So honored and blessed to be featuring a guest blogger whom I respect and admire so much. Efren and I have been friends for quite some time now and he remains to be a role model to me and many ways. More than a colleague, Efren is a great mentor. More than an investment expert, Efren is a genuine advocate who practices more than what he preaches.

In this installment, Efren puts some wisdom on stock market investing. With so much attention and curiosity in stock investing, Efren’s wisdom is so timely and his balanced view is something that he is really known for — I take his insights and advise very seriously. 

Efren will be featured in iCon 2013: The No Nonsense Investments Conference this June 22, 2013 at the SMX. He will tackle the very important topic of investment planning. Check out the conference HERE

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Some Commandments in Stock Investing

by Efren Ll. Cruz, RFP

Question:Are there any rulesthat I should strictly follow in stock investing?– via email

Answer:To be sure, there are many rules to follow.  But here are some that immediately come to mind.

1) Do not make money a graven image.  Money has always been and will always be just one of the tools to achieve the more important things in life. The same goes for stock investing. Don’t get me wrong though. Money and stock investing are important tools. Just don’t let your life revolve around them as if they were the reasons for being. And when you make money, don’t forget to whom the glory belongs.

2) Forget about buying at the bottom and selling at the peak. Your chances of buying at the lowest point and selling at the highest level is as slim as winning the 6/55 lotto (about one in nearly 29 million). Why? Because you will only know that a particular price is either the lowest or the highest after the fact. Worse, you may not have even placed your order before then.

3) You beta watch out, you beta not cry. Stock prices tend to move together.  It’s just that some move faster than others.  A way to measure this relative movement is to measure a stock’s beta.  Usually, a stock’s beta is measured against a broad market indicator like the Philippine Stock Exchange Composite Index or PSEi. Operationally, if a stock’s beta is 1.5, and the PSEi made a 2% return, that stock should make a 3% (i.e. 1.5 x 2%) return.

A higher beta would mean a stock with a more volatile and, therefore more risky behavior vis-à-vis the PSEi. This is not to say that stocks with high betas should be totally avoided.  You just need to match your risk tolerance with that of the stock you are buying. In other words, buy with eyes wide open. You don’t need to perform the computations for deriving beta as you can simply ask for them from your stock broker.

4) Investment decisions have manufactured and best before dates. Do not cry over spilled milk as they say.  If you are truly diligent in studying your options before investing, you would always make the best decisions given the information available to you at the time.  However, the only thing that is constant in life is change itself. Your investment decisions will have a shelf life as many factors can change with the underlying companies you bought.  So make it a habit to review your investments periodically.  Once a quarter should be good enough.

5) Do not covet your neighbor’s allocation. Even if someone comes up to you to brag about the tons of money he made from a certain investment allocation,that is his allocation and not yours.  You will need to come up with your own according to your own return objectives and risk preference.  How else will you be able to tell your own story?

6) Do not get too excited with breaking news. Stock investing is manic-depressive.  Keep your cool when you come across exciting news. In the first place, if it wereexciting news about a certain stock, it would already be a time to sell that stock and not to buy it. You are supposed to buy before the news breaks. More importantly, it is the long-term earnings and growth prospects of the underlying companies you boughtthat you should focus on.

There are much more stock investing commandments to write about.  But the foregoing should give you enough to chew on for a while.

Thanks to Randell for allowing me to post this guest blog.  More power to you my dear friend.

Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to [email protected].

Copyright 2013 Efren Ll. Cruz, RFP.  All rights reserved. This material should not be published, broadcast, rewritten or redistributed without the express written of the author. 

There has been a lot of people wondering about investing in the stock market and for a good reason — our local stock market has been outperforming many other markets and has seen tremendous growth in the last 3 years.

Assuming that you have identified your investment objectives and you are willing to accept the risks of investing in equities, you may want to do the next thing and start investing.

Here’s a guest post by my good friend and ‘inaanak’ who is popularly known as Mr. Stock Smarts. I’ve asked Marvin to list the 5 things he considers before buying a stock.

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5 Basic things I consider before buying a Stock by Marvin Germo, RFP

What’s amazing about the stock market is that it is not about how deep your knowledge is in the economy or how awesome you are in using graphs that will make you earn. It’s also not about how much you know but how you implement that knowledge and balance it with your emotions. I always tell my clients that there is no right or wrong in terms of strategy in investing or trading in the stock market. What I always tell them is that when you find a strategy that earns for you, stick to it like the glue and don’t change your technique in the middle of the game.

In a nutshell here’s a basic process that I follow whenever I buy stocks. It’s my desire to see more and more Filipinos walk in their God given destinies of abundance.

1. Fundamentals — Increasing earnings and increasing market.
The very first thing that I consider before buying a stock is looking at the company’s finances. For me it doesn’t make sense to put my money into a company that is not earning. I look at the track record of the company if it’s sales, net earnings, along with its earnings per share are increasing every year, for the past 5 years. This gives me a sense of comfort as I would know what the company has done in the past to earn further. At the end of the day, it’s all about earnings, earnings, and more earnings that would take the stock price higher.

