Business or stocks?

QUESTION: I want to turn over a new leaf in 2014. I have money to invest.  But I do not know whether I should invest in my own business or invest in stocks. I heard that investing in stocks had provided good returns in the last few years.  Yet I also hear that stock investing is full of risks. On the other hand, I have an idea for a business that I believe will fly with my target customers.  But I am not totally convinced that I should go into business and forgo the steady income from my employment. Can you help me decide?—posted at PFA’s “ask a friend, ask Efren” service at www.personalfinance.ph

Answer:  There are many factors to consider in investing.  People even write thick books on the matter. Allow me to give you a bird’s eye view to start your decision making process.

Investing in stocks and in your own business are actually two peas in a pod, so to speak.  There is a tendency for people to forget that investing in stocks is also investing in a business.

In fact, no less than Warren Buffet says that investors should consider buying stocks as buying into a business.

And when you buy into a business, you should consider whether the business: 1) is simple and easy to understand; 2) has a consistent track record as well as favorable long-term prospects; 3) has excellent management; 4) has high profit margins; 5) pays attention to stockholders’ earnings; and 6) is selling at a significant discount to its intrinsic value.

The Philippine Stock Exchange index (PSEi) has lately been declining owing to the seasonal lull in investing as well as the headwinds it faces.

For one, there is the headwind from the “tapering” of support of the US economy by the US Federal Reserve, the counterpart of our Bangko Sentral ng Pilipinas.

Under its quantitative easing program, the US Federal Reserve has been buying bonds in the open market, to the tune of $85 billion each month, in an effort to put more cash in the pockets of investors and boost the economy.

This action of the US Federal Reserve also tends to lower long-term interest rates, making investing in businesses more attractive.

Recently, however, the US Federal Reserve decided to taper its quantitative easing by $10 billion a month.

The immediate reaction of the markets is a big sigh of relief as a larger tapering would have led to a significant jump in interest rates, a prospect that would have cut short the recovery of the US economy and sent both stock and bond prices plummeting.

But analysts also say that if the US economy continues to recover, quantitative easing will eventually be abolished, ending the regime of low interest rates both in the US and the rest of the world.

There is also headwind coming from US government spending limits and debt ceiling that will come to fore in January and February of 2014.

Add to these the still fragile recovery of certain European countries as well as the Philippines’ recovery efforts after the devastation brought on by the recent natural calamities and you see a near-term prospect fraught with challenges for the Philippine stock market.

The issues on corruption in the Philippines are not helping either. Plus, national elections will again be held in just a couple of years.  Usually, investors take a wait and see attitude right before such elections.

But all these macroeconomic factors will be experienced by small businesses as well, including the one you are thinking of setting up. One other rule of Warren Buffet is that he buys only those businesses that profit regardless of what happens to the economy.

The first thing to do in your case is to determine whether you have enough cash to forgo your steady income and set up your own business.

Remember that investing in a business requires a long-term horizon, perhaps at least five years.

If you will not be earning much from your business in the next few years then you better have the cash to tide you over.

Such cash will be part of your permanent working capital.  Then see if your business fits Warren Buffet’s six investing rules.

While you will not have a consistent track record because you are setting up a new business, you should have at least favorable long-term prospects.

And if you are not buying an existing business, at least make sure that your potential profit margins are high.

Do remember that you need to earn substantially more from your business considering the high level of risk that you are taking.

Now if you do not have the needed permanent working capital and/or the penchant to take on significantly higher risks, then just follow Warren Buffet’s six rules in investing in businesses that are listed on the stock exchange.

If you want to learn more about investing in stocks or in your own business, please visit www.personalfinance.ph. You will find a lot of free useful resources there. You may also attend one of the 2014 EnRich™ personal finance trainings as follows: Feb. 22 in San Fernando, Pampanga, March 1 in Baguio City, March 8 in Davao City, March 15 in Cebu City and March 22 in Metro Manila. Details for the next EnRich™ may be found on the website.

Here’s to a profitable 2014 for you.

(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 09175050709 or e-mail to [email protected]. To learn more about the RFP program, attend a FREE orientation on Jan. 9, 2014, 7 p.m. at the PSE Center. E-mail [email protected] or text <name><e-mail><RFP> at 09173464126 to register.)