Is the stock market a good investment?
ONE idea that financial-literacy gurus have absolutely gotten right
is that you have an obligation to teach your children about investing.
The days of making money, having a comfortable bank-account balance and
waiting for your golden years are long gone.Cash is no longer king; it is the court jester. If you are middle aged, you needed to increase your net worth every year of your productive life by 10 percent just to stay a little ahead of the game. Since 1958 the inflation rate in the Philippines has averaged 8.84 percent through 2014. While the rate has been falling substantially in the last few years, the return on investment by holding cash is still poor, with no expectations that “money” is going to be any more valuable than it is today.
However, there is a cultural bias in the Philippines against sensible investing. Filipinos have a problem accepting risk without the expectation of an unrealistic reward. While the stock market attracts very few Filipinos, pyramid scams and multilevel marketing do well here.
While deep inside most people probably know that the pyramid scams are “too good to be true,” the large potential reward that they are promised cloud their judgment as to the risks. While we dismiss this as merely greed, it is more of wanting to hit the jackpot just one time to secure the future.
However, when it comes to the stock market, most would say that they avoid investing because it is too risky.
Some cultures want to take risks, and this can be found in the fact that risking and losing does not carry any stigma. The US is a good example of that. Business icons, like real-estate mogul Donald Trump, talk constantly about their failures and their subsequent rise from the ashes. Even Warren Buffett, whom most people think never lost any money, wrote extensively about his bad investment decisions.
The one quality that the Filipino does have is the entrepreneurial spirit. There always seems to be a newspaper or magazine profile of that man or woman who started with an idea, worked hard and became wealthy. The risks of the business owner seem comfortable and manageable. But the risks of passive investing seem too much too handle.
The percentage of Filipinos investing in the stock market has changed very little in the last 20 years, despite the stock-market index having gone up nearly 1,000 percent.
We look at the recent list of 11 Filipino dollar billionaires with wonder and perhaps envy, perhaps not realizing that all but one holds that great wealth because of the stock market. Henry Sy may have a few billion dollars in cash and in the bank—or not—but the bulk of his wealth and that of the others is their ownership of their publicly listed companies. And that necessitates talking risks.
For example, Sy moved from an estimated net worth of $9.1 billion in 2012 to $14.2 billion in 2014, or about 60 percent higher. SM Investments Corp. share price is about 80 percent higher.
Yet, these “billionaires” are not investing in the stock market. They are investing in their own “entrepreneurial” companies.
Yet, if you told me that you had an extra P25,000 or P50,000 each month to invest, I would not recommend the stock market. Go buy a house and lot—not a condominium.
The greatest advantage the stock market holds for an individual investor is the liquidity. But no matter how high the market may go in the next five years, you are only holding a piece of paper the value of which is subject to market-price fluctuations. A house has both intrinsic and practical value, unlike shares.
In the last 20 years the cost of building a house has increased only slightly less than the increase of the Philippine Stock Exchange index. That is why I have always recommended, make paper-money profits in stocks and then go buy something tangible and long lasting. What you lose in liquidity you make up in reduced risk.
The stock market is a great short-term investment, and that is the way you should think about it. Even if you buy and hold for 10 years or more, you should always be taking profits out.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
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