Imperfection makes things perfect

Question: Wow, this stock market of ours is really a roller coaster ride. Has it always been this way? —asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.

Answer: The Philippine stock market has had its share of ups and downs as have all stock markets around the world. This volatility is but par for the course.

From 1987 to 2009, the Philippine stock market was stuck in a very long sideways movement where the composite index or PSEi was range bound with a support at about the 1,000 level and resistance slightly above 3,000.

The PSEi flirted with its support level three times during the period and attempted to bust through the resistance level four times. It was just on the fourth try that the PSEi broke through the 3,000 level. And believe it or not, this breaking through came right after the so-called global financial crisis.

Despite the ups and downs, there was money to be made. The only trick is that you had to have the latest information on exchange-listed companies and you had to be quick on your proverbial toes to trade those that had movement, whether that movement was going up or down.

For the expert trader, the period 1987 to 2009 got predictable to a certain extent.

What was more unpredictable was the rally that ensued after the global financial crisis, which as Fareed Zakaria pointed out in his book, “The Post-American World,” was just a crisis for the West and, in fact, heralded the rise of the rest.

While the West was in decline, the rest of the world was booming. This optimism for the rest of the world sent global investors rushing into Asia. Coincidentally, the Philippines was ripe for the picking because of the institutional reforms that had already been put in place that cemented a growth trajectory that paralleled China’s.

As a result, the PSEi has never looked back since 2009. Sure, there were still ups and downs in the stock market. However, they have so far not been in the magnitude of those from 1987 to 2009.

Now I said that the PSEi became less predictable after 2009. The reason is that trading ranges became narrower. But just like the Philippine economy, the index was and still is on a long-term uptrend. So, be thankful for the ups and downs because such imperfection in the long-term uptrend makes it even more solid and perfect.

Ask any seasoned fund manager if they would be happy seeing the PSEi going up in a straight line. They would most likely say that they would be fearful of that scenario because it does not make for solid footing from which to stage the next leg of the runup. And a straight-line uptrend is a sure recipe for a major correction.

So be thankful for the uptrend in the stock market that is marked by bouts of corrections. The long-term trend is still pointing upwards. These imperfections in the uptrend just make the trajectory real and perfect.