Question: I am excited that stock prices are low now. In fact, when I compare the PSEi (Philippine Stock Exchange index) to other Asian indexes, the PSEi has the biggest drop on a one-year basis. I am itching to buy stocks. How should I go about it? Asked at “Ask a Friend, Ask Efren” Free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook.
Answer: I like guitars. I have liked them since I was a teenager. It is just unfortunate that I did not take care of the very first guitar I bought, which was a Gibson purchased through the proceeds of stock market trading. Yes, through an aunt, I was able to trade and profit from the stock market. But I also did not nurture any interest in stock market investing and trading, not at least until I was well into my career in finance.
Back to guitars, I liked them so much that I took lessons as a teenager. Why, I even had a recital playing the jazz song “Un homme et une femme” (A Man and A Woman). I also joined my neighbor’s informal band, where police were called on us for playing too loud late at night. Ah, the mischief of youth.But as fate would have it, I would drop playing the guitar for a while for other mundane things.
When I was already earning, I developed asthma with my finances. I had to “asthma” (i.e., ask my) wife first whether I could buy toys for the big boys. At the same time, my interest in guitars was rekindled. At first, I bought a cheap P3,000-guitar and took lessons. Alas, that was the top of the slippery slope.I suffered from GAS, or gear acquisition syndrome, as my virtuoso guitar teacher would call it. But he guided me in the right direction. He told me not to buy guitars just to be able to say I had a variety of them. He enlightened me on the quality of the specs to look for like the type of wood for the body/neck/ fretboard, tuners, binding, pickups, brand, style, strings, and, more importantly, collectability. If a guitar is collectible, its value will go up over time, making that guitar ideal to OWN.
Being an obedient student, I followed his teachings, which actually paid off. Lo and behold, I was able to buy electric guitars that have already doubled in value.
Investing in stocks is no different. Remember that it is so easy to buy. What is most difficult is selling at a profit. So, before buying shares of stock, ask yourself if you really want to own the company behind them. This frame of mind will lead you to do in depth research about the company.
You can start with the company’s expected return on equity and then break it down to its expected profitability (i.e., net income margin), capacity of assets to produce revenues (i.e., asset turnover) and effective use of debt (i.e., equity multiplier). These factors will eventually lead to digging deeper into other factors like quality of management, availability of skilled labor, efficiency of processes, and effectiveness of marketing strategies all backed by empowering finances.
The end result is to arrive at an intrinsic value for the company and to see if the stock market is properly pricing the firm. If the market price is too low compared to your derived intrinsic value, then the stock of the company is a buy. Conversely, if the market price is too high compared to the intrinsic value, then the stock is a sell.
So, buy a stock like you would buy a guitar. If they are both collectible, their value will rise over time. But there is one more lesson you should know about both of them and that is you should NEVER love them for they will not love you back.
Stay safe and healthy. INQ
Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Join our Yaman Coach Free Webinar series. For details, email [email protected] To learn more about personal financial planning, attend the 85th RFP Program this September 2020. To inquire, email [email protected] or text at 0917-9689774.
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