Tuesday, 24 July 2012

You should not invest in the stock market

Business Mirror

TOO many of the people that invest in the stock market only have a minimal understanding of what it is all about. Most people should not invest in the stock market.
If you believe there is a fool-proof strategy for making money in the stock market, you should not invest. I wish there was, but after more than 30 years in this business, I have yet to find one. There is no guaranteed winning formula. Anyone who tells you that there is, is either a fool or a liar.

The most popular “guaranteed” strategy is one of several variations of dollar-cost-averaging. You buy the same peso amount of shares of a big blue chip stock every month and eventually you will be a millionaire. It is based on the idea that stock prices will always eventually go higher. The other premise that the “expert” does not tell you is that you better not ever need your invested money until you do become a millionaire. They like to quote Warren Buffet saying, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

Buffett does not buy stock. He buys companies using the stock market as a vehicle. If the company and its share price do not do well, he likes taking them over and running them. That is his Plan B and he is good at it. You cannot follow Buffett’s Plan A without being ready to do Plan B.

San Miguel is a big company. It is a well-operated company. Let’s suppose you started buying P5,000 of San Miguel every month since January 2011. You would now be down 10 percent. Start your monthly buying in January 2010, you made an annual return of 7 percent. Even if your buying started in January 2009, you still only earned 7 percent per year.

Imagine walking into an automobile dealership ready to buy and being told you could buy but not drive the car. Or having the property salesperson inform you that you were not allowed to live in that new condo you just bought. Better yet, the bank manger thanks you for opening a new account but says that when you do want to withdraw, you might have to wait days, weeks, or months to get your money back.

Every form of dollar-cost-averaging goes against the basic stock-market principle of instant liquidity in the same sense of a bank account being instantly available. Having to hold issues until they become profitable is like buying the same lotto numbers over and over until you win. It makes no investment sense.

But there is an even better way to lose money and opportunity than using dollar-cost-averaging.

Again, too many stock-market investors use less care in buying securities than they do buying a pair of shoes. They look only at the price.

Have you gone into a department store and found a pair of shoes previously priced at P5,000 marked down to only P1,000? Of course you have. And you immediately put your money on the table and bought them. Of course not. You waited to make your purchase to find the shoes in your size. A pair of shoes you cannot wear is not a bargain, is not cheap, if you cannot wear them.

Price is one of two considerations in purchasing a stock. The other is the trend of the price. An issue that was at P200 that is now at P100 is not a bargain if it is trending to P50. However, too many investors look for bargains. A stock that was P50 that is now P100 on its way to P200 is a bargain. But many investors do not look at it that way and should not be putting their money in the market.

If you do not know what you are doing, stay away from the stock market.

E-mail to mangun@gmail.com, web site is www.mangunonmarkets.com and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.

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