Lessons from the market slide

Remember lechon manok, shawarma, and zagu? At one time they were all the rage, and it seemed like every week a new stall would be sprouting up on the next street corner, never mind that there were already a dozen others within walking distance.

We’d hear stories of how this or that person made a ton of money with just a small investment. For some, the temptation would eventually become too great that they would open their own stall not wanting to miss out on the action. Many did not even bother with basic market studies—potential buyers in the area, foot or vehicular traffic passing by, competition, etc. Inevitably, of course, most shut down and what are left are those that do have solid value propositions.

Substitute stocks for lechon manok and you have a taste of what has happened in the market lately.

While the market was going up, more and more people came in for the ride without fully understanding why they were doing it and what they were getting into.

Herd mentality

The low interest rates were also a factor—people were simply looking for instruments from which they could earn more. But herd mentality is contagious when it comes to investments: If Pedro or Juan are in it, it must be OK, and if Rosing is making money, I probably will, too!

The recent slide teaches us a number of lessons:

Do not go with the herd. As Warren Buffet famously said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” And from Peter Lynch: “A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.”

Do not let emotions rule investment decisions. The excitement of seeing money growing quickly when sentiments are positive often leads people to buy when prices are high, just as fear in a down market often leads people to sell when prices are low.

Be careful who you deal with. In an up market, everyone’s an expert. There is no shortage of people advertising their gains, giving advice and enticing you to invest your hard-earned money. But in a down market, many suddenly disappear. Look for the ones who will be with you through the ups and downs, who will address your concerns, handhold you and help guide you in deciding what to do.

Lengthen your horizons. If we look at the movement of the PSEi between end-2012 and end-June 2013, its close has gone from 5812.73 at year-end to a high of 7392.20 on May 15 to a low of 5789.06 on June 25. Just three days later, it ended at 6465.28. Quite a lot of movement. And if you went in and out during that period, depending on when you did so, you could have either made a lot of money or lost quite a bit.

A matter of time

In 2007 the index ended at 3621.60, only to drop to 1872.85 by end-2008. A friend of mine who had invested in an equity fund in 2007 told me she panicked and took her money out. Taking that particular equity fund, if she had put in a P1,000,000 at the end of 2007, this would have been down to P624,000 by end-2008, so she would have realized quite a significant loss. But if she had kept her money in, that same P624,000 would have been back to P1.26 million by end-2010, and P1.73 million by end-2012.

As you can see, it is very difficult to time the market. But the longer you are invested, the smaller the effect of market fluctuations. As pundits would often say, investing is a matter of time, not timing.

And by investing regularly you can do peso cost averaging. Markets always move in cycles, and by putting in a fixed amount each month, you take advantage of these cycles by buying more stocks when the market is down.

Look outside. Nowadays, successful investing requires understanding not just the local, but also global environments. Global economies have never been as interconnected as they are now and capital flows easily across countries.

As we have seen, no matter how good our economy has been, it is not immune to developments overseas. A simple statement from the Fed chair on the possible phasing out of the US government’s bond-buying program triggered a massive selloff in many overseas markets, including ours.

The road up

Most of us, however, have neither the time nor the expertise to do so. So, having a professional fund manager handle your money is a good option, and many will do it for an initial investment of as little as P5,000.

What to do now that the market is down?

That of course depends on your needs.

If you need the money now, hopefully you would have been invested for a while—one typically wouldn’t invest in stocks for immediate needs. Given the run-up in recent years, you would still be ahead from when you put in the money. In fact, even year-on-year, you would still be ahead.

If you don’t need the money now, remember that the outlook is still bright. Market corrections are essential to prevent asset bubbles from forming. When sentiments run high, exuberance can lead to unrealistic prices.

Now that much of the “hot” money has exited, the market is back to fundamentals, and fundamentals remain healthy. Longer term, the market is expected to bounce back. Just remember that the road up is never straight.

Strong fundamentals

Recently our chief investments officer was trying to explain the market situation and outlook to a twenty-something associate tasked to prepare an infographic, without much success.

Finally, noticing how much of a fashionista the associate was, the officer said, “when a bag goes on sale at 50 percent off, you can now buy two bags for the price of one, right?”

Seeing her nod, he continued, “but nothing about the bag has changed, right? It has the same quality, and is just as stylish. Its fundamental value hasn’t changed. But now, you can get more of it for the same amount. But once the sale is over, if the bag is really a good one, it goes back up in price.”

It’s the same with our market—the underlying values remain the same, but now stocks are much cheaper than a month and a half ago, and eventually will find their true value. As the money returns to emerging markets, most economists agree that the Philippines will be a prime destination.

So if you’re looking for long-term value rather than quick gains, remember that the market is anchored on strong fundamentals. To go back to the bag analogy, a good bag is a good bag, even when on sale, it will still take you places!

(The author is president and CEO of Sun Life Financial.)