More newbie questions to investing in the Philippine stock market

Last June 2, 2009 I wrote a post entitled “Newbie’s questions to investing in the Philippine stock market” wherein I answered several questions on the investing in the Philippine stock market from a reader of this blog.

After several days, she emailed me back and gave some follow up questions. I enjoy answering questions from my readers as it forces me to write on a topic and to know exactly what my readers want. Here is my response to her email:

Dear Ashley,

Sorry it took me a long time to response as I had been very busy with other matters

I have tried to break down your questions into 5 parts and have done my best to present it just the way it is, unedited. I hope by answering this questions and posting it in my blog, others with similar questions might find the answers that they are looking for. In a way you are helping others who might have similar questions but are to shy or too busy to ask. Anyway, here are my answers to your questions:

1.) “ . . . I just wanted to ask, by “match” do you mean an EXACT match? What if I wanted to buy the stocks for 1 peso and 50 cents per share and someone is selling it for just 1 peso and 25 cents, wouldn’t that also be a “match”? Similarly, what if I wanted to sell my stocks for 1 peso per share and someone wanted to buy it for 1 peso and 10 cents, wouldn’t that also be a “match”?”

Yes, technically it is also a match. You do not need to meet at a certain price. For as long as there are willing buyers and sellers you will get a match. For example the other day, I wanted to buy a certain stock for P 3.00 per share. But the minimum amount that the sellers were selling was at 3.05. Anyway, I entered my buying price. Before the closing bell closed, somebody sold the stock to me for P 3.00 per share. Remember that the stock market is just like your regular market where people sort of “haggle” over the price, although not physically but electronically. The price wherein you buy and sell will be dictated by the law of supply and demand. The hotter the stock, the more people will buy and the more the price will go up. The more sellers there are of a certain stock, prices will go down as more and more people want to get rid of a certain stock. This is what they meant that the investing in the stock market is like a roller coaster ride as there is too much volatility.

2.) “ . . .Can you recommend a good book to read for a newbie like me? . .. ”

I am glad you asked that I have been asked by others as well about this. Although I highly recommend the book Rule #1 by Phil Town which is my very first introductory book to the world of value investing, I recommend that you read first the book entitled “How Buffett does it” by James Pardoe. It’s only 154 pages and is such an easy read. After that you can read Rule #1 by Phil Town. Other books I strongly recommend are The Tao of Warren Buffett, Buffetology and the New Buffetology by Mary Buffett and David Clark. After reading Rule #1, I grabbed all the value investing books that I could get my hands on especially those on Warren Buffett. I have read more than 20 value investing and Warren Buffett books so far. If you live in the United States you can purchase these books via my Guerilla Blogger eStore which is powered by Amazon. Just click on books and enter “Value investing” or “Warren Buffett” in the search box. If you live in the Philippines you can get copies at your nearest Fully Booked or Power Books.

You might want to follow what I am reading, so just drop by from time to time in this blog. In my right side bar I usually display what books I am currently reading and what I have just read.

3.) “. . . Also, in BPI Trade Online, they said that the credit/debit will be posted to your account after 3 transaction days. But I was just thinking, what if the closing price of the stock I wanted to buy today is 0.20 pesos then I decided that I wanted to buy it today. Now, I entered to BPI Trade Online and entered my transaction but it’s already 1pm. Can you give me the possible results for this scenario? I’m afraid that the price of the stock will rise the next day and I will never ever get a match since there’s like a day of delay (I entered my transaction today then the next day the price went to 0.30 pesos). When will my online broker actually post my offer at the market? After 3 days? After a day? . . .”

You can only do actual real time selling and buying of stocks during trading hours that is between 9:30 am to 12:30 pm. The PSE was planning to add 2 hours of trading session in the afternoon, but I heard recently that the implementation of this has been postponed. Anyway, you can post “off hours” orders but you can’t buy and sell during these times as the market is closed. So the possible result of the scenario you are presenting is this, if you posted an off hour order, the next day when the market opens your order will get posted. If your off hour order gets matched then you either successfully executed a buy or sell order. However if you get no match, then you could cancel your off hour order and enter a new one.

