Wealth and Risk: How to Pick Profitable Stocks
When buying a new property, the wise buyer does her research. She checks the current prices of the neighborhood, including the most recent sale. She asks around about water pressure and whether certain streets in the neighborhood are prone to flooding. She looks at the security of the gated village. She even clocks the commute time to get from the prospective house to the office.
This kind of thoroughness in a shopper covers even small purchases like jewelry and bags, or even the best bargain for getting sans rival or lechon.
So, how does it happen that when this same wily shopper becomes an investor and puts money on a stock (usually a lot of money) all she relies on is a “hot tip” from an insider? How does she plunk in the cost of half a house on such meager information and hearsay research?
It should be back to investment basics and taking a healthy long-term view of good companies with a record of profitability and growth.
First-time investors, sometimes dismissed as “desperate housewives,” rely heavily on hot tips. They even insist that their brokers give them some. Even when these otherwise savvy shoppers are sent the research files with graphs showing the ups and downs (mostly the latter) of the particular stock, their usual thoroughness in getting the best value for their money seems to be left by the wayside. On the basis of unconfirmed plans of pending acquisition, stock buy-back or a follow-on offering, a newly discovered mine site, or the investment of a highly regarded businessman in this company, the newbie jumps in and buys a particular stock.
Insider trading is a variation of insider information which drives hot tips. In our milieu, those using and dispensing insider knowledge work directly for the subject company, using unpublished information to gain undue advantage over the uninformed public. They pass on their private information to relatives and friends after they have already bought the stock, a week earlier, of course. This illegal practice is seldom even commented on in the local market but is a serious offense in the United States. Think of Martha Stewart, even if that particular charge evolved later into false testimony and a cover-up of the real facts. Anyway, that lady is back to dispensing homespun wisdom on the best way to tuck in the bed sheets and hang flimsy curtains (use weights on the skirts to keep them from flapping in the wind).
The way that individuals pick stocks or companies to invest in seems even more casual than the way they choose shampoos. At least for the stuff they put on their head, they check the label and note the contraindications that apply to their scalp. One only has to hear about yet another scam that has taken in supposedly wealthy (and presumably financially informed) investors to appreciate the need for personal research. Manila has its own share of Ponzi schemers, sometimes with a foreign currency twist, so we don’t need to lament the case of Bernard Madoff or even hark back to the financial meltdown of 2008. Our schemers have a longer run and provide a more creative mix that includes elaborate Christmas gifts and stunning events.
Even when these otherwise savvy shoppers are sent the research files with graphs showing the ups and downs (mostly the latter) of the particular stock, their usual thoroughness in getting the best value for their money seems to be left by the wayside.
With the rise of “private banking” units in local banks where high net-worth individuals, perhaps with investible funds of ten to fifteen million pesos, are targeted and accorded a portfolio adviser offering services beyond CASA (Checking Account/Savings Account). A report (complete with pie charts) on how the client’s placement with the bank is doing is periodically submitted. Even here, the client is asked about his investment goals, whether growth, high risk/high reward or a conservative fixed income stream. But is it also enough to leave everything to the expert? (Read on.)
Nothing is more dangerous for the new stock player than early success based on a hot tip. Quick profits from an IPO or a tipped stock with business plans but no cash flow prospects for the next eight years endow the inexperienced investor with beginner’s luck and a growing faith in unconfirmed tips. The danger increases when she manages to outperform research-based investors…in the short term. She is lulled into thinking that she needs neither expert advice nor any research at all, until the market imitates the gravity-succumbing antics of a falling knife, as it did in the last half of 2008.
Since this is a fresh new quarter of the new year of the brown cow, maybe we should take to heart a few lessons.
Doing away with basic financial information is a sure recipe for buyer’s remorse. Why did I get into that stock? What was I thinking? The company has no assets, only business plans which consist of a wish list of favorable events taking place. Here are some things to note.
There are really no experts. Even if there are, they usually do not agree with one another. So, even if one tries to benefit from the experience and expertise of market players, which one does one pick and surrender one’s money to? Experts managing funds have track records and these have to be examined, if only for the lowest loss ratios. How well did this fund do against the Phisix? What about against other funds? This simple test of performance is available and can even be requested from the fund being considered. Especially in a bearish market, performance indicators are critical. After all, in a bull market, every investor can look like a financial genius since everything is moving up. The acid test of 2008 may make everyone gun-shy, but there are still opportunities for investments.
Pick the industry leader. For individual stock picks, it is good to go with a company outperforming its market. This can be in terms of market share or profitability, an undervalued price/earnings ratio or revenue growth. After picking the sector to invest in, say property or financial services, it is a matter of selecting the top performers of their category. This involves looking at market share and dividend history. Such data are readily available from one’s brokers. With the severe depletion of industry players, the survivors are all worth considering.
Nothing is more dangerous for the new stock player than early success based on a hot tip.
Attend investor briefings. Most listed companies have a full-time Investor Relations (IR) unit which deals with researchers and provides statistics on earnings, major challenges, market share, strategic businesses and changes in management. While only securities analysts attend these, stockholders are often invited too. It is not necessary to ask questions directly. Attending these sessions gives you a feel of the quality of management and the firmness of business plans. These stats are also found in the Web site of most listed companies.
Read up on the company. News items in the business papers, interviews of the CEO, and company reports of the stockbrokers provide many insights into the company that can inform the investor enough to make intelligent decisions. In fact, the absence of information, or the frequent postponement of stockholders’ meetings, or delayed releases of financial performance are all warning signs and signal a sell for such a company. While media coverage often harps on personal rivalries and feuds, the more sober business papers will provide more economically relevant data.
There is no such thing as having too much information on a stock that one wants to buy. Even if the information is negative, at least the investor knows when to sell and cut losses.
Because of low returns from bank deposits (low single digits), many savers need to look at alternative investments. The 2008 experience provides a cautionary tale of the possibility of losing everything. But for those who still have investible cash, risk avoidance is not a sustainable strategy for conserving wealth.
It should be back to investment basics and taking a healthy long-term view of good companies with a record of profitability and growth. The excitement still lies in discovering a company with a small market cap and a good story for the future.
Shopping is good training for the investor who wants to get the best deal for herself. Looking before you leap is sound advice for the discriminating shopper. Of course, you can also just hang on to your cash, or whatever’s left of it.