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Just sharing this insightful article by John Mangun taken from Business Mirror.
‘THE sheep pretend the wolf will never come. The sheepdog lives for that day.”
The Philippines stock market has been one of the best global performing markets during the past two years. There are many factors that will push prices higher in 2013. The Philippine Stock Exchange index above 7,000 by year-end is probable.
However, there is a disturbing trend that has been going on for two years that seems to be accelerating. It is rooted in the premise that the stock market will continue to go higher and higher and give higher and higher returns. The trend I am worried about is the belief that the stock market is a sensible investment vehicle for everyone.
Granted, a person can invest through a managed investment program, such as mutual funds, and these funds do help reduce the risk. But there is always a downside risk.
There is an old stock-market saying that when the shoeshine boys start investing in the stock market, that is the time to sell. While there may not be many shoeshine stands left, there are a variety of lower-income individuals who are being encouraged to put their excess money in the market. Is it time to sell when the domestic helpers are investing?
The sheep pretend that the wolf will never come because they are told not to worry about the possibility of a wolf.
The Hong Kong stock and commodity markets were hot in the early 1990s. Prices more than doubled in two years. Prices tripled in less than four years. The only topic of conversation upon getting into the taxicab was “The Market.” Yet from January 1994 to the end of that year, the market lost nearly 40 percent. During the 1997 Asian financial crisis, the Hong Kong stock market dropped more than 50 percent. More recently, that stock market fell almost 60 percent from 2007 to 2009.
The taxi drivers probably did not get caught in the last downturn; they decided not to be the sheep of the stock exchange.
Investors must understand that the stock market operates in a very real sense like a pyramid scheme. That is, investors that buy into an issue early are able to profit because of buyers later in the game. There is nothing wrong with that. All buy low and sell high in every business works that way. The first investors who started selling pearl shakes made a fortune; the ones who opened stores a few years later probably lost money. However, you do not want to be the last one in on a fad or the last one buying at the stock-market price top.
The argument to the less sophisticated investor is always going to be that professional management will protect your investment. That is not a guarantee against losses, even large and potentially fatal losses. The Black Swans can always fly, and when they do the results can be disastrous.
Black Swan events are high-profile, hard-to-predict and rare events that are seemingly beyond the realm of normal expectations. But that does not mean that Black Swans are totally off the chart as to the possibility of them happening. The key is that they are hard to predict and the results are equally difficult to forecast.
The Mount Pinatubo eruption was unpredictable but had virtually no impact on the stock market. But what would happen if there were a major earthquake in Metro Manila? No amount of professional investment management could protect stock positions from that situation.
Highly unlikely, but a serious attempt to overthrow the government as happened in 1989 might drop prices by 50 percent within days.
Things could get militarily out of hand quickly between the Chinese and the Japanese or even involving the Philippines, and potentially the US. How fast and how far would stock prices fall?
Every sensible economist knows that at some point, the US debt situation could cause a collapse in the value of the US dollar. The operative word is “could,” but it has happened before in living memory and no one knows exactly what conditions would have to come together to make that happen again. But we have seen it before in 1997. The Philippine peso closed at 26 to one US dollar on Friday and by Monday, the rate was 36 to 1 or 35 percent lower in value. Stock prices lost 40 percent in one month.
The sheepdog is prepared for those events by understanding the potential for loss. The sheep believes it will never happen.
E-mail to email@example.com. My web site is www.mangunonmarkets.com and Twitterme@mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.
Gee, that sounds scary. All of a sudden, I got nervous thinking about that black swan possibility.
I’m guessing now where that swan is swimming right now HAHA.
That why I really see Stocks Alert of Truly Rich Club very helpful. This is the way of the club to give relevant important market updates to the members each time they need it. And that is my way so as not to worry so much about thinking how to protect every peso of my investment. I let the people who monitor the market all their lives do their thing and leverage on it.
Resting under the shade of a coconut tree watching the setting of the sun in a yellow-orange sky while sipping fresh buko juice in a tall glass with a tiny umbrella.
Cool dream, isn’t it? =)
Have fun investing (with your peace of mind)!
In case you have not yet received the news, there’s a new stocks alert from the club about AP.
Stocks Alert: Sell APWe believe it’s time to sell AP (Aboitiz Power). Not because it reached our Target Price (it hasn’t), but because we feel the growth moving forward will be slow. Don’t get me wrong: AP is a fantastic company, and long-term, it’s very good. It just has someshort-term challenges that it has to face. You can sell AP and buy the other new companies we recommended, such as AGI.Mike Vinas will talk more about this in the next Stocks Update. May your dreams come true, Bo Sanchez
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