Are you looking at stocks outside of PSE?

If you are looking for growth or strong capital appreciation, PSE might not be the best stock market to invest in as our biggest companies are just mostly serving the Philippine market, in mature industries, and/or difficult to scale, such as real estate, banks, telcos, and food.

If you look at markets around the world, you will see that growth and biggest capital appreciation mostly came from companies in Tech as they disrupt established industries. In fact, the biggest companies in terms of market capitalization are all in Tech (with the exception of Aramco, but would likely also fall as the world shifts to renewables), like Apple, Microsoft, Amazon, Google - all having trillion-dollar-market-cap! Software is truly eating the world.

Personally, these stocks are my favorite and following closely:

  1. Tesla - disrupting cars and energy
  2. Square and Paypal - disrupting banking
  3. Beyond Meat - the future of food

Which company/stock in the world are you invested/investing, or following closely? Any company/stock in Ph you think could possibly break out and have a worldwide appeal?

When you do decide to finally invest, it is best to actually know the company - their products, competitors, management, competitive advantage, threats, etc.

To do that, you would need to rely on the information you find on the Internet. I suggest these sources:

  • Company communications
  • Main stream media
  • Twitter/YouTube (analysts)
  • Twitter/YouTube (fans and not fans)

Over time, you will see who twists the truth, those that overhype, those that downplays, and how well or poorly management is executing by basing it on actual company performance.

Lots of noises out there, but hopefully, by synthesizing all these information, it would help you make a better judgement. In the end it would be your money on the line.

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If you have enough time and money, you should be able to create and manage your own investment portfolio - time: to study and follow closely your investments, especially in stocks; and money: to properly diversify your investments, thus mitigate risk.

“Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories.”

If you don’t have enough of both, you should consider pooled investments instead via mutual fund or exchange traded fund (etf):

  • active, or
  • passive

I prefer passively managed funds, which has gained popularity over the years, for three main reasons:

  1. Transparency. The performance of the fund is based on an index, like S&P 500

  2. Cost. Minimal management fees since the fund just mirrors an index’s basket of stocks.

  3. Performance. Really difficult to beat S&P 500 index (benchmark of active funds), thus investing in an actively managed fund does not guarantee a better return

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Great read! Super helpful! I’ve always wanted to do this but I didn’t know where and how to start.

I guess you can start locally through your bank. Normally, banks offer mutual funds aside from standard deposits, but I think you need to place it there for at least a year, or you will be penalized. Just select the fund that is based on the PSE Index for transparency.

But you might want to hold off in the meantime. So many bad news:

Our GDP is down 16.5% (worst in ASEAN)

Jollibee posted a P12B loss in the first half, closes 255 stores

And now, we’re back to MECQ (lockdown). Not looking good. Might even get worse in the coming months. But, if PSE Index goes down to 4,500 (currently at 5,900), I will personally consider going in, but having a 3-yr timeframe, ie money that I would not need for the next 3 years.

Does value investing still work?

Definitely it works - it made WARREN BUFFET, the best-known follower of value investing, one of the richest people in the world. Or, at least it used to work as the past decade played out differently. In an era with many technological advancements, his fund, although still good, did not do as well compared to S&P 500.

The S&P 500 is made up mainly of the biggest companies in the US regardless of industry. With the biggest companies mostly in tech, the weighted-index is biased towards the tech industry. Thus, value investing might not be appropriate in today’s age where tech companies dominate. A longer investment horizon of 5 to 10 years might be more suitable for a technology or disruption to play out.

One fund seems to be at the forefront of this kind of thinking that focuses on looking for disruptive technologies, and looking out to at least 5 years into the future.

