By Salve
10/30/08
Posted under Investing
Yesterday’s “Pesos and Sense” seminar at the Makati Sports Club was, in my opinion, very successful and extremely interesting. Speakers Chinkee Tan, Randell Tiongson and Francis Kong drew up a crowd and not only talked about dealing with debt, investing and saving, but also kept money issues in perspective. One of the seminar participants even flew in from Cebu, fly-in-fly-out style.
Randell Tiongson, president and chief operating officer of Personal Finance Advisers Phils. Corp., made a very interesting comparison between two giants in the world of finance: Jesse Livermore and Warren Buffett.
Jesse Livermore was a master of the art of speculation. He was first and foremost a trader and a technician who preached never to “fight the tape.” One of his rules was to cut your losses when your losses reach 10%.
He was famous for shorting the market during two crises and earning tons of money. First during 1907 when he bagged $3 million (guess how much that’s worth today!), and the second time in the 1929 crash when he made $100 million. He lost both fortunes after the market crashes.
Livermore lived in luxury—houses around the world, yachts, limousines and he could also be called “Lovermore” with five marriages. He died at 62 when he walked into a New York hotel room and shot himself.
Warren Buffett can be described as an investor, and not a trader. He doesn’t like Wall Street and says that openly. He doesn’t buy stocks; he buys businesses and holds on to them for the long-term. He doesn’t care about the economy. He likes businesses that survive despite economic downturns. Now at 72, he is the world’s richest man and gave away bulk of his money to charity a few years ago.
Buffett has a grandfatherly air, drives his own car and picks up his own guests at the airport. He owns five houses but still lives in his first home in Omaha and his car tag says “Thrifty.” I am currently reading the only book about him that he authorized: The Snowball: Warren Buffett and The Business Of Life and so far, it has been an intensely interesting read.
There is no question which one most people would like to be. And yet, why do most people who love Warren sometimes end up doing a Livermore?
Source/Link:http://blogs.inquirer.net/moneysmarts
Thursday, October 30, 2008
Wednesday, October 29, 2008
THE TROUBLE WITH PHILAMLIFE
And BDO, and Metrobank and UCPB and. … and the economy as a whole. as a financial adviser (Mutual Funds, Insurance) connected with Philamlife, I’ve been bombarded with questions from apprehensive, panicky and quite a few, angry, clients/investors and policy holders with regards to their money invested in Philamlife, and most of my time these past two months have been spent reassuring them, notwithstanding the statement released by the company assuring investors and policy holders of the company’s ability to meet all its present and future obligations. So I’m posting a column here of Dr. Ravalo, an economist. While this column was posted last year (Aug.2007) it is very timely now, in lieu of the events unfolding caused by the US sub-prime crisis-Lehman Bros. Merrill-Lynch, and of course AIG(our mother company) and since he is not connected with any company, financial or otherwise, that should make his views objective. Dr. Ravalo here explains clearly, what’s really going on with the economy and how it affects Philamlife and other financial institutions in particular and all of us in general. Note: letters in blue are my own opinion, additions and comments for further clarification, and is not part of the original column.-Nards
After stock market routs, can shares become worthless?
By Dr. Johnny Noet Ravalo*
INQUIRER.net
Last updated 08:48am (Mla time) 08/22/2007
Questions:
I am new to investing in the Philippine stock market. I am wondering how the other markets affect the position of our economy especially when China's market went down last February and currently the US market is declining. -- Mr. WannaKnow
I am an OFW, a “greenie” in stock market and have just bought some IPO shares recently. (Knock on wood). At what point will my shares be considered of no value. Say if bought at P5/share and value goes down, at what price level will my share be considered lost and gone? If for instance after some time the price rebounded, will I still be considered as a shareholder of these stocks? -- Jim Francisco
And of course that other lingering question that I’ve been ask-which I’ll answer at the end of the column: If Philamlife is as strong (its no.1 in case you’re not aware) and profitable as it claims, how come it’s for sale?-Nards
I wanted to talk about these issues when this column started almost six months ago but like most voluntary to-do lists, it somehow got lost in the shuffle. Now, I don’t have any good excuse to postpone it since the issue is central to what is currently happening in the market.
Stock markets are unique in the sense that shares of stocks are not debts created by the company. The issuing company is not borrowing the investors’ funds but is taking in the investors as owners of the company and the shares are just the proof of ownership.
