Q: The stock market has been trading at its all-time high recently. I have friends who told me they made had money from stocks. I want to try investing in the stock market but I am not sure if this is the right time to enter since most stocks are trading at high prices. Please advise me. —Marikris by e-mail
A: There is no perfect time to enter the stock market. Every day is an opportunity to make money. Whether the market is trending up or down, there is always a room for picking the right stocks. Never make the mistake of trying to outsmart the market by waiting for the perfect time to invest because you may never find that time.
While it is encouraging sometimes when you hear your friends saying they made a fortune from stocks recently, beware that it is not that easy as it sounds. Your friends never told you that they also lost 10 times in stocks before they hit the jackpot.
Investing in stocks requires certain skills and commitment. The stock traders and analysts are the experts who spent hundreds of hours weekly studying research reports, news and charts to analyze what will likely happen to a particular stock and the market as whole. You can leverage on these people to feed you information for updates and tips but do not rely on them completely. You are responsible for your own investments so you need to make your own decisions.
There are two approaches that you can use before making a decision to buy or sell.
The first is to look at the financial and management background of the stock. How is the earnings track record of the company? What is the prospect of the stock’s earnings 12 months from now? Who are the people in the management team? Investing in stocks is like investing in real business. Common sense will tell you that before you commit your hard earned money to another company, you want to make sure that it has history of profitability and competent management.
In stocks, profitability is just one of the criteria. You can measure this by looking at the price to earnings ratio. Bear in mind that P/Es serve only as benchmark for decision making. A stock with low P/E ratio means it is cheap relative to the market but may not necessarily be a screaming buy. In the same way, a stock with a higher than market average P/E may be considered expensive but may not necessarily be a sell. Why? Because the past earnings have been known to the market and it is already reflected in the stock price. If there is no reason for the market to believe that the stock will increase its earnings, the stock will remain at low P/E and the stock price will never go up. On the other hand, a stock can justify a rising P/E ratio if it can convince the market that it has strong earnings outlook over the next 12 months. Your challenge here is to look not only for stocks that are fundamentally sound but also those with good earnings momentum.
Sometimes you will also notice that there are stocks with no track record of profitability and yet their stock price is rising like crazy.
One example is a stock called Lepanto Consolidated or LC. This company has been reporting net losses consistently for the past years but its stock price has more than quadrupled from P0.41 last year to a high of P1.82 this year. How come this stock that doesn’t even have a P/E ratio because its income is negative can rise by this much? A little research on company disclosures will tell you that LC is going to finalize a joint venture project with a foreign company that is going to invest a substantial amount of money in the venture. The market was anticipating this partnership to push through and expects that LC will create strong earnings momentum. This justifies the run up of the stock price.
This is an example of speculative investing. There is no track record to rely on but only expectation that something extra ordinary is going to happen to this company. As a beginner in stock market, it is not advisable for you to speculate so much in stocks unless you have all the time in the world to investigate and research.
Once you know the fundamentals, you need to time your buying and selling of stocks. When do you buy and at what price?
Many traders use charts to analyze trends and predict if a stock is ripe for buying or selling. You can attend free seminars offered by stock brokers on technical analysis for your own learning. When you are analyzing using charts, you must only remember two items—price and volume. If the stock price is going up but the volume is decreasing, it means that the trend is weak and, therefore, you wait until it corrects again. If the volume is increasing along with stock price, it means the buying is real and there may be good momentum. If the stock price is going down but its volume is increasing, it means strong hands are getting out of the stock and you must avoid it. If volume is decreasing along with falling stock price, that is good opportunity to buy because the selling is weak.
I hope you learn something about investing. I advise you that you start investing with one or two stocks first while learning. Watching and reading business news is one way to learn. Read basic investment books and be familiar with corporate finance. Invest in seminars and learn from others. As your confidence and experience grow, you can accumulate and build your own portfolio of stocks.
Happy Investing!
(Henry Ong is a registered financial planner of RFP Philippines. To learn more about creating your own stocks and bonds portfolio, attend the globally recognized Chartered Wealth Manager (CWM) program on March 17-April 28. Inquire at info@rfp.ph or call 382-4530 )