Monday, 23 August 2010

PSEi will hit 5000 in the next 24 month

PSEi 5000
Written by Phillip S. Hagedorn
Bull Session
Business Mirror

THE PSEi will hit 5000 in the next 24 months. That is my view. I’ve answered the “What?” and the “When?” in my first sentence. Now I need to answer the “Why?” The reason the Philippine stock-market index will hit 5000 in the next 24 months is you.

Thomas L. Friedman in his book The Lexus and the Olive Tree said the first bull must be a local. I completely agree. How can we convince foreigners to invest here if we don’t put our own money where our mouth is? Beginning in 2009, Filipino investors have taken over as the largest investors in the stock market. This is unusual, because for the past 20 years foreign funds dominated the daily volume of the exchange. Something very interesting is happening. Filipinos are discovering the stock market, and this time it’s not too late. This time local investors will beat the foreign money to the punch and not be the ones left holding the bag. This time, Filipinos will benefit from a run-up in the stock market like they have never benefited before.

The basic question for Filipino investors is, “Are you happy with your investment returns today?” A typical Filipino investor will have a vast majority of investments in fixed-income instruments, like government securities. These investments are safe because they are guaranteed by the government. Historically, investing in Philippine government securities gave you returns in the high single digits like 9 percent per annum. Hopefully, those days are gone forever. The only reason government securities were giving you that rate was because the government’s fiscal position was in a heap of trouble. Things are very different today. Today the benchmark 91-Day Treasury bill gives you 3.9 percent per annum, and that is before taxes. Fixed-income returns today do not compensate for even inflation. As our economy improves and inflation creeps higher, what will you do? Some of you will be happy to keep your money safe in the government’s hands (yikes…did I really say that?). I suspect many of you will look to the stock market for the first time in your lives. Be not afraid, be not afraid.

In the interest of full disclosure, I manage Philippine equity portfolios. I basically make my living from my association with the stock market. I will not pretend to have all the answers but here are some tips to get you started in stocks. In my view, you have three choices. You can befriend a stockbroker, buy stocks online or buy an equity fund. Here is my take on each.

I love stockbrokers. My grandfather was a broker, my father was a broker and I was a broker. These folks are hard- working, aggressive, quick-thinking and risk-takers. Contrary to the myth created by “Wall Street” and Gordon Gekko, most stockbrokers are honest folks. The bottom line for them is to make money for their clients. If they don’t, they will have no clients. Most of them earn their living from a share of the commissions they earn for their brokerage houses. In the Philippines, typically a stockbroker needs to generate transactions of over P7 million in a month to take home a pay check of P20,000. What this basically means is that if you have less than a couple of million pesos to invest, you will be hard-pressed to find a good stockbroker willing to share their valuable time with you. A good stockbroker should provide you with “buy” and “sell” ideas and not just be an order taker. A good broker should provide you with fundamental or technical research on the stocks they recommend. A good stockbroker should provide you with timely execution and settlement of your account. And, finally, a good stockbroker should take you out for a cocktail or two once in a while.

Around the world, individual investors’ preferred mode of investing in the stock market is to buy mutual funds. In the Philippines there are over 20 equity funds which individuals can access. These funds have very low minimum requirements (between P5,000 and P100,000) and are managed by professional fund managers. The performances of these funds are posted daily in the newspapers for all to see. The past performance of these funds speaks for themselves; in most cases, the results are nothing less than excellent. The cost of owning a fund should not exceed about 3 percent of the value of your investment per annum. The Philippine fund-management industry has grown by leaps and bounds in the last decade. I believe we are reaching a tipping point where owning a fund will be as familiar as owning a mobile phone. The beauty here is that you are not limited to buying just one fund. You can have a portfolio of funds and effectively pick the best minds in the industry to make these difficult investment decisions for you. You should pick funds that are transparent with you about their objectives, what stocks they own, and what their costs of operations are. You should also select a fund manager who gives you some access to the decision-makers of the fund at briefings or seminars. Opening a mutual-fund account is very similar to opening a bank account in that the personal information required is almost identical. Remember that the past performance of a fund is not an indication of how it will perform in the future. This is why it is vital that you understand the style and investment approach of your fund manager. If you have never invested in the stock market before, buying a mutual fund, in my opinion, is the best way to start your stock-market investing career.

My father was a stockbroker his whole life. After he passed away I was rummaging through his things and to my utter surprise and amazement, I found a hardbound book with the title All I Know About the Stock Market, written by Fred C. Hagedorn III. I was amazed because he never told anyone in the family that he had written a book. I was also excited, as I thought I found the little black book with all the stock-market secrets on how to make millions. I sat on the floor and started thumbing through the pages. Nothing, nada, zilch, zero. Every page was blank. Cruel joke or harsh reality? There is no secret formula to beating the market. You will never beat it. If you respect it and take a long-term view, it will work for you. If you only want to join the party when things are hot, then you are bound to get burned.

Phillip Hagedorn is the investment director for Equity Portfolio Management for ATR KimEng Asset Management and chairman of its Investment Committee. For comments, you may e-mail him at .

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