Common Cents Advice

Charlie Munger on how to win at life. 🔑

Keep! But also invest :)

IPON CHALLENGE 2021 EDITION 💪

If saving money is part of your New Year's resolutions, this 52-week money challenge is for you!

This reminds me of something @charliemungerquotes says about how you need to ask “why?” in order to get smart.

HOLIDAY STOCK SLUGGISHNESS AND OPPORTUNITIES TO BUY:

Fund managers will take profits near the end of the year, for the holidays. As you know, funds are judged by their annual performance -- they don't exactly hold that long, and will probably want to liquidate by year-end, to make sure nothing weird happens while their managers are on vacation.

Be on the lookout, then, for great companies that might suddenly experience 5-10% dips in price over the next few days. If you've been eyeing some good stocks to buy, this might be an opportunity.

Of course, these companies are probably few; the PH market is priced a little higher than I would be comfortable with at this stage of the pandemic. Still, there are a few gems here and there. Good luck!

I wanted to share some original insights here, but I find that Warren Buffett put it better than I ever could have. So, I will be sharing here an excerpt from his 1996 letter to Berkshire Hathaway's shareholders. I quote:

"Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses.

Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.

Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value. Though it's seldom recognized, this is the exact approach that has produced gains for Berkshire shareholders: Our look-through earnings have grown at a good clip over the years, and our stock price has risen correspondingly. Had those gains in earnings not materialized, there would have been little increase in Berkshire's value."

Usual disclaimer: These are not recommendations to buy. They are my own buys. Needless to say, do your own research.

I am making my final stock buys for the year. (US stocks: Kroger, General Mills. Philippine stocks: PLDT and Filinvest Development Corporation).

Kroger ($KR) is a US grocery chain. Selling at around 33 dollars a share, I am convinced that the fair value should be at least 50 dollars a share. The stock has taken a beating relative to the other massive grocery chains, but the management, in my view, is making all the right decisions.

Kroger has used some of its COVID-19 sales to pay off debt, reinvest in the business, and accumulate a massive cash haul. Those are always good signs for a stock selling at a discount.

A similar management approach is being undertaken at General Mills, the gigantic cereal maker ($GIS). The stock almost always outperforms the market during downturns. I expect that the market will come to its senses and pullback on some of its optimism. Fair value 82 dollars per share, current price around 60 dollars.

PLDT: The stock is so deeply undervalued relative to its cash flows that, if it were being treated the way ICTSI is being treated by the market, it would be worth at least 5 times its price. That said, I like PLDT because its extensive national network (and the costs of competing with such coverage) is extremely difficult. Be honest with yourself: Are you really going to shift to, say, DITO or NOW or CONVERGE? In most places, they will not even be able yet for years.
In businesses that require massive capital investments and right-of-way (for wiring, cell sites, etc.), never underestimate the power of economies of scale. PLDT will only have to marginally boost its speeds and performance, something it has done over the past year. The others will have to get lucky several times in several areas.

Currently priced at around 1300 pesos. My fair value estimate is at least 1700 – conservatively. The dividends are also pretty good at 5.7 or so percent. My fearless forecast for the next five years: PLDT will do a stock split.

FDC: This one is my riskiest buy. FDC is of course not just Filinvest Land, but is the conglomerate that runs the former and a host of other businesses, including the growing EastWest Bank. The earnings did not deteriorate in any noteworthy way during the COVID-19 pandemic. I think the depression in price is one of those “idiot busts” that take place every so often. No mathematical justification for the magnitude of the price cut. Of course, as I always say, the conglomerate with its own stable bank is the best structure to withstand an economic crisis. It’s very hard to run out of cash when you own a well-run bank.

The risk is that, because FDC is not very highly traded, this could become a value trap (LPZ, GMA7 are undervalued stocks whose prices don’t appreciate by much). I am convinced that the potential rewards are worth the risks, so I went with the stock.

Do your own research. These are leads, not recommendations. Feel free to disagree with me 🙂

If you have value investment ideas, and want to be part of a diverse community of value investors, do check out this website:

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COMMON CENTS PRINCIPLES OF INVESTING

1. Invest within your circle of competence. If I can’t understand the business (say, software, which is beyond the limits of my comprehension), I don’t bother. I limit myself to the businesses I can understand. It’s unrealistic to expect yourself to get acquainted with all the industries in the bourse. Relax. You don’t have to take action on every quote the market gives you.

