(LAST WEEK’S ARTICLE ON value-style investing, entitled “Buffett-style investing shines” has caused quite a stir among readers of the Philippine Daily Inquirer and its online news publication, the INQUIRER.net. We have asked the president of the Chartered Financial Analysts of the Philippines, Vandermir Say, to answer two of our readers’ questions.)

Q: I have placed my investable funds in mutual funds that are managed by a reputable fund manager in the Philippines. I am not as technically proficient in the markets as Mr. Say, thus I chose to be more of a defensive investor rather than an active one—dealing more in funds than in individual securities. The majority of my funds is invested in balanced funds, while a small percentage is in money market funds. However, I am re-evaluating my asset allocation strategy. At this point, I’m thinking of putting in money market funds or something even less “sexy” (like certificates of deposit). Would this be a good move? And does the principle of peso cost averaging still apply in a financial environment so volatile as we have today? -- Jericho, via e-mail

Say: A passive investor like you would do well by investing in index funds, since such a fund is generally cheaper and, therefore, reduces the costs of having an exposure to the stock market over a number of years. Index funds are cheaper now and may get cheaper going forward; therefore, index funds are becoming more attractive.
During this current crisis, you may also want to allocate more funds to cash. The size of the allocation depends on your cash flow requirements.

Q: I invested money with BPI in one of its mutual funds sometime in July 2008. Another amount was invested with Philam, also in one of its mutual funds, just four days before Lehman Brothers fell, and my husband invested P1 million in AXA Life with me as beneficiary and insured in the amount of P250,000.

Are the above investments safe in the light of the present financial crisis? Did we make the right placements for our hard-earned money? We want to save for our retirement and old age. Entering into any business venture is not a choice for us. -- Amelia, via e-mail

Say: Investors must determine how much they can put into the markets without borrowing and without drastically affecting their lifestyles. Don’t depend on leverage (debt) to generate investment returns.

When an investor seeks to follow the value style of investments, the investors should either invest in a value-style mutual fund or an index fund. In the developed markets, there are numerous value-style mutual funds. One could also simply invest in Berkshire Hathaway, the main company of Warren Buffett.

The problem with a lot of investors is that they invest in mutual funds that do not deliver superior returns. Theoretically and in practice, we observe that a majority of mutual funds fail to beat a passive index. For example, one can compare the returns of a mutual fund against the Phisix or S&P 500.

In investments, an ounce of prevention is worth a pound of cure. The value style of investment requires one to invest only in things one understands. This supports the index fund investment model, since if one cannot make an intelligent conclusion on the superiority of a mutual fund, investing in the index that tracks the movements of the stock market makes more sense.

This is so, since, as we now can see, institutions we thought deserved our trust actually did not. As Buffett says, “You always find out who is swimming naked when the tide goes out.” Recently he said: “We found out that Wall Street has been kind of a nudist beach.”

Integrity and ethics are very important when investing especially when you will become a minority shareholder in a business. If the management of a company has displayed a low level of ethics or integrity, then you should reconsider your investment in that company. Sometimes, investors only decide to act on these kinds of views when assets have been lost already.

An investor can use a cost-averaging method when the investor is fairly certain that the business is superior and will continue to produce cash and income in the future. Cost-averaging on a punt or speculative play makes less sense as more money may be lost if the gamble doesn’t work out.

(If you want to read more about value-investing, you may visit Mr. Say’s blog at http://sayvalue.blogspot.com.)