Q: The stock market has started to move sideways last week after registering an all-time high at 6,800 points recently. I wonder if this is a good time to take profits now as many stocks are already expensive, but I also worry that I might regret it later if the market resumes its uptrend and goes up further. I want to maximize my profits from stocks. Can you advise me? – Evan De Vera by e-mail
A: The reason you hesitate to sell your stocks now is you have the feeling of greed that comes with the anticipation that the market will further go up. The feeling of greed tells you to hold on to your stocks and wait for it to go higher as everyone expects the stock market to break the 7,000 target soon. There is a feeling of denial within you every time you see the market falling because you don’t want to hurt your ego by accepting the possibility that you may be wrong about your expectations.
Yes, there is no doubt that the market will go up again and possibly set another record high but every time the market goes up, the risk of losing also gets bigger. Considering the rocket speed and steep rise of the PSE index, which rose by 18 percent in less than three months, it is not hard to see that the stock market may soon be due for massive correction.
It may not necessarily be a sharp fall unless there is a reason for the market to panic but it may decline slowly on choppy fashion. Speculators will trade less as buying slows down. Traders take a back seat and assess where the market stands fundamentally. Some may fear that the market has topped already. Others think that since the Philippine stock market is already trading at scary valuations, many stocks are now ripe for the harvest.
This may be the best time for you to cash in on your gains while the opportunity to sell at a good price is still there. You may have missed out selling it at the highest price but at least you will be able to sell it at a nice profit before it is too late. You will never know where the market will go next. It may recover soon or stay sluggish for some time. When you sell it now, you can have that peace of mind that you can always buy it back later when it falls further.
If you are holding on to shares that are still trading at paper loss, you can sell it at best price possible. It doesn’t have to go above your cost. If you think that the stock has nothing good to offer and it is not going anywhere amidst the bullish market environment, then make a decision to cut your losses and minimize the damage.
As a rule of thumb, cut your losses when your investment has already lost 7 to 8 percent from your purchase price. If you cut your losses at 15 percent, you will need the stock to recover by 18% to break even. If you sell your stock at 50 percent loss, you will need the stock to recover by 100 percent just to break even.
There are growing risks that indicate that the market may be on its way to correct soon. Because of so much money that is flowing into the market brought about by lower interest rates, investing in Philippine stocks has been more of liquidity driven rather than fundamentals driven. The excess liquidity in the system has been propelling the market to euphoric levels. Market players have turned into speculators from investors. When people start to ignore high P/E valuations and buy up stocks like crazy, trouble is not far behind. Sooner or later, this market bubble is going to burst and many people will be rushing to get out of the market.
As we approach the end of the first quarter, it will be interesting to see how the quarterly earnings results will turn out next month. A quick sampling of the top index stocks with at least 20x P/E and above shows that the average expected earnings growth rate this year is 23 percent. Will the first quarter earnings results align with market expectations? That is something to watch out for. If the results turn out to be disappointing, then expect the market to fall. Share prices will be falling until market adjusts to a lower P/E target.
Another risk to look out for is inflation. Declining inflation from 4.6 percent in 2011 to 3.1 percent last year helped push stock prices up. The low inflation environment is a key factor that makes the market willing to pay a premium for market P/E because there is a perception of quality in earnings growth. The growth that is not artificially caused by inflation, because it is low but by real demand.
In February, the inflation rate has started to pick up and rose to 3.4 percent, the fastest in four months. Although this is still low by any comparison, there is a probability that this trend will carry on. With so much money circulating in the system, increased consumer spending that will support our growing economy this year will likely drive inflation higher. Also, we have the forthcoming national elections when a lot of money will change hands. When inflation increases, the premium on market P/E declines.
Sell now while it feels good. Look for the opportunity to sell your stocks at a good price. Selling on strength every time the market makes rally is a good strategy to get out.
Henry Ong is registered financial planner of RFP Philippines. To learn more about financial planning and how to become RFP, attend a free personal finance talk on April 4, 7 p.m. at PSE Center, Ortigas. To reserve, e-mail at email@example.com or visit www.rfp.ph