OUTSIDE THE BOX
One of the most amazing events in human history was when some guy walking along the ocean shore first pried an oyster off the rocks, broke open the shell, and ate it raw.
I mean, think about it. If someone had not told you how delicious eating an oyster is, would you really want to be the first one to ever try it?
Investing in the stock market for the first time can be a traumatic experience. But why?
It is my strong belief that every person of reasonable financial means should have a stock-market investment. Buying shares is as liquid as a bank account. Share prices follow general economic trends and, therefore, it is fairly easy to predict price movement or at least direction over the long term. Returns are higher than any comparable liquid investment. Long-term share buyers can significantly reduce risk to a low and manageable level.
So why not invest?
Most non-investors have misconceptions about the market. It is a casino. It is all a manipulated game. The little guy can never profit and on and on. All of those ideas are in some sense true and all of them are false.
Ever watched professional poker playing on television? You see some player win the top tournament prize of a million dollars and you might think, what a lucky person. Nonsense. Luck plays a role just in the same way it does in any professional sport.
What you do not see is that player has spent 10 years studying the game, knows all the mathematical odds of the cards, and has played a million hands to understand how other people play the game.
It is not gambling any more than the stock market if you have done your homework and learned the knowledge.
A first-time investor should always buy the company and not the stock. Who do you bank with? BPI? Do they give you good service? Is the bank full with customers when you go there? Does it seem like they appreciate your business? Why not own a piece of the company.
In January 2006, you could have bought BPI shares for P38. It closed yesterday at P58.80 for a 54-percent increase or about 10 percent return per year. It has also paid you P11.00 per share in cash dividends, increasing your return to 80 percent over five years. They also gave you 40 percent more stock. Altogether your total return in the last five years is 150 percent.
You saw the global financial markets explode. Philippine politics was business as usual during that period. The price of BPI even dropped to a loss a P35. But had you just put it away not caring about the daily ups and downs of both the Philippines and BPI, your P100,000 investment would now be worth P250,000.
You did not have to wait for and believe the hot stock tip from your brother-in-law. You did not have to be a member of the “Old-Boys Club.” You did not even have to follow the price movement more than once a week or so. All you had to do was buy the company you do business with.
Other examples? San Miguel gave a 110-percent return since 2006. Do you buy your electricity from Meralco? You should have also bought the stock. It has risen from P13 in 2006 to P250 and paid another P17 per share in cash.
Buy the shares of companies you know, not some company that is going to turn salt water into gold. That is for professional trades who buy and sell the stock and not the company. Traders make money off price movements, not the company. For my managed account trading portfolios, honestly, half the time I do not even know the name of the company, just the symbol. I do not care what the company does; I am trading price movements.
Investors on the other hand should know the company they own. Read the annual report. Go to shareholder meetings. See if the people sitting at the head table are the kind of group that you would do business with. Monitor the company you own. Talk to the average employees. If your bank branch has a new manager every few months, is it because the bank is growing and there are promotions? Or is it because they hate working there.
Remember what the foundation of a stock market is. Companies come to the market to sell a portion of their ownership to raise cash for company improvement. You are buying the company not the stock.
On a personal note, you can follow me on Twitter @mangunonmarkets.
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Wednesday, 17 August 2011