Next critical elements in bottom-up investing

The Philippine Stock Exchange index (PSEi) continued to slip and shed 13.42 points or 0.19 percent when it closed last Friday at 7,232.66, while the peso headed toward the opposite direction to close at P49.92 to the US dollar.

The all-shares index gained 3.42 points or 0.08 percent at 4,365.63 even if total value turnover was low at P5.7 billion. Still, gainers outnumbered losers 94 to 84, and with 45 issues unchanged.

The market’s downtrend was generally attributed to the general angst felt in overseas markets ahead of billionaire Donald Trump’s ascent to the US presidency.

One such worry was Trump’s election promise to even up to China over its supposed unfair trade practices and currency manipulation, among others.  Another worry was Trump’s threat to terminate some global trade deals.

The market was further weighed down by the disappointing performance of the agricultural sector in 2016.   Farm output contracted as a result of the poor fourth quarter performance.  Agricultural production was down 1.41 percent in 2016 from a contraction of 0.11 percent in 2015.

On the other hand, as major Asian markets fell to negative territory last week, Shanghai stocks climbed to higher ground.  This was on account of China’s official announcement that its overall growth for 2016 has improved to 6.7 percent, reversing its falling trend that started in 2014.

Bottom line spin

The nebulous outlook of the market at present is one of the ideal situations that calls for the use of the bottom-up approach in investing: General fundamentals are difficult to read and stock prices lack trend but are active.

Prices of popular stocks like Metropolitan Bank & Trust Co., Universal Robina Corp., SM Investments Corp. and Ayala Corp. closed lower last Friday but remained healthy and prospective like the other stocks I have earlier pointed out as stock picks of dominant players.

If you will remember, I said that the stock picks of dominant players ideally serve as a good guide as to what stocks to pick or choose.

These stock picks of dominant players have, as well, the necessary volume that can afford “ease of entry” and “timely exit,” which are the next critical elements in bottom-up investing.

Volume, in the investing process, plays a very important role in the growth and preservation of capital.

The importance of volume cannot be overemphasized in both sides of the trading process.

On the buying side, a stock’s price could rise too fast when buying demand outstrips the supply of shares available.  Like it has always happened, they can go up well above your acceptable entry price and leave you out in an otherwise profitable hunt.

The need for sufficient volume is further demonstrated in a short situation (you sold shares that you did not have).  As the market goes against your trade, you need to buy back fast. Otherwise you’d be in trouble.  But, you won’t be able to buy that fast.  The price of a stock soars when there is not enough volume.

The same experience applies on the selling side.  The price of the stock without sufficient volume can easily fall fast, leading to a disastrous trade that could potentially wipe out anyone’s capital.

In addition to having a good volume of transaction, you must choose a stock on the basis of your familiarity with the company’s business or services.

Most end up in disastrous trading experiences because of this oversight or lack of appreciation of these two critical elements in bottom-up investing.