in it until you do
9. don't be emotional about your investment. be prepared to sell if necessary
10. again, don't lose money

Thursday, April 7, 2011

don't swallow the "average returns" published by your fund

It's always nice to look at the annual reports of various investment funds. They are always printed in glossy paper and a lot of effort went into its publication, think graphics, etc. If you ask me, I'd rather have an ordinary looking report printed on ordinary paper, if that would mean considerable savings for the fund that will be translated to reduced account fees; ergo, more returns for us. Yes, we are paying fees and this eats into our returns, my friend. Anyway, the point of this blog entry is to tell you that numbers aren't always what they seem. Let's say the fund gained (+50%) in year 1 and lost (-30%) in year two. You invested 100 into the fund. How much do you have after 2 years. 110? Nope, you have exactly 105 after 2 years. Most people, in fact most funds will average the returns (50%+(-30%))/2years equals 10% average return. But that is not accurate. After year one, your investment is now worth 150 after a 50% return. After year 2, your 150 is now worth 105 after a 30% loss. So in reality your fund's performance is not a respectable 10%, but only 5% or about 2.3% return per annum. So when you see 13% average returns over 5 years published, don't be impressed right away. Moral of the story, evaluate your investments regularly, at least once a year and do your own math as to your actual returns, or loss for that matter. Happy investing!

Wednesday, April 6, 2011

the little thing called inflation

Inflation is an important factor in evaluating the performance of your investments from time to time. But what is inflation. Let's say you work for 30 minutes and get paid $10 for it. You then spend the money to buy a piece of hamburger since you're hungry, that's consumption. You decide to work for another 30 minutes and get paid another $10. Since you don't need to spend it, you decide to save it for you to spend after, let's say 5 years. If you decide to put the $10 in a jar and get it back after 5 years, it would still be the same $10. But alas, because of inflation, the hamburger this time costs $11.50, so you can't even afford to buy one now. Let's say you were a little bit wiser and deposited the money in a savings account earning 3% pa. You then withdraw the money after 5 years and got $11.50. Well and good, you can still afford to buy the same hamburger now. Let's say you were somewhat aggressive and used the $10 to buy one share of stock in a reputable company with solid earnings and excellent management. You then sell that share of stock for $13.50 after 5 years. You get to buy a hamburger and still have $2 to spare. But it is also possible that the stock you bought could be worth only $8 when you sell it 5 years after. No hamburger for you then. Another thing about inflation is that it varies from one country to another. Let's say in country A, you're getting returns of 10% but if the inflation rate is 8%, you're basically just getting 2%. Compare that with investments earning "only" 6% in country B with an inflation rate of 2%. In this scenario, country B offers better returns of 4% after inflation. Remember to evaluate your investments at least once a year and don't forget to factor inflation when gauging their performance. Happy investing!

Monday, April 4, 2011

using your head when evaluating business proposals from friends

Recently, friends and relatives have pitched ideas for financing certain business ventures or investments. It ranged from the ubiquitous internet cafes to residential real estate. Although there is a good chance of making money in such ventures. I have issues with a few things. First is trust. Money is quite a temptation and you can never be 100% sure of the people who will handle yours. I don't want to be sleep deprived thinking if the money is still there. This is made worse by the fact that the proposals I got offered very little control, especially that I reside overseas. They are basically asking me to trust them with capital and it will grow. That's not my style as I want to be involved in any business or investment I'm in. Second problem is, close relationships often get in the way of business and it's hard not to let emotions get involved. Surely, I love my friends and relatives but at the same time, I would want decent returns on the capital. If I were a stockholder, I would demand the very best from management. If not they get fired. This would be very difficult in a small business involving relatives or friends.

The key is to evaluate each pitch thoroughly. The following guidelines might help:
1. The proponent must have a track record. I will not finance a business idea from a 16 year old cousin who hasn't done it before. Not because of his age, but because I need to be comfortable in the fact that he has experience handling money, best if it was his own at first and maybe he can handle mine.
2. The business plan must be very good. And I mean a written business plan. It doesn't mean that just because they're close to you, you'll just throw money on a poorly thought out business or investment plan.
3. He must be able to answer all of your questions regarding the planned venture satisfactorily. That would mean that the person is serious about it.

Even the perfect plan carried out by a trustworthy, hardworking friend can still fail so I would only invest the amount of money I would be comfortable losing. The downside would be little money lost but the upside is great. If the investment or business thrives. Not only will you earn, you would have helped someone else too.