TIPS ON HOW TO BECOME A BETTER INVESTOR

By Ron Nathan  aka Mr. BearBull
(Email Add: mrbearbull@gmail.com)
ORIGINALLY, when I wrote this article last year, it was entitled the Ten Commandments. However, this time, there are only nine, as I decided to omit the one about adultery. When Moses went up Mount Cyanide, he came down with two heavy tablets made of stone, engraved in Hebrew. Unfortunately, I am much older than he was, so I took the cable car up Mount Mayon and instead of bringing down two large tablets, I brought down two capsules. I had them translated from Mayonaise to English and here they are.

Despite the humorous introduction, the rest of this article and the next one will completely change your investment psychology and you will be a far better investor in the future. What follows is based on 52 years' experience in London and Manila. You can profit from my observations and mistakes. It will be particularly useful for beginners whose knowledge of investing is limited. Good luck, and if you find it useful, cut out the articles and paste them on your bedroom or office wall, in between your pin-ups of Beyonce and Anna Kournikova

1. Do not trade against the trend
You will be shocked to learn that almost 90 percent of investors in the Philippines, US, UK and Japan lost money in the stock market. This is because they ignore the first commandment and jump in only after the market has already had a big rise. Let us examine the Phisix first.

On Jan. 9, 1997, the index stood at 3,420. Since then, it has been changed three times, with the worst performers weeded out and replaced by better companies. Despite this, the Phisix is still less than half of its level, seven years ago. So, in theory, you have lost about 55 percent of your money. But this does not take into account inflation, which in earlier years was very high. Adjusting for the depreciation of the peso, you have lost 77 percent. During this period, you would have received hardly any dividends whereas you could have earned 10 percent-plus on bonds. Allowing for the loss of seven years interest, your real loss is around 90 percent.

It was the same story in Japan, where the NIKKEI plunged from, almost 40,000 down to 8,000, and is still only a quarter of what it was in 1990. You would have done far better to buy a 10-year US treasury bond, when the dollar was P25. Or you could have bought gold, property or an oil tanker. The value of super tankers has tripled in the last year and is expected to go higher.

So why invest in the stock market at all? The short and honest answer is that you should not, unless you follow the rules, which I will set out in the next few weeks. The prime requirement is patience. I no longer trade because of my blood pressure but over the past seven years my clients have been out of the market for six of them. There is no such thing as long-term investment. Ask the Japanese, whom after 14 years are still losing 75 percent of their capital.

You only BUY when the market has fallen and the technical indicators say that it is about to turn up. There are many indicators and I will deal with some of them next week so do not ask me what they are now. Conversely, you SELL when that index has had a big rise and the indicators show that momentum is slowing down or is about to decline.

But what happens in reality? When Joseph Estrada was elected president, the market rose sharply and most players jumped in near the top. Over the next year, disillusionment set in and the Phisix eventually fell below 1,000. Then when Gloria Macapagal-Arroyo replaced Estrada, the index opened 500 points higher and a very large fund bought huge quantities of MER-B at P86.

That morning, I sent a message to my subscribers at 9:40 to SELL EVERYTHING because, while I was pleased with the change in the presidency, the numerous problems facing the country remained. By the end of the trading session, the Phisix had lost 250 of its 500 points. Eventually, the index again fell below 1,000.

Players do not use their head, they trade on their emotions, and this is nearly always wrong. I will tell you where to get the necessary fundamental and technical data, but in the meantime, you can use a 20-day moving average of the index or any stock, which you hold. You do not need a computer for this. A P100 calculator should suffice. If you have a computer program, you have a big advantage over the average investor.

2. Cut your losses quickly
Years ago, before the 9/11 attack, a financial journalist wrote two books called Market Wizards, in which he interviewed about 50 fund managers who had outstanding records over a five- to 10-year period. Obviously, this could not be just attributed to luck so he interviewed them in great detail, hoping to find the connecting link. They traded commodities, currencies, options, futures and stocks.

They came in all shapes and sizes, short, tall, fat, thin, and it took him a long time to find the connection. Some were pure fundamental analysts who never looked at charts; others were technical analysts who did not know one side of a balance sheet from the other. Some studied economics and neural networks while others preferred tarot cards or horoscopes. Some had master's degrees or doctorates while others came from the street where they ran the numbers game (jueteng) or horse racing. Some were extremely serious and studied DESCARTES while others made terrible puns, were covered in tattoos and wore nose rings. It took him a long time before he hit on the solution.

As the first four groups were highly leveraged, about 10 to 1, they followed the principle of POP COLA.

Prolong Our Profits Cut Our Losses Aggressively

Incredible as it may seem, although they took great care in their entry points, 63 percent of their transactions resulted in small losses. About 30 percent made small gains while the remaining seven percent scored huge gains, doubling, tripling, quadrupling or even becoming 10-baggers, because of the leverage.

So, when you get it right, let your profits run until momentum stops rising. But when you get it wrong, SELL three percent below your buying price. I did this with Piltel recently, selling three fluctuations below P2.50. It is now P2.20. Sometimes, this will be a mistake but it protects you against disaster. After