2. Decide based on a preponderance of evidence. I like looking at all the sources available to assess a company’s prospects. That means looking at everything from branding and “share of mind,” to the kind of people the managers are. I only make a buy decision when enough evidence tells me that the decision would be well-advised.

3. Keep a margin of safety. This is one of the most important principles in investing. A good investment decision considers all scenarios of profit or loss, and is based on the investor’s conclusion that even if some of the worst prospects are considered, the investor ultimately still makes money, and that the potential returns are worth the risks entailed.

4. Look at the obvious maths. Subpar investing has a tendency to be obscured by formulas that make the analyst feel like he or she has somehow done an exhaustive analysis. Most of the time, such formulas include “projections,” which, upon closer inspection, are judgment calls that could be right or spectacularly wrong. Anyone who follows “analyst consensus estimates” would know that they are just as often right as they are wrong. Go for the obvious quantitative signs, supported by principle #3. Is the company profitable in a promising industry? If that’s the case and it’s selling for, say, just a fifth of book value, it may be worth looking at

5. Phenomenology – Do the legwork. It’s hard to get a sense of a company’s prospects unless you can get a “feel” of its business. Do the legwork. Check the business out. Anybody who would have visited one of Mang Inasal’s first outlets in VisMin in the late 2000s would have known that Injap Sia was up to something. Those who would have preferred Zoom over other conferencing applications would have had a clue about its prospects during a global quarantine.

6. Equanimity, or a healthy sense of indifference. The market rises and falls, and one year may see a rise or fall of 50% in stock value. As long as you are confident about your judgment, relax. If a great company you own tumbles in stock price, you could perhaps see if it’s a good time to own more of the stock.

7. Trust your gut. You’ve done principles 1 to 5. The company passes. And yet, something feels off. Maybe it’s that huge loan the company recently took against good advice. Maybe it’s the fact that, despite corporate figures, the owners are notorious in their communities for being up to no good. Whatever it is, if something makes you feel very suspicious, trust your gut. Investigate deeper. In an activity such as investing where losing money has real opportunity costs, it pays to listen to your innate guards against harm.

8. Do not overdiversify. Some hedges against the vicissitudes of time are good. My personal preference is a good share of bonds and a slice or two of scarce commodities. But, honestly, if you are certain that one business will outperform all the others, why would you water down your returns with, say, the 20th best? Diversification is an acceptable strategy if you are uncertain about your handful of stocks. But, heck, if you’re so uncertain and want to diversify, why don’t you just buy the index of the 30 best companies?

9. Study history. People never change. The follies of mankind tend to be the same in every generation. Those who learned about the South Sea Bubble or the Tulip Bubble would have seen the signs in the ‘Nifty Fifty’ and the Dot Com Bubble. Those who saw the follies of the Dot Com Bubble and the disasters of overpricing stocks unbacked by corporate performance would have had a clue about the potential disasters unbacked mortgages would unleash on the economy. Studying what happened in the past given similar circumstances is often as important as knowing the “outlook” for an uncertain future. In some cases, it may be more educational to look back than to guess the future.

10. Be generous. The locker room culture in investing, where some people feel the need to be number one and make the biggest trades, is toxic. The best mitigant for that is to temper your worst impulses with generosity. Keep a bit of every unexpected windfall, but share much of it with the less fortunate. I assure you that you will be happier as an investor and as a person when you’re not doing everything for self-gratification or to finance excesses. Hubris is dangerous in investing. Keep it in check with a bit of self-denial.

We at Common Cents Advice also give tips on US stock investing. If you want to start your account, feel free to open one through this link. Opening an account through this link will give both you and me $50 each -- absolutely free.

Best of luck!

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COMMON CENTS ADVICE: GO FOR THE OBVIOUS

The stock market is challenging, but it is not exactly complex. Usually the best choices are obvious choices, if you will ignore the noise.

What's a good example? Well, the digital economy is on the rise. As our work and consumption habits change more and more, more of us will have to be hooked to the internet. And internet connection is a service that you have to pay for in cash. Given that, you might want to check out which telecommunications companies are selling for cheap, relative to their earnings and relative to their capacity to earn more in the future.