The “unit of analysis” for stocks is the company itself. Whatever affects the fortunes of the firm is supposed to be reflected in the share price. The share price is the future revenue stream of the company translated into today’s prices (i.e., it is discounted). If something boosts or impairs that income stream, then share prices are supposed to rise or fall respectively.
We are talking about the “future” fortunes of the firm. Expectations are critical and someone has to set that bar. Analysts typically do that based on what the company projects as its future income stream, together with the analyst’s own views. If the bar is set too high, the company will always underperform and share prices fall. Yes, there are “models” out there for such valuation but stock analysis involves a fair amount of crystal-ball reading.
To answer Jim’s question, remember that there are many shares of stock that have been issued by the firm. The value of each share then reflects both the expected fortunes of the firm and the number of shares that have been issued.
I like to think of it as a pie. Some pies just don’t taste good so no one buys them even at low prices. The better pies are of higher value but if there are 1,000 slices, each slice may just be worth 50 centavos. If the firm shuts down, obviously there isn’t any future to speak of so that the theoretical price is zero. But I have seen shares whose value in centavos is so small that you need a lot of shares to be meaningful.
All these go back to the intrinsic value of the pie. That part is the most absolute concept you will get: YOU deem it either good to buy, passable to hold (just in case) or bad enough to dispose. But if you intend to trade stocks (rather than be an owner) then the views of analysts, commentators and the media count only because these views move markets. The views aren’t always fair but they are the market’s handles of reality unless new views prove otherwise.
The fortune of the firm is not totally dependent on the firm’s projections or its management’s decisions. If the whole economy goes into a rut, that will show at the level of all firms (of course, some worse than others). If the industry to which the firm belongs has a breakthrough, that will lift the industry as a whole. And since discounting future income is involved, one would generally see falling share prices as interest rates rise, all things equal.
How then would the misfortunes of country XYZ (or for want of a better example let us change those letters to U S A) be a boom to shares in the Philippines?
Theoretically, that is possible if firms in country USA are producing goods that are substitutes for the output of firms in the Philippines. If for some reason drinking tea falls out of fashion (as far as I know the Philippines does not produce tea), that may be good for coffee manufacturers or distributors here if tea-patrons (and there are millions-were talking about the U.S. market here, as an example) shift their consumption (and their wallet use) into drinking coffee instead.
For similar reasons, investors in developed countries like the US are known to invest in the financial markets of Asia. This is just the old adage of not putting your eggs in the same basket. So if the US financial market goes into a downturn, there is the rising fortune of Asian financial markets to offset the losses (and vice versa). Finance has a fancy term for this and it is called “diversification”. Every student of macro-financial economics is taught of the virtues and financial gains from diversifying one’s portfolio.
So if the US dollar was weakening, wouldn’t you expect the peso part in the peso-dollar rate to strengthen ... always? With the US market reeling from the credit woes of its subprime market, shouldn’t that be a boom to our markets? As you can see, it doesn’t always work that way.
So, how come their loss is our loss and our loss is ... well, still just our loss?
Fortunately, this is not one of those “only in the Philippines” things. When the US market closes, Asia is just waking up to go to work (actually, we’re waking up so that we can beat the 6:15 EDSA traffic). Instead of feeling perky about the possibility of funds shifting into Asia, market players in Asia go into defensive mode and reinforce the US shock with another Asian shock.
Why do we do this? Good question.
In principle the credit woes in the US subprime market is a US issue. But it affects the rest of the world for several reasons. First, the US Fed can and has altered its interest rate benchmark and that will directly affect exchange rates and economies with money board arrangements. Second, US institutional investors may pull out of their Asia investments, taking profits to offset losses in their subprime bond holdings.
The first two reasons are out of our hands, the third reason is one that is squarely our own doing: the tendency to go with the herd.
Some people have described this as a room full of panicky traders. Perhaps, but I still think that the root cause of that panic is that “market awareness” is often an oxymoron for almost all individual investors and unfortunately, as it turns out, even for some market practitioners.
I am not saying that investments are a fool’s gamble. To the contrary, investments have a very clear role in improving the economy. But nothing is guaranteed and since it’s our savings, diligence on our part is an absolute must.
I think the Chinese summarize it best. Their character for risk contains two components, the first literally representing “danger” while the other represents “opportunity”. What makes investing work is maintaining that balance.
