Personal Stock Investment Guidelines

After more or less two months investing, trading and speculating in the stock market and experiencing both losses and gains, I find the field exciting. I just hope that this excitement will not turn to despondency once something that I failed to anticipate happened. 

I consider my losses as "tuition fee" for my enrollment in this "school". I decided to educate myself simply because my more or less three years of reading the books written by Austrian economists made me suspicious of conventional wisdom. 

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I do not trust brokers and analysts. Even though they claim that they wish their clients to be wealthy, but I am realistic that to make themselves rich is their priority. And there is nothing wrong with that. Everyone serves his own self-interest regardless of the claim of those who advocate for altruistic ends. 

In this article, I simply want to write my thoughts after reading an ebook from investment website about the ten most successful investors in the world. And so I consolidated the common ideas among these investors and added my own thoughts. 

Let me begin with a self-explanatory guideline. 

1. Study and apply margin of safety.

2. Hold cash. Better to hold cash in your portfolio than simply following the crowd when in fact based on your research, you see no stocks that offer profit opportunities.

In today's economies where governments heavily interfere, it pays to be a contrarian. Maintain a healthy dosage of skepticism against conventional wisdom. Be wary of popular stocks everyone is buying. Buy instead at a maximum point of pessimism (e.gs. MWC and DMPL).

3. Study economics. Living in an interventionist world, financial literacy is not enough. In order to thrive in the world of investment, the knowledge of financial literacy should be supplemented or if not, grounded on a basic understanding of economics. Knowing the situation and direction of global economy is vital to your success. In an interventionist economy, to predict interest rates seems futile, and therefore an investor should not allow central bankers to dictate his decision.

The basic knowledge of economics will give you insight as to countries attractive for investment. Look for countries with low inflation rate. As for cities, invest among those who implement liberal policies. 

Moreover, know that economic depression and political uncertainties provide great opportunities. Stay invested when everyone is in panic. 

4. Only buy stocks that you understand. Start with the specific sector. Know which one is thriving (consumer sector) and which one is undervalued (mining sector) due to political pressure and bureaucratic process. Go for a company in a growing sector, but be always watchful of undervalued companies. In this uncertain times, investing in consumer sector is considered defensive. However, a year or two before the market crashes, better invest in mining sector particularly the gold stocks. 

Furthermore, stick with what you know and within your competence. Leave no stones unturned before buying a stock. If possible, ask the management or key personnel important questions related to future prospects and competition. Your goal is to come up with solid reasons for buying a stock.

5. Buy when the stock is undervalued and sell when it is overvalued. This means buying quality stocks when it is marked down (e.gs. PSPC, IMI). Such stocks are on sale or trading at bargain prices. However, though the company is great, still know the reason for its distress (e.gs. MWC due to arbitration, BLOOM due to Chinese government's campaign against gaming sector and DMPL's acquisition of DMFI) and if the reasons are unjustified and the situation offers a significant upside potential, increase your stake. Only sell when you find the company losing its competitive advantage, undergoing a management crisis and showing incosistency in its financial statements.

Nevertheless, maintain an open mind about stocks trading above their book value but not above their intrinsic value. Though it is impossible to arrive at a precise intrinsic value of a stock, come up with a relative price using several valuation methods to be used as a benchmark to assess whether you are buying an undervalued or overvalued stock. 

6. If you are looking to supplement your income, buy dividend-paying stocks. Consider also the comparative financial statements of the company if earning is growing. Once the company stops giving dividend and the financial statements show earning decline, sell that stock. 

7. Carefully study the balance sheet of the company. Go for companies with tangible assets and a minimal long-term debt. 

8. Technical analysis and market-timing play a role in investing, trading and speculating. It is foolish to ignore macro-economic developments and short-term price fluctuations for they are trying to tell you something. Listen to them and invest. 

9. Buy stocks that have long-term prospects. These are companies managed by honest and competent professionals, have competitive advantage and possibly one among the market leaders and have high profit potential.

10. Choose between a focused or a diversified portfolio. You can find examples of successful investors applying both. However, for those who decide in favor of a focused portfolio, they prefer to limit their expertise on few companies rather than doing research in a wide range of companies. If this is your preference and you have a medium-size fund, limit your portfolio to 8 to 10 stocks. However, if you have small fund more or less than Php 200, 000, better limit your portfolio to 3 to 6 stocks.

Conclusion: Live simply regardless of your investment success.

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Disclaimer: In a global economy that there is so much liquidity coming from the central banks, almost all stocks even those in the down trend are way above their book value. However, in the world of overpriced stocks, I personally consider PSPC and IMI as undervalued. Having expressed this opinion, this should not be taken as an investment advice. Trade and invest at your own risk.