The Horror… of Stocks!
October 21, 2013
Halloween is coming and it seems appropriate writing something related to horror and fear. Couple of months back, we started a fund-management service wherein we make and provide Philippine equities portfolios to investors. These portfolios are built for growth and resiliency over the long term to be managed by us. We think it’s going to be a simple service. We’ve been making portfolios since 2010. Our performance speaks for itself (in the Stocks Service Page), and the Philippine economy is bustling so we think it’s probably a good time to launch this kind of service.
However, the public is generally afraid of stocks. Stocks are volatile, and bad news to them, makes stocks worse. There has been a lot of bad news lately from Napoles & Company, the US government shutdown to the debt ceiling and to the magnitude 7 earthquake down south. The drop last May also brought up the tempo of the public’s fear of stocks.
People like fixed-income securities better. A friend who’s not into finance has some stocks but has a great deal of bonds because he thinks it’s safer. A friend who’s a stock analyst got into a mutual fund with a bigger fixed-income component than stocks. Though fundamental indicators are rosy going forward, some stocks people we know are 50% into stocks. Going back to our Halloween theme, to them, stocks are scarier than vampires, Sadako and the walking dead.
When Graham pioneered intelligent-investing, he made it for the purpose so no one would lose money. He came from the depression and would not want anyone to experience the lows of that period. Surprisingly, those who practiced intelligent-investing, which eventually became known as value-investing, made superior returns relative to the market index. It’s because they were able to take advantage of the fear and greed cycles by using their heads instead of their hearts in investing.
Truth is, there will always be bad news and stocks will always be volatile. The only time I heard Warren Buffett mentioned the Philippines is when he said that the Dow was 100 during the Bataan death march. And he said, look where the Dow is now. He and other value-investors including Graham were awestruck and worried about the rise of thermonuclear weapons in the 60s. It was like that the world can end in a push of a button. Those WMDs, however, did not stop them from investing in stocks and switching to bonds. Graham, Schloss and Buffett made average annual returns of 17%, 21% and 43%, respectively over the years.
The real horror to value-investors is holding on to cash and placing cash in time deposits, bonds and other fixed-income securities. It is an absolute waste of growth potential of hard-earned money. Aside from share price appreciation, stocks give cash dividends. The average dividend yield in end 2012 of our 59-stock coverage was 2.13%. Not bad in covering most of inflation and reinvesting this into stocks creates a multiplier effect. Long term share price appreciation of value stocks is also superior than the yields of fixed-income securities. The fear and greed cycle was mentioned earlier, and with Halloween coming, remember to be greedy in seasons of fear.
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