You don't have to discover "the next big thing" each time. You just have to choose a stock that will make you more money than an index fund. If a listed company is bound to perform better than the average company, and it is selling at a price that is much cheaper than what it should be valued, then go for that stock.

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Dios Mabalos Po!

Here at Common Cents, we are value investors. We don't like trading all that much. But you don't have to take it from us. Take it from Wilson Sy, the country's greatest investor.

Financial Adviser: 5 Investing Lessons Everyone Can Learn From the "Warren Buffett of PH" Wilson Sy Learn about the investing philosophies from a true legend.

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Simeon Ola by Christian Dy, (English) Get to know this Bikolano general who is said to be the last Filipino to surrender to the American forces during the Filipino-American War.

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COMMON CENTS ADVICE - Get rid of all your high-interest debt before investing.

It's a chore to have to pay high-interest debt, right? And it's not as exciting as investing.

For better or for worse though, the longer debt lasts, the more you pay in interest expense. Credit card debt can go as high as 24% a year in the Philippines -- if you can get me sure returns on investment at 24%, I would take it over almost any other investment.

Pay all your credit card debt. Live within your means. Remember that while investment is an uncertain proposition, your interest payments are certain expenses. A company goes bankrupt when an investment goes south and they are unable to meet payments for debts. The same goes for a person.

So get rid of high-interest as soon as you can before you make investments. Chances are, you'll save more money eliminating high-interest debt than you will make money from investments.

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COMMON CENTS ADVICE: The market is there to serve you, not to instruct you.

Maraming "financial coaches" ang nagsasabing "now is the time to invest." Minamadali ka na ngayon mo na dapat ilagay ang pera mo. Sa totoo lang, what's the rush?

Sabi nila "now is the best time because blue chips are selling at a discount." At a discount? Natural bagsak ang blue chips dahil bagsak ang ekonomiya at ang kita ng mga negosyong ito. Hindi 'yan discount.

Mas maganda bang bumili ng stocks ngayon kesa sa ibang panahon? Not necessarily. In fact, mas malaki ang risks. Kaya lang may mga malalaki ang kinikita ngayon ay dahil malaki rin ang volatility. Kung gusto mong sumali sa ganyang kalakaran, nasa sa'yo 'yan.

Pero kung gusto mong protektahan ang pera mo, hindi mo naman kailangang magmadaling mag-invest. Hindi naman maglalahong parang bula ang magagandang stocks.

Siguro may makukuha kang gains from acting on a certain day. But it can also easily go the other way. In the long run, if the company is a strong performer, these minor differences of 5% or so of price will nearly be irrelevant.

There is no need to "time the market." Stick to your filters, and invest when you're sure.

Good luck to you.

COMMON CENTS ADVICE #5 - Be cautious when others are greedy.

Alam mo ba kung ano ang isang "bubble?" Ang "bubble" sa pamilihan ay nangyayari kapag umaakyat ang presyo ng isang produkto o asset batay sa irrational o unreasonable expectations tungkol sa magiging halaga ng produktong o asset na ito.

Araw-araw, may "mini-bubble" sa stock market. Madalas itong mangyari kapag optimistic ang mga tao tungkol sa future. Isa sa mga pinakamalaking halimbawa ng stock market bubble ay ang "dot com bubble" ng 1990s hanggang early 2000s.

Tama naman ang hinala ng market na magbabago ang mundo dahil sa internet. Kaya lang, basta may "dot com" sa pangalan noon, kahit walang kwentang kumpanya, umaakyat ang value. Siyempre, hindi naman sustainable ang stock value na nakabatay sa "expectations." At some point, the company will have to deliver on its supposed potential. Karamihan sa internet companies noong dot com bubble, flop ang actual business performance. Kaya, ayun. Biglang bumagsak ang value ng internet companies na overpriced naman talaga sa simula pa lamang.

Kaya kapag biglaan ang pag-akyat ng isang kumpanya, kahit wala pa namang napapatunayan, o kaya excited masyado ang mga tao tungkol sa potential ng isang stock, mag-iingat ka. Personal experience ko lang, basta gumagamit na ang stock ng marketing words tulad ng "revolutionize," flop sa bandang huli.

