Finance


Time to invest in stocks now?




FINEX FOLIO
By Flor G. Tarriela

Posted on January 29, 2016


Now that the stock market is down, with the Philippine Stock Exchange index lower year on year (vs 7,548.93 (January 2015), is it a good time to get in? If yes, which stocks to buy?

How do you make money in the stock market? The general principle is buy low and sell high. Warren Buffett seems to be always “lucky” in his investments; there must be a basis or a formula. How does he do it?

Over the holidays, I was reading the book “Warren Buffett and the Interpretation of Financial Statements” by Mary Buffett and David Clark. What can we learn from Warren Buffett? He looks at companies on a long-term basis. He is specifically looking for companies with a long advantage over their competitors. He doesn’t wait for bargain prices; his principle is that even if he paid a fair price, in the long term, the investment will pay off and make him rich.

What are Mr. Buffett’s do’s and don’ts for interpreting income statements? What companies should one stay away from even at a low price? What are the analytical tools to help identify these special businesses with long-term advantages over their competitors? What are these companies? The book says:

• Companies that sell a unique product. His examples are: Wrigley, Coca-Cola, Kraft, Procter and Gamble -- basically, products we think of when we want to satisfy a need. They own a piece of the consumers’ mind.

• Companies that sell a unique service. These are companies that sell services that people need and are willing to pay for on an institutional basis, as opposed to lawyers or doctors, which are person-specific. Firms selling unique services can actually produce better margins than firms selling products.

• Low-cost buyer or seller of a product or service that the public has on going need for.

Where does Mr. Buffett look for companies with the competitive advantage? The financial statement (FS), mainly the income statement, and the balance sheet.

The income statement tells how much money the company earned, its profit margin, and the direction and trends of earnings. Mr. Buffett looks for consistency. Is its earnings margin consistently on up trend? A company could be making big revenues, but what margins does it give? Does it have to spend a lot on research and development to keep its competitiveness? He avoids businesses with high and extensive research and development costs, high capital expenditures and/or lots of debts. In general, companies with durable competitive advantage used 50% or less of net income for capital expenditures.

He also shies away from companies with erratic earnings as this shows that these firms are in boom or bust industries. He thinks to buy such stocks is akin to taking a “long slow ride to nowhere”.

The balance sheet, on the other hand, shows how much money the company has in the bank, assets, and how much it owes.

Net worth or equity is the total of company’s assets less all its liabilities. Mr. Buffett is wary of debts, especially big debts. Consistent high returns on equity means the company is putting to good use earnings retained. This increases value of the business and is eventually reflected by increases in the company’s stock price.

Note that there are profitable companies that pay out dividends to shareholders and don’t retain earnings. They’re to be differentiated from mediocre companies with losses and negative equity. “If we see a lot of cash and marketable securities with little or no debt, chances are very good that the business will sail on through troubled times. But if the company is hurting and is sitting on a mountain of debt, it probably is a sinking ship that not even the most skilled manager can save,” the book said.

Where to get financial information? The annual report which contains the FS of companies, usually filed with Securities and Exchange Commission. Here, listed companies file their SEC 17-Q or earnings reports quarterly. And in this digital age, there are a lot of information in the internet. Our very own PSE maintains a website called EDGE or the Electronic Disclosure Generation Technology, where publicly-listed companies are required to upload their financial statements and announcements for access by the general public. The PSE EDGE can be accessed via http://edge.pse.com.ph.

When is the right time to invest? The cost of your investment affects return. The lower the price paid, the better the return over a long-term period. So when do you buy? Bear markets may be a good start, but be prepared for the inevitable volatility in prices. The reverse is stay away from bull markets, or when companies trade at high price to earnings multiples.

And when do you sell? Occasions to sell are in a bull market, but also take caution not to buy another stock at the same time. Another good time to sell is when you have an opportunity to invest in a better company. Further, when the company in which you invested runs into some trouble. Be able to ascertain, though, if the problem is only temporary and can be resolved easily. Lastly, if the reason you invested in the company has changed, it is probably a good time to sell.

Is now an opportunity to consider to invest in stocks? I don’t personally play the stock market but I was a stock researcher/analyst during my Bancom days. With the stock market quite low, if you have extra cash and can carefully choose companies with strong fundamentals, it may be a good time. But we should be prepared for market volatility. The horizon should be long-term, no panic, so we don’t say goodbye to a potentially long-term good buy.

Time to invest? Why not?

Flor G. Tarriela is Chairman of Philippine National Bank and a FINEX Trustee. She was formerly Undersecretary of Finance. First Filipina Vice-President of Citibank. A natural gardener and environmentalist.