Value Investing - Looking for Value in a Company

If there is one thing to take away from all this blog, it is to find value. And nothing can be more valuable than a company that earns. Thus, value is equal to earnings.

I didn't say potential earnings. But just earnings. Many people would buy a company because of its earning potential. A potential merger, a potential acquisition, a potential mineral resource on the earth yet to be mined. But the future is unknown. It is all just "potential". I can not count potential as a net worth. Or use "potential" to buy myself a house, a car or another company.

It is very risky to bet on something that hasn't happened yet. As well as bet on something based on the past. For me, it is a lot more accurate to bet on something as it stands, the present condition of the company.

What is a more accurate indicator of a company's standing? It is the balance sheet. In it, you'll be able to see how much debt it has, how much cash reserves and assets it has. Is it in the red? Or is it flourishing? Did it invest on itself? Did it bought back its shares from the public? Are the debts being paid back?

Now to look at its value, we look at the income statement. How much money is it earning? Is it growing? Is it declining? Is it losing to competition?

Once you have found a good company, one that is in good standing and has good value, you may decide to invest on it (buy its shares). But keep in mind that the market, at the time you saw this share, may not be accurately pricing the stock. How then you'll be able to know if its underpriced or overpriced? Even if you found a good company, paying for an overpriced stock will still make you lose money.

One indicator out of many is the use of P/E ratio. It is not the only way, but one way out of many. A single digit P/E ratio may be a good indicator that it is underpriced. While the higher number means its overpriced.

One way to think of P/E ratio is to look at it in a number of years to earn back your investment. If the P/E ratio of the company is 10 (for example), then it will take you 10 years to earn back your investment.

Once you have bought a company in which you think has a good standing, good value and good price, there is one more thing that you need to be successful. And it doesn't take any technical skills to achieve, yet it is the hardest.

The market on the short term is a voting machine. Market participants who buy and sell shares will do so according to their personal beliefs on the companies' prospects. In other words, a bad rumor may put the stock price diving down, even if the balance sheet is still good. In the same way as a good "potential" news will keep the stock price rising, even though its fundamentals are deteriorating.

The skill then for the investor is temperament. The confidence to hold on to ones' investment and sit through its rough times as the market votes for it in the short term. In the long term, the market becomes a weighing scale. Where the votes of traders and short term fanatics will not be reflected. But the same criteria you based in choosing the company.

In the long term, news and rumors and potentials are not the basis, but standing, value and price. It may take you 2 years, 3 years or even 10 years of waiting for the market to realize this. But the rewards will be great.

Merry Christmas!

2 Years of Stock Investing Philippines

Look at how time flies! It has been 2 years since I started this blog to track my journey in investing. And so far, I'm loving the process. Here are just random thoughts I could think of as I try to remember the things that happened this year.

I started investing in the stock market following the ideas I read in books. Without any prior experience, the authors were my only guide.

Needless to say, the first years were almost red. I was on the edge if I should trust a person who wrote a book about investing. But today, their wisdom has guided me. They proved to me that value investing works. You just need to have the temperament to hold on tough times.

If it works all the time, it wouldn't be effective as more people would be doing it. The down times for value investing is what makes it effective. Not many people can withstand a 2 year loss of -30%. And not many people are willing to sit through it. Thinking that trading and doing something with the portfolio will make it produce money.

Wealth is created when value is created. And many more wealth when majority has mispriced them. But the real premise is to find value.

Mutual funds adds no value. To the one who knows what he's doing. But takes money from you.

Consider this, a mature economy, the US' stock market returns only 7% per year. Minus inflation of 3%, you're left with 4% of your investment to use for living expenses or whatnot. Now then if mutual funds charges 5.5% per year on management fees, you are -1.5% down. You lose money. If you're not angry about that, you should be.

Even with the least management fees I could find in Philippine Mutual Funds of 1.5% per annum. You're looking at 2.5% per year yield on your investment.

My portfolio is up 20%. Based on capital appreciation alone (dividends are not included). Compared to the PSE Index 4.87% as of this writing. I've beaten the index! YEAH!

Most of the stocks I hold now have yields from 10% reaching 50%. Though not yet a tenbagger, I already have the proof and confidence that I need to continue this style of investing. I do have some losers but I'm still up on the bottom line and they still give me dividends from 3% - 10% per year.

My goals have changed. The original goal of this blog was to reach $1 Million through investing. But I have come to realize that I do not need to have that amount of money. Because the investment income that I have, would already be sufficient for me to live comfortably at P46,000 / month. It is then more practical to pursue other things in life. I have made a page for the goals.

Personal Index Fund

Recently, I posted about how disappointed I am with mutual funds. And how these funds suck money away due to fees and commissions. And today, I just finished deploying my cash to mimic the index.

The total cost of it (tax, broker commission) is a one time cost of 1.1% of my cash total. Management fee per year would be 0%. Exit expense would of course be influenced by broker commissions and tax. But I could care less about that since I won't be selling anytime soon. But I could guess that it would also be a one time cost of 1.1%.

To create your own index fund, you just need to copy the PSEi composition. That is, to buy the stocks listed in here.

Pay good attention to the weigh %. For example, 11.48% should be for TEL. If you have P1 million to invest. 11.48% of that money should be used to buy TEL shares, which is P114,800 or 42 shares of TEL. Just do that with the remaining stocks and you will have your own index fund with no management cost. And I'm sure you'll be beating 90% of the mutual fund managers in the Philippines by doing so.

There's also an alternative, recently, there's FMETF. Which tracks the index. So instead of buying 30 companies individually, you can just buy FMETF and be done with it. I haven't bought FMETF yet, I'm not sure exactly if dividends would be paid out as well so I'm still on the fence with it.

I like dividends and its one of the main principle of this blog, to have passive income thru investing.