Is it time to buy stocks?
Question: I read your recent article on the investing survival guide under COVID-19. My questions
are, how can I buy at the bottom and which stock should I buy to best take advantage of the recovery of the stock market. Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, LinkedIn, WhatsApp and Facebook
Answer: I will ask you the same thing. When will you know when stock prices have bottomed out? Put another way, how do you know that your middle finger is the longest among your fingers in one hand? You know by comparing the middle finger’s length to the other fingers close to it.
In a similar way, you will know when a stock’s price has bottomed out when you compare that price to those that immediately precede and succeed it. That means it will be impossible to buy at the bottom because you will only know one of the bases for comparison (i.e. the immediately succeeding price) “after the fact.”
Jesse Livermore, the world’s greatest stock trader, says that you should not buy when falling stock prices start to reverse direction, which is called the pivotal point. You should buy when stock prices continue to rise after the pivotal point and are supported by increased volumes. You need not be the first out of the proverbial gate.
Now, when the market recovers, and it most definitely will, you can ride the recovery by “buying” the index as no portfolio can outperform the index in a recovery or bull run. Outperformance is measured against a benchmark like the Philippine Stock Exchange index (PSEi). But if you are just after absolute returns, measure yourself against that return level.
You buy the index by creating a portfolio with stock exposure weights equal to those of index component stocks.
If you believe that you are a great stock picker, buy more of the index component stocks that have a prospective beta to the PSEi higher than 1. If a stock’s beta is 1.5x, when the PSEi moves up by 1 percent, the stock will move up by 1 percent x 1.5 or 1.5 percent. Conversely, if the stock moves down by 1 percent, that stock will drop in price by 1 percent x 1.5 or 1.5 percent. High return equates to high risk. And to check if you are truly a good stock picker, you can track your performance through performance attribution analysis.
Now if you are starting to fall asleep by reading this piece, wake up to know that direct investing is indeed complicated as you will need to be all S.E.T.
“S” stands for sizeable funds. You will need to manage huge amounts for those stockbrokers with excellent research to service you; and you will need more than one of them to cover all grounds. “E” means you will need not only expertise to understand the excellent research but also to understand the psychology of investors. And “T” stands for the ability to manage your investment portfolio full time, especially during these times when volatility is the new normal.
Now if you lack even in just one of the S, E or T and you want the easy way to invest, do indirect investing just by leaving your money with the professionals. This can be done buying either an index mutual fund or index unit investment trust fund. And if you want life insurance to come with your investments, especially when you know you still need life insurance but want to shell out more for investing, get a single pay variable unit-linked insurance policy. These products are called pooled funds and are meant for the retail market.
If you have at least P5 million in cash to invest, open a full discretion investment management account where the Trust Department will structure a portfolio just for you.
Here’s to a successful recovery/bull run investing for you. INQ
Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Be a tools-based Yaman Coach.
Details at www.personalfinance.ph/coach.html. To learn more about personal financial planning, attend the 82nd RFP Program this May 2020. To inquire, e-mail [email protected] or text at 0917-9689774.) Copyright 2020 Efren Ll. Cruz, RFP. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without the prior written consent of the author.