Do not confuse entering orders with “credit/debit.” What that means is that if you cash out or transfer money from your trade account to your settlement account (Which is usually the account where you can withdraw via ATM) is that it takes 3 days for this process to take effect. This also refers to the selling of stocks. If you sell a certain stock today, the proceeds will be credited to your trade account after 3 days. The same thing also applies to dividends that you received from companies. After the payment date, it takes 3 days before you get the money gets into your trade account.

4.) “ . . . I read somewhere (not sure where over the vast space of the internet) that the common misconception of newbies in buying/selling stocks is that, if the price of your stock go down, then wait until it goes up I mean, isn’t it the most logical thing to do? You don’t want to lose some possible profit, do you?”

I am not sure what you mean by this, but yes I agree it is the most logical thing to do. Probably you are confused because the author of the article says that it is the “common misconception” of newbies in the stock market. Well most likely the author of that article is a technical investor. Most of those who invest in the stock market especially the Philippine stock market are technical investors. (Probably 80 or more than 90 %) Purely technical investors or Day traders do not care about the fundamentals of a company. All they care about is the price. If the price starts to go up and the charts and their technical analysis say that it will keep on going up then they buy. If the price starts to go down and the charts and their technical analysis say it will go down further they start to sell to “minimize their losses.” This is probably why the author of that article said that “holding” on to a stock is a misconception for newbies because for them dumping a stock to minimize their losses is the most logical thing to do. (Whatever happened to the old time adage of “Buying low and selling high ?” it seems that the technical investors forgot about this hehehehe) Technical and or day traders engage in a lot of buying and selling in the stock market. They could buy a stock today and sell it tomorrow, or buy a stock this minute and sell it after several minutes or hours.

As a value investor I find such activity repugnant. With due respect to the technical investors, frankly it is the most stupid thing to do. It reduces stock market investing to speculation and makes investing in the stock market become a gamble. Even you as an ordinary person who is a newbie to stock market investing finds such statement confusing and deems it “illogical” and that the most logical thing to do is to wait for the stock to go up. Warren Buffett has this to say about stock market forecasting “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” With regards to indiscriminately buying and selling of stocks for the short term, Buffett has this to say “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

As value investors we do not read the carts. We do not care if the stock price goes up or down. We do not even care what the market’s activity is at all. In fact we act as if the stock market do not exist. This is what Buffett meant when he refers to himself as a “Rip Van Winkle” investor.

Remember that shares of stocks represent real and actual businesses. All we care about is if the fundamentals of the underlying business of the stock we are buying are sound. For the technical investors or day traders a stock is merely pieces of paper or a commodity that they trade around. For the fundamental investors or value investors when we buy stocks we are buying a business. This is what Benjamin Graham, Buffett’s mentor meant when he said “Investing is most intelligent when it is most business like.”

5.) “. . . another newbies misconception is that, if the price of a stock is going up, then don’t buy it yet. Wait for it to go down again, then buy it, then wait for it to go up again, then sell it. Is this really a misconception?”

In value investing we do not care if the price is going up or going down. Besides who in the entire world can predict this except from a few clairvoyant individual like Madam Auring (Or can she predict it ? hehehehe, if she did she’d be richer than the world’s greatest investor, Warren Buffett) 🙂

In value investing remember this rule of the thumb “The price you pay determines your rate of return.” Before I buy stocks, I look for “wonderful businesses with a durable competitive advantage.” Then I look at the fundamentals of the business. Once I determine its intrinsic value, I set a price wherein I project that I will get a minimum of 15 % compounded rate of return per annum. Why 15 % for more on this you might want to read my post entitled “Determining the best rate of return”

I buy only at that price because the price I pay determines my rate of return. Even if it is “a wonderful business but the price is too high, it might affect my rate of return. The higher the price, the lower my expected rate of return. So if it exceeds my target price then I wait until the price drops. How do you know when the price will drop ? Frankly you don’t, however there are some conditions that might cause prices to drop you might want to learn more about this. Learn more about when to buy stocks in my three part post entitled “Follow Warren Buffett’s signal on when to buy stocks”

Warren Buffett has this to say about waiting for the right moment on when to buy a stock. He calls this as the “Fat pitch” he wrote “I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.” In contrast Warren Buffett has this to say about most fund managers “The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”

I hope you find my answers to your questions satisfactory and I hope that the wit and wisdom of the world’s greatest investor has enlightened your path to investing once again as he has done with mine.

The Guerilla investor 🙂

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