Ark Invest

Cathie Wood, ARK Invest CEO

“Her actively managed Ark Innovation ETF is the best performer among 584 funds with at least $1 billion of assets in the global equity market, crushing the likes of BlackRock”

Cathie Wood, the Best Investor You’ve Never Heard Of
https://www.bloomberg.com/opinion/articles/2020-02-18/cathie-wood-s-tesla-bet-puts-ark-invest-in-spotlight

ARK Invest has gone against the grain in terms of stock picks, with Tesla being the most controversial of all, and their fund’s biggest holding. Ark has been bullish on the stock since its low $200s, while most analysts were bearish. Their thesis is that soon electric-vehicles will be at cost parity with combustion engine cars; and, Tesla would dominate as it takes advantage of the convergence of different technologies. This thesis seems to be holding as Tesla continues to bring down their costs, e.g. battery. Similarly, Ark’s thesis on Square and Bitcoin are also holding up well.

Watch Cathie defend Tesla while in the $200s, and how she correctly predicted the outcome.

Disruptive technology seems to be where the strong growth is in terms of capital appreciation as it changes markets. But, also very risky as a much superior technology might come along, So caution is needed, not to mention constant attention and monitoring.

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How to Invest in Foreign Stock Markets

I have been watching a lot of finance videos lately, and was surprised, and glad, to see that there is now an easy way to invest in the US without the usual hurdles that I found when I was looking a few years back:

  • having a bank account in the US
  • having a dollar account here
  • high initial investment requirement
  • high commission fees
  • minimum monthly commission fees
  • strict document requirements

eToro seemed to have addressed all these concerns. And on top of stocks, you can also trade cryptocurrencies (eg bitcoin), commodities, forex, futures, leverage trading, short sell, and options. Here are the important things that I learned after watching the instructional videos below:

  • You can create an account w/o funding so you can test
  • Play money to practice trade to familiarize yourself with the platform
  • Once you are ready, you can fund your account using Peso
  • It will automatically convert your Peso to USD
  • Initial funding, I think, is $250
  • After which, you can add funds at lower or higher amounts
  • No commission/maintaining fees
  • You can buy fractional shares (ex. Amazon @ $3k/share; for $50 you can buy a fraction of 1 share)

When I was looking at investing in the US market, the biggest hurdle is the US Bank account requirement; followed by the minimum monthly commission fees (not for long term investors like me). Saw COL Global (100% subsidiary of locally listed COL Financial) being suggested in some message boards. Requires a bit of capital with their minimum investment requirement, but workable since only a local USD account is needed. Plus, there is a path to avoid inactivity fee.

eToro’s affordable initial investment and fractional shares are important features to help it gain a wide base of local investors. This gives the local investors more earning opportunities, especially in the high growth technology companies which are lacking in our stock market. Hopefully, this would prod Ph companies to step-up their game to compete for capital allocation, as local investors become exposed to other markets and become more sophisticated.

Some caution, though:

  • know the platform well - its features and functionality
  • know the types of trading you can do and the risk it entails (ex. options, leverage, etc)
  • most tech stocks are at an all time high, maybe wait for a correction
  • coming US elections
  • trade war of US and China

To lessen risk:

  • practice trade first using the play money to know the platform
  • stick to US stocks, for now
  • avoid leverage buying or shorting (borrowing money to trade)
  • avoid options
  • know the business and the stock price of the company you will invest in well

Many Filipino investors can now own stocks of the biggest tech companies in the world, like Apple, Amazon, Microsoft, Facebook, Netflix, and other promising start-ups. Happy investing.

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Here are instructional videos I found to help you get started in using eToro:

Etoro Philippines: How to register [ Non US Etoro Account ]

eToro Philippines: Top up or add fund through BDO Online Local Banking [Non US Account]

Etoro Philippines: How to Buy USA Stocks using eToro [For Non US Account]

3 WAYS TO BUY FACEBOOK STOCK FOR 50 US DOLLARS ONLY

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COL Global info:
http://global.colsecurities.com.hk/col/home/

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Diversification

“Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.”

Case against a diversified portfolio

As far as stocks go, I don’t believe in owning many stocks, or trying to own stocks in different sectors.

One, if the idea of investing is to know the companies behind the stocks, then owning a lot will be quite a headache. Even more so if the company belongs to an industry you are not familiar with. Add to that the many sources of information / misinformation available all over the internet, then it could really be a challenge.

