Nose-bleed alert! Lengthy but informative.

This is a column I originally wrote in October 2008. It is still a timely message today.

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I received a very interesting and timely text message from a very good friend, one who I really look up to. He gives me wise counsel, particularly in the arena of investments.

The message goes like this: “In market crashes and recessions, heed the H-I-T advice which stands for ‘Hang In There.’ During the ‘Height of Pessimism,’ there’s always H-o-Pe.”

That advice is so wise especially in these times of financial anxiety.

There is a lot of talk recently that people would rather keep their money in cold cash and sale of vaults has dramatically surged in the US.

While I agree that we should keep a portion of our money in cash, having everything in disposable cash is very unwise. Why? Well, crisis or not, we always have to contend with the fact that inflation will always erode our money. Keeping your money out of investments may help you feel secure but, in the long run, it would do more damage toward achieving your financial goals.

The antidote to crisis is opportunity. In times like these, we see investment and business-savvy people really jump in and look around for opportunities. When things are on “Sale,” we tend to buy things—that we normally wouldn’t—because it suddenly becomes cheaper. Many of us are guilty of such practice.

We can use the same mindset in investing, particularly in the stock market today. If you look at the prices in the stock market today, you will see many of stocks priced really low, some even below its book value. I’m not referring to speculative stocks here but to the tried and tested blue-chip stocks that are fundamentally strong and highly profitable.

There are many stocks that are on their 52-week low or very near it, like Ayala Corp., BPI, Banco de Oro, SM, Globe, Metro Bank and even the favorite PLDT. If you have money to invest and you are willing to invest it over a long period, say five years, then investing in the stock market may be a great idea.

Of course, you must always consider your risk tolerance—if you can’t tolerate volatility, the stock market is not for you regardless of the buying opportunity today.

Keeping calm in these times is crucial; be steadfast and avoid the stress brought about by panic. The best form of risk management is not keeping your money in vaults; it is diversification.

What determines the performance of your investments isn’t so much about selection and timing. It’s allocation. While it is always a great idea to be prudent with our investments, we must also understand that things operate on cycles—there are good days and there are bad days.

You can bet that people like Warren Buffet and Henry Sy and his family are not keeping their money in cold cash. They are busy looking at many opportunities—and that’s the reason they are, well, rich.

Let’s take the case of Henry Sy’s family. Economic activity does not deter them from being bullish in their investments. Even when the gross national product is really low, SM opens malls. Why? Well, for starters, things are cheaper when the economy is slow, particularly real estate. They don’t look at economic statistics, they look at golden opportunities.

Remain calm and focus toward the end goal: your investment objective. Here’s some great advice from the world’s richest man, Warren Buffet: turn off the stock market; buy a business and not a stock, you don’t sell your business immediately when times get rough, right?; don’t worry about the economy, buy companies that profit regardless of the economy; manage a portfolio of business; diversify.

Such wise counsel in times like these. No wonder he is that rich!

For those who are feeling the anxiety of the looming crisis, be still. Be comforted by the fact that we are in a cycle, it is down today but it will be up tomorrow (hopefully).

I find comfort by consulting the best business, investment and practical-living book of all time. A book that is not just timely, it is timeless —the Bible. Romans 12:12 (NIV) says: “Be joyful in hope, patient in affliction, faithful in prayer.” God’s words really help bring clarity to our hearts and minds.

My good friend Louis is taking his post-graduate at a good university which is green (that’s why it’s good). When he told me his plans on going back to school, I told him that education is always a good idea. When he told me what he wanted to take up, I said “what?” and “why?” He is taking up a master’s degree course on Financial Engineering. Well, I said since you are young and you have the energy – go!

Louis and I have regular chats, over coffee or over the keyboard – in our latest chat, he was complaining about how difficult his exams are … stochastic matrices, markov chain, fractals, modern portfolio theory, CAPM, APT… etc. I told Louis a few things I know about his subjects; for instance, I said “modern portfolio theory is a theory of investment which tries to maximize return and minimize risk by carefully choosing different assets; or in other words, the concept of diversification in a mathematical formula.” Nose bleed alert!

After a few more nose bleed discussions, I told Louis… “wanna know a secret?” All those stuff doesn’t really work in today’s environment! Those investment theories will require very high IQs but will not mean squat in the real market. Theories assume that people’s behaviors are rational … the more you study the market’s history, the more you realize that rational behavior is always missing in the market. The more you try to understand what’s going on, the more you see things are fundamental… the more things go back to the basics like supply and demand. The market is a representation of people’s sentiments – and people’s sentiments are either overly optimistic or disastrously pessimistic.

So will I advise Louis to quit school? Never. Louis will need to learn all the nose bleed stuff for him to have a more intelligent view of things that are fundamental in nature. If you’re reading this Louis, go hit the books!