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a framework for investing in the stock market

Warren Buffett famously said: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework."

A big reason why I blog is to preserve the framework I use. Reading past entries allow me to revisit the ideas from various sources that have influenced my investing style. When it comes to putting money in the stock market, here are some guidelines:

1. assess the management - If you manage your own business, you know for a fact that no one could possibly do it better than you. But when it comes to companies whose stock you would like to buy, how do you know that management is doing their best. Check if they have achieved previously stated objectives, check measurements like earnings per share growth and revenue growth, check surveys that publish the most admired and well managed Philippine companies.

2. assess its financial health - one word: cash flow. A company with good cash flow will survive even if its management is incompetent. This is especially true for companies with a firm grip on its market.

3. understand its principal activities - when you buy a company's stock, you own that company. You should therefore understand how it makes money, how can it expand and what are the threats facing its business model.

4. assess its outlook - the stock market is forward looking. the record levels we currently see in the Philippine Stock Exchange means that investors have a rosy outlook for the companies in the exchange. The opposite can also happen, investors can also leave in droves if current events turn sour. This, however can present opportunities to buy stocks at a cheap price if you think that a company's outlook will remain strong despite general economic uncertainty.

5. stick to the framework and don't let your emotions rule - Here's a thought exercise: Let's say you have 500,000 invested in the stock market. The next day a military coup takes over Malacanang and assumes power. Foreign investors withdraw their money and as a result the stock price falls. Your investment is now worth 250,000. If you stick to the framework, you will leave it as it is. But if you panic and follow your emotion of fear and uncertainty, you will also withdraw your investments with a 250,000 loss. Let's say after 1 month the coup is quashed and civilian rule returns. Foreign investors move their money out of Europe because of Greece and Spain defaulting. They then see that the Philippines is still a good place to invest and stock price slowly move up. After 8 months, the value of your stock investments is now worth 510,000. In a span of 9 months, you could either have earned 10,000 or lost 250,000. It all depends on whether you can keep your emotions in check.

Happy investing!

Comments

  1. Understanding the principal and activities is for me a great guidelines that need to consider.You really gave me a lot of good info in here,Great article.

    ReplyDelete
  2. This has to be one of my favorite posts! And on top of thats its also very helpful topic for newbies. Thanks a lot for informative information!
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    ReplyDelete
  3. Hey guys, if you would like to know more about stock investing you could visit the PSE academy website. It is a smart start to investing.

    http://pseacademy.com.ph/

    PSE Academy, the official market education website of the Philippine Stock Exchange, Inc. (PSE) created in partnership with the PSE Foundation, Inc. It is designed to provide a comprehensive investor web-based education for market participants, would-be equity investors, and the public in general.

    ReplyDelete
    Replies
    1. Hi Oliver. Thank you for sharing information on PSE Academy. I've visited the site and it offers very good information on stock market investing. Considering the very low participation rates of Filipinos in this particular investment, I hope many more will be interested in including Philippine stocks in their portfolio.

      Delete
  4. Great tips! Thanks for writing this!

    #5 is key. There are a lot of good strategies out there. But even simple cost-averaging won't work without keeping our emotions in check.

    ReplyDelete
  5. Replies
    1. This is a good post. This post give truly quality information.I’m definitely going to look into it.Really very here.thank you so much.Keep up the good useful tips are provided works

      Delete
  6. Wow. Great Tips. Ang daming bagong learnings!!! Thanks for sharing.

    http://savingspinay.blogspot.com/2014/04/how-to-be-financially-blessed.html

    ReplyDelete

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