Save your money for the rainy days. Ang opposite kasi ng overoptimism sa stock market ay kapag masyadong pessimistic ang presyo ng stock ng isang magandang kumpanya. If you consistently save yourself from riding hypes, swooping in on artificial depressions in the stock price of great companies will make you very rich.

Good luck to you!

COMMON CENTS ADVICE #4 - Play the games where you're ahead.

Sa investing, nakataya ang pera mo. Pwede kang matalo. Kaya kung susugal ka sa isang investment, doon ka sa investment na lamang ka sa iba pagdating sa knowledge tungkol sa negosyo.

Nurse ka ba, at nakikita mo ang mga gamot na bago, promising, at madalas iprescribe? Malamang, mas may alam ka kesa sa stock analysts pagdating sa future ng pharmaceutical companies.

Stay-at-home mom ka ba at may mga produkto kang hindi maiwasang bilhin kahit nakabudget? Malamang mas kuha mo kung anong mga kumpanya ang pandemic-proof.

Consumer ka ba ng isang utilities company na hindi napuputol ang serbisyo? Kung ganoon, baka alam mo kung underpriced o overpriced ang stock ng utilities provider mo.

Condo owner ka ba at ang property developer niyo ay magaling gumawa ng livable spaces? Malamang makakapagsabi ka rin kung magandang mag-invest sa property developer mismo!

Hindi mo naman kailangang bumili ng stocks na wala kang ideya kung ano ang linya ng negosyo. Hindi mo kailangang bumili ng stock ng semiconductor exporter kung hindi mo gamay ang negosyo. Doon ka sa stocks ng mga kumpanyang may "advantage" ka bilang consumer, empleyado, o stakeholder. Sa investing, lamang ang maalam.

COMMON CENTS ADVICE #3 - If you like the store, you'll love the stock.

Paano ba pumili ng magandang stock?

Ang daming kumpanyang may stock sa stock market. Maraming kumpanyang naka-"hype" ang stock kaya maraming sumasakay. Nakakalito tuloy para sa first time investor. Okay kaya itong stock na pinag-uusapan ng lahat? Tama ba ang sumakay ako sa hype?

Para sa first-time stock investor, ano ang pinakamadaling paraan upang pumili ng stock investment?

Sa mga unang Common Cents Advice, natutunan natin na may negosyo sa likod ng bawat stock. Kapag maganda ang takbo ng negosyo, gaganda ang takbo ng stock.

Ano ang pinakaimportanteng kataingan ng isang negosyo? Simple lang naman: Kapag kumikita ito dahil masaya ang customers, tiyak na maganda ang negosyo.

Kaya kung pipili ka ng first stock mo, ito ang suggestion namin:
1. Ilista ang lahat ng negosyo na satisfied ka sa serbisyo, kaya binabalik-balikan mo.
2. Hanapin kung may "stocks" ang mga negosyong ito.
3. Sa lahat ng gusto mong negosyo na may stock, piliin ang mga stock na may pinakamababang "debt to equity" o utang, pinakamataas na "profit margin," mababang "price-to-equity" ratio (kadalasan, mas maganda kung mababa sa 15 ang P/E)
4. Sa mga napili mo, tingnan kung aling mga kumpanya ang magiging matatag sa anumang panahon at 'yung lamang sa mga kakumpetensya nito.
5. Tingnan kung komportable ka sa reputasyon ng mga may-ari ng kumpanyang napili mo. Kung okay kang maging ka-sosyo ng mga may-ari ng kumpanya, batay sa reputasyon nila, maari kang bumili ng stock nila. Maghanap na lang ng ibang stock kung may hinala ka sa pagkatao ng mga may-ari ng kumpanya.

Kung pipili ka ng una mong stock gamit ang mga batayang ito, sure na hindi ka magkakamali, lalo kung willing kang hawakan ang stock na ito ng matagal na panahon.

Sa likod ng bawat stock, may negosyo. Masayang maging may-ari ng isang marangal at mabuting negosyo. Piliin ang mga stock na magiging proud ka bilang may-ari.

On this page, we are Charlie Munger fans. :)

Charlie Munger: 'Opportunity comes to the prepared mind' Warren Buffett and Charlie Munger answer questions on Zen Buddhism, cost of capital and big ideas at the 2001 Berkshire Hathaway annual meeting.