And yes, I still think “market awareness” is an oxymoron. At least for now.
And may I add another reason, just like its US counter-parts, some of our banks also diversify and invest in the financial markets of the US for the same reasons, which explains BDO’s, Metrobank, UCPB, and others’ exposure to Lehman Bros. a big Investment/Financial company. Still that decision is with the banks and beyond our control. Luckily for depositors, their exposure was not that big (1% as they claim) to pose a risk. And presents another good argument for diversification-not putting their eggs in one basket.
In answer to the third question: There is a law that prohibits a mother company from taking out the profits and assets of its local subsidiary-to raise capital, nor pay off its debts. it can only do so by selling parts or the whole of its subsidiary, which is what AIG is doing right now: selling Philamlife-to pay off its (now) more than $100b loan to the federal government)AIG has decided to divest itself of its prized, and profitable foreign holdings (of which Philamlife is one) because it’s only logical, to dispose companies that are desirable,(with its assets and value intact) so it can attract lots of potential buyers, can command a much higher prize, and more important, it can dictate the terms of the sale (you can read the no. of interested buyers in Philam from newspapers)
And going back, to that Chinese character for risk containing two components, danger and opportunity, isn’t NOW the best time to actually invest in the financial markets, when its share value is low? Just asking. Nards
*((Noet Ravalo is the first Filipino to earn a PhD in Economics from Boston University and is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work for multilateral and foreign agencies. His current engagements are with the Bangko Sentral ng Pilipinas and the PDS Group. Over the past 12 years, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos’ personal finances.)
After stock market routs, can shares become worthless?
By Dr. Johnny Noet Ravalo*
INQUIRER.net
Last updated 08:48am (Mla time) 08/22/2007
Questions:
I am new to investing in the Philippine stock market. I am wondering how the other markets affect the position of our economy especially when China's market went down last February and currently the US market is declining. -- Mr. WannaKnow
I am an OFW, a “greenie” in stock market and have just bought some IPO shares recently. (Knock on wood). At what point will my shares be considered of no value. Say if bought at P5/share and value goes down, at what price level will my share be considered lost and gone? If for instance after some time the price rebounded, will I still be considered as a shareholder of these stocks? -- Jim Francisco
And of course that other lingering question that I’ve been ask-which I’ll answer at the end of the column: If Philamlife is as strong (its no.1 in case you’re not aware) and profitable as it claims, how come it’s for sale?-Nards
I wanted to talk about these issues when this column started almost six months ago but like most voluntary to-do lists, it somehow got lost in the shuffle. Now, I don’t have any good excuse to postpone it since the issue is central to what is currently happening in the market.
Stock markets are unique in the sense that shares of stocks are not debts created by the company. The issuing company is not borrowing the investors’ funds but is taking in the investors as owners of the company and the shares are just the proof of ownership.
The “unit of analysis” for stocks is the company itself. Whatever affects the fortunes of the firm is supposed to be reflected in the share price. The share price is the future revenue stream of the company translated into today’s prices (i.e., it is discounted). If something boosts or impairs that income stream, then share prices are supposed to rise or fall respectively.
We are talking about the “future” fortunes of the firm. Expectations are critical and someone has to set that bar. Analysts typically do that based on what the company projects as its future income stream, together with the analyst’s own views. If the bar is set too high, the company will always underperform and share prices fall. Yes, there are “models” out there for such valuation but stock analysis involves a fair amount of crystal-ball reading.
To answer Jim’s question, remember that there are many shares of stock that have been issued by the firm. The value of each share then reflects both the expected fortunes of the firm and the number of shares that have been issued.
I like to think of it as a pie. Some pies just don’t taste good so no one buys them even at low prices. The better pies are of higher value but if there are 1,000 slices, each slice may just be worth 50 centavos. If the firm shuts down, obviously there isn’t any future to speak of so that the theoretical price is zero. But I have seen shares whose value in centavos is so small that you need a lot of shares to be meaningful.
All these go back to the intrinsic value of the pie. That part is the most absolute concept you will get: YOU deem it either good to buy, passable to hold (just in case) or bad enough to dispose. But if you intend to trade stocks (rather than be an owner) then the views of analysts, commentators and the media count only because these views move markets. The views aren’t always fair but they are the market’s handles of reality unless new views prove otherwise.
