ILLUSTRATION: Ruth Macapagal
Before you invest, look for companies that make enough money for you.
Companies that earn 15 percent a year, at least, as compensation to their stakeholders for the capital that they have invested, the risk they were exposed to and the time or years spent to get their money back, will make you happy.
What does ‘earn’ mean?
If you have a deposit in a bank, the interest that you receive, after the payment of tax, represents your earnings. If you have an investment in a bond, the after-tax interest that you receive equals your earnings.
If you own 100 percent of a company that has no debt and you reinvest the money you earn back into the business, income from operations (or money left after subtracting the cost of goods sold from the money received from the sale of its goods or products) that you receive, after the payment of tax, becomes your earnings.
If you are earning P15 for every P100 pesos of money (capital) of the company, you are earning at the rate of 15 percent a year and will get back all (or “double”) the money that you invested in less than five years.
Why is “at least” important?
It is the answer to the question: “Does the company have the competitive advantage it takes to keep its competitors at bay for an extended period—‘moat’?”
Companies that double their money in less than five years have moats around their earnings. Their competitive advantage—high barriers to entry, a sizable share of the market, low cost of production, high cost of switching, etc.—prevent others into their market, limit competition and allow them to increase their revenues while preserving the rate at which they are earning.
If you are a minority shareholder (typically, less than 50 percent of the voting shares), you do not have control of the rate at which your investment will earn. Hence, ‘at least’ is important to find companies whose rate of earnings shows a moat.
Where to find companies
The website https://edge.pse.com.ph/ shares the disclosures of listed companies relating to their financial condition and the results of operations, among many others.
In Advanced Search, type the name of the company and, thereafter, click on ‘Company Disclosures’ to find the company’s List of 100 Stockholders (Common Shares), Public Ownership Reports, Clarification of New Reports, Material Information/Transactions, Notice of Analysts/Investors’ Briefing, Other SEC Forms, Reports and Requirements, Statement of Changes in Beneficial Ownership, Quarterly Report, etc.
The money that a company makes can be gleaned from its financial statements.
The quarterly reports (or Securities and Exchange Commission Form 17-Q) are of special interest as they contain financial information and other information, including that which will help you compute how much a company has earned. Look into revenue, other operating income, cost of revenue, operating expenses, debt, shareholder’s equity, reserve for loan loss (if the company has any), deferred tax liabilities (if any) and accrued income taxes (if any), etc.
How to pick stocks
In my many, many, many years of helping small investors and companies in economics, company analysis, valuation and portfolio management, I found nine companies only that earn at least 15 percent a year. All other companies on the Philippine Stock Exchange, excluding the financial sector, earn less than 15 percent a year.
If you had invested in the shares of these nine companies five years ago, you would have achieved your investment objective of ‘positive investment return,’ versus the 6 percent a year loss (average) of all shares, as of this writing. All nine companies delivered positive returns, without exception.
If you had invested in GMA7 Network Inc., one of the nine companies, including the cash dividends that you received, you would have earned 22 percent! (There are 32 companies that fall under the category of financials. Four earn at least 15 percent a year. Of the four, one company only delivered positive returns.)
In the last five years, GMA7 was making enough money—34 percent a year–out of the money (capital) you had invested versus the average rate of earnings of all companies of 6.7 percent a year.
If you aspire to double your money, do not own (invest in) a company that does not double its (your) money. Otherwise, you will be taking far, far greater risk than you think or can stomach or be happy with. —Contributed INQ
(The author had worked for big local and regional financial institutions as a professional fund manager for 25 years before retirement. He can be reached at juniebanaag@gmail.com.)