2. Valuations – Intrinsic Value is higher than the market price.

This entails computing what the company is really worth based on what it currently has and what its supposed to receive in the future. Upon computing and I see that the intrinsic value is HIGHER than the market price it furthers my stance in buying the stock. If the company is overvalued and IT’S MARKET PRICE IS HIGHER THAN IT’S INTRINSIC VALUE I avoid the stock at all cost.

3. Momentum – I buy when there is increased volume.
The stock market is all about liquidity, the more interest there is in a certain stock the easier it would be to buy and sell it. For me, no matter how good a stock is fundamentally if no one pays attention to it, the stock would go nowhere for weeks, months, and even years. The bigger the volume for a certain stock gives me a stronger conviction to buy it.

4. Technical analysis – I buy when the stock is about to reverse into an uptrend
Technical analysis is the study of market sentiment represented in graphs and charts. With the premise that an investor would be able to get indicators whether it would be a good time to come in or out of a certain stock. I only buy stocks in an uptrend, meaning the general direction of the market is in a buying frenzy for the stock. I never go against the flow or the trend as this is a very very good way to lose a lot of money. If I find a stock that is undervalued, good earnings, and has volume, I check if it’s in an uptrend then I’d buy it.

5. Emotions — I don’t listen to forums and I ignore the crowd.

Once I have confirmed everything using fundamental analysis and technical analysis and have made my decision to buy the stock. I ignore everything else. I see to it that buying is based on my analysis and not what I hear in forums, the net, or even my closest friends. At the end of the day buying of a certain stock is a personal decision that each investor should make.

To learn about Marvin, visit his site www.marvingermo.com

With all the good things we hear about the Stock Market, are we to expect that more Pinoys are now investing there? Not really. Data from the Philippine Stock Exchange (PSE) reveals this –

In 2011, there were 505,054 accounts registered among all active trading participants, up by 1.3% from the previous year’s total of 498,838 accounts. Of the total 505,054 accounts, 478,362 or 94.7% were considered retail while 26,692 or 5.3% were classified as institutional accounts.

Here’s more –

Of the total accounts in 2011, 157,535 or 31.2% were considered active. Active accounts are defined as accounts that have traded at least once during the year. The number of active accounts in 2011 rose by 31.3% from the previous year’s total of 120,016 accounts.

What the numbers are saying is this – only a handful of Pinoys are invested in the PSE! 500 K out of over a 90 M population makes that a very small percentage – roughly 0.5% of the population. With all the gains of the market in the recent years, Pinoys could have taken advantage of improving their financial situation… but unfortunately, only a handful did. While I don’t expect a staggering percentage of Pinoys investing in the market because of its risk and complexity, 0.5% is just way too miniscule. By contrast, some countries have 30 to 50% (or more) of their population investing in their Stock Market directly or indirectly through funds.

There are reasons why people stay away from the Stock Market but the top two reasons I would like to believe is ignorance and fear.

Admittedly, the Stock Market requires some studying before anyone should enter it. I always remind people not to invest in anything you don’t understand; but the Stock Market isn’t also rocket science and I have faith that the average Pinoy would be able to understand equity investing – or at least 1/3 of our population can. Reading a starter book, researching over the internet or better yet attending a seminar will do wonders to enlighten Pinoys on what the Stock Market is all about. Basic understanding of how the Stock Market operates is a worthwhile endeavor for us Pinoys because we can really benefit by investing in it – at the same time help the country grow its capital market (a discussion for another blog). A healthy and robust stock market that is sizeable in volume is very good for the economy. Currently, the PSE is healthy and robust albeit with very little volume.

Fear is another issue amongst us Pinoy. It has been a noted fact the Filipinos are risk-averse in nature, meaning we tend to avoid risks especially in investing and business. Proof of which is our huge money in Savings account and Special Deposit Accounts. BSP numbers pegs bank accounts (Savings, Checking & Time Deposits) at about P 5 Trillion while Special Deposit Accounts (SDA) at approximately P 1.5 Trillion. A big chunk of the money of the Pinoys is not really being invested and definitely not earning properly. While Bank accounts and the SDA are really safe investments, their yields are almost certain to be below inflation rates which means that most of our money are really eroding in value.

My recommendation is this – let us all learn about investing because it is one of those things that will bring us financial freedom and it can empowers us. Let us also not be crippled by fear because if we risk nothing, we gain nothing and I don’t mean speculating or gambling our hard earned money away – we can learn to diversify and practice prudent investment planning. If individual investing in the Stock Market may be too much for us to bear, then I suggest we look at pooled equity funds like the UITFs or Mutual Funds as well. Regardless of investing directly or indirectly, I believe it’s time for Pinoys to learn and invest in the Philippine Stock Market.

My 2 cents.