The fortune of the firm is not totally dependent on the firm’s projections or its management’s decisions. If the whole economy goes into a rut, that will show at the level of all firms (of course, some worse than others). If the industry to which the firm belongs has a breakthrough, that will lift the industry as a whole. And since discounting future income is involved, one would generally see falling share prices as interest rates rise, all things equal.
How then would the misfortunes of country XYZ (or for want of a better example let us change those letters to U S A) be a boom to shares in the Philippines?
Theoretically, that is possible if firms in country USA are producing goods that are substitutes for the output of firms in the Philippines. If for some reason drinking tea falls out of fashion (as far as I know the Philippines does not produce tea), that may be good for coffee manufacturers or distributors here if tea-patrons (and there are millions-were talking about the U.S. market here, as an example) shift their consumption (and their wallet use) into drinking coffee instead.
For similar reasons, investors in developed countries like the US are known to invest in the financial markets of Asia. This is just the old adage of not putting your eggs in the same basket. So if the US financial market goes into a downturn, there is the rising fortune of Asian financial markets to offset the losses (and vice versa). Finance has a fancy term for this and it is called “diversification”. Every student of macro-financial economics is taught of the virtues and financial gains from diversifying one’s portfolio.
So if the US dollar was weakening, wouldn’t you expect the peso part in the peso-dollar rate to strengthen ... always? With the US market reeling from the credit woes of its subprime market, shouldn’t that be a boom to our markets? As you can see, it doesn’t always work that way.
So, how come their loss is our loss and our loss is ... well, still just our loss?
Fortunately, this is not one of those “only in the Philippines” things. When the US market closes, Asia is just waking up to go to work (actually, we’re waking up so that we can beat the 6:15 EDSA traffic). Instead of feeling perky about the possibility of funds shifting into Asia, market players in Asia go into defensive mode and reinforce the US shock with another Asian shock.
Why do we do this? Good question.
In principle the credit woes in the US subprime market is a US issue. But it affects the rest of the world for several reasons. First, the US Fed can and has altered its interest rate benchmark and that will directly affect exchange rates and economies with money board arrangements. Second, US institutional investors may pull out of their Asia investments, taking profits to offset losses in their subprime bond holdings.
The first two reasons are out of our hands, the third reason is one that is squarely our own doing: the tendency to go with the herd.
Some people have described this as a room full of panicky traders. Perhaps, but I still think that the root cause of that panic is that “market awareness” is often an oxymoron for almost all individual investors and unfortunately, as it turns out, even for some market practitioners.
I am not saying that investments are a fool’s gamble. To the contrary, investments have a very clear role in improving the economy. But nothing is guaranteed and since it’s our savings, diligence on our part is an absolute must.
I think the Chinese summarize it best. Their character for risk contains two components, the first literally representing “danger” while the other represents “opportunity”. What makes investing work is maintaining that balance.
And yes, I still think “market awareness” is an oxymoron. At least for now.
And may I add another reason, just like its US counter-parts, some of our banks also diversify and invest in the financial markets of the US for the same reasons, which explains BDO’s, Metrobank, UCPB, and others’ exposure to Lehman Bros. a big Investment/Financial company. Still that decision is with the banks and beyond our control. Luckily for depositors, their exposure was not that big (1% as they claim) to pose a risk. And presents another good argument for diversification-not putting their eggs in one basket.
In answer to the third question: There is a law that prohibits a mother company from taking out the profits and assets of its local subsidiary-to raise capital, nor pay off its debts. it can only do so by selling parts or the whole of its subsidiary, which is what AIG is doing right now: selling Philamlife-to pay off its (now) more than $100b loan to the federal government)AIG has decided to divest itself of its prized, and profitable foreign holdings (of which Philamlife is one) because it’s only logical, to dispose companies that are desirable,(with its assets and value intact) so it can attract lots of potential buyers, can command a much higher prize, and more important, it can dictate the terms of the sale (you can read the no. of interested buyers in Philam from newspapers)
And going back, to that Chinese character for risk containing two components, danger and opportunity, isn’t NOW the best time to actually invest in the financial markets, when its share value is low? Just asking. Nards
*((Noet Ravalo is the first Filipino to earn a PhD in Economics from Boston University and is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work for multilateral and foreign agencies. His current engagements are with the Bangko Sentral ng Pilipinas and the PDS Group. Over the past 12 years, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos’ personal finances.)
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