Two, it limits potential gains - as some stocks go up, some stocks could also go down. In the same token, it also limits potential loss. Essentially, a well diversified portfolio is a bet on the macro economy.

Thus, if your preference is to have a diversified portfolio, then maybe the best option is to just invest in mutual funds, exchange traded funds (ETF) or index funds.

Case for a concentrated holdings

The idea of owning just a handful of stocks scares a lot of people as it is a high risk proposition. But on the flipside, it also provides the highest potential return. If you want to build wealth, as opposed to protecting wealth, this is the best strategy to take.

“Buffett generated his most breathtaking returns when Berkshire ran on a concentrated stock portfolio”

The key to mitigate the risk in a concentrated portfolio is to study and know the underlying companies and the industry it belongs to really well. Get as much information as possible, but also vet as misinformation/disinformation are abundant out there. Over time, you will learn the trustworthy sources of information. Synthesize these information and form your own investment thesis. Your conviction would dictate its allocation size in your stock portfolio, could be even be just a 1-stock portfolio like mine.

“Diversification is a protection against ignorance,"

As a long term investor, I don’t time the market. To know when to sell, challenge your investment thesis. If it does not hold anymore, then sell.

But diversify based on asset class

Although I don’t believe in having a diversified stock portfolio, it is still prudent to diversify based on asset class like cash, bonds, even properties. For example, maybe keep at least 20% in cash, and 80% in stocks. Really, case-to-case basis depending on one’s financial situation.

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Picking stocks

One should always buy into the company and not the stock. Meaning, you have to know the company’s business, their products, and the people who run it. Even better if you love their products so following their progress would be a joy. This is especially true for long term investors.

As a starting point, with so many stocks in the US Market (over 4k), it is a good idea to narrow this down by looking at the best managed funds, for example ARK Invest, and see which companies they are investing into. Personally, I also consider stocks I see/hear from people I follow on Twitter / YouTube / Reddit / Other social groups that over time I have found to be credible and have good investment judgement.

From there, I do my own research and vet the companies as follows:

  1. The CEO should also be the Founder

From what I have seen over the years, non-founder CEOs have the tendency to just stay in line and simply build on the existing products and grow their market. They lack the confidence of a founder, maybe even the vision, to think outside the box - disrupting markets through innovation, or even just drastic changes in how things are done. This can be clearly seen on how they responded in the recent US Congress hearing on monopolies where the top tech companies were invited - Founder CEOs Jeff Bezos (Amazon) and Mark Zuckerburg (Facebook); compared to Non-founder CEOs Tim Cook (Apple) and Sundar Pichai (Google). Well, actually it was just Jeff Bezos who stood out. The rest sounded like they were reading from a script and were unable to speak their mind.

  1. Track record of Founder/CEO

Like loaning money to someone, you should first know the character and track record of the people running the company. After all, as a long term investor, you will be entrusting your money to them for a long time. And who wouldn’t want to sleep peacefully at night.

  1. 10x potential in 5 to 10 years

Can the company grow 10 times in the next ten years? This is where some analysis would have to be done. Is the market they are operating in allow them to grow that much? Can they scale quick enough? Is there another industry that they can potentially enter into as a byproduct? Are they redefining / creating new markets? Any strong moats or advantages? The answer to these questions, hopefully, would enable you to find out if a company has a 10x potential.

  1. Low Market Cap

The best time to invest in a company is when their market cap is low – less than $50 billion, or close to it (the lower the better) – to increase the probability of a 10x. It is just the law of large numbers (in business), i.e. as a business expands, the growth rate becomes increasingly difficult to maintain. For example, with Apple now at $2 trillion market cap, can it still 10x from $2 to $20 trillion in 10 years? Although possible, it is not likely, especially if you consider that the bulk of its revenue is in a mature market. Still, a market cap of over $50 billion, or even over $100 billion, can still be considered, but it should be operating in a huge market, or even multiple markets. And, it should be able to redefine this market, and lead it.