OUTSIDE THE BOX
MONEY by definition is first and foremost storage of wealth. Rather than carrying around two Jollibee hamburger meals to have when you get hungry, that P100 in your pocket “stores” the food until you want it. Money is also a medium of wealth transfer as you exchange the P100 note for the food when you go to Jollibee.
But in 2013, money is only a very temporary storage of wealth.
If you were around in 1988 you might have gone to Greenbelt in Makati like I did and watched the first Die Hard movie starring Bruce Willis. The cost of a ticket was P15. In a few weeks A Good Day to Die Hard, starring Bruce Willis, will probably be showing in Greenbelt and you will pay about 1,000 percent more than in 1988.
Is the movie going to be 10 times as good as the first Die Hard? Will the popcorn be 1,000 percent more flavorful than in 1988? Then why is the ticket price now about P150 instead of P15?
You might say that the Greenbelt movie theater of 2013 is 10 times better than in 1988, with reclining seats and stereo sound blasting from a bigger screen. Perhaps that is true. But here is what is interesting.
In 1988, for the price of seeing Die Hard and a bucket of popcorn, you could have instead bought 1 kilo of pork. In 2013, for the price of seeing A Good Day to Die Hard and a bucket of popcorn, you can buy 1 kilo of pork.
In 1988 the P100 you earned in wages could have taken two people to see the movie, with popcorn and still had money left over. In 2013 that same P100 bill will not even get you in the theater door. Had you saved that 1998 P100 note in the bank or under your bed, you would be poorer today.
That P100 you are holding is very bad as a storehouse of wealth and that fact is critical to your financial well-being.
Allow me to be brutally honest. Much of the financial advice you are hearing today is guaranteed to make you poorer in the future.
You are told to save your money. Unless you consider yourself wealthy, you should never have more than three to six months of the amount you need to live on in cash for emergencies. “Saving” for retirement will financially destroy you. Had you started in 1988 and saved P25,000 per year, your money would now total about P1.8 million, enough to buy an average studio condominium. You would have done better to use that P25,000 each year to buy condos throughout the last 25 years. The same is true now. Buy hard assets that you can use 10 years from now or that will increase in value through time.
The Philippine stock market is driving people crazy. It keeps going up and up and this is not supposed to happen by “normal” standards. Well, welcome to the New Normal.
At this time in 2008, Ayala Land shares were trading at P13.50. Now those shares are priced around P30 or up over 120 percent in five years. The PSE Composite Index has more than doubled since February 2008. Do corporate profits justify a more than doubling of share price in five years? The answer is no.
Go back to the Greenbelt theater. While both the peso price of movie tickets and pork is up 1,000 percent over 25 years, the “price” relationship between movies and pork has virtually not changed at all. One kilo of pork still buys one movie ticket…and popcorn and probably will in the future.
The “peso price” of gold is up 86 percent since 2008 and note that the peso-dollar exchange rate is almost the same now as in February 2008. The “peso price” of Ayala Land shares is up 120 percent since 2008. But the price of Ayala Land shares in “gold price” is only about 18 percent higher since 2008, which accurately and adequately reflects the increased value and earnings of the Ayala Land Corp.
We cannot think of cash anymore as the standard to determine value. It is not that Bruce Willis tickets have appreciated 1,000 percent in 25 years; it is that the peso has depreciated against the value of a movie ticket during that time. It is not so much that the Philippine stock exchange is gaining value but that the peso is losing value as measured by the “price” of a PSE listed share.
You must constantly protect yourself against the continuing loss of purchasing power of money by buying hard assets.
E-mail to firstname.lastname@example.org. My web site is www.mangunonmarkets.com and Twitterme@mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.
Thursday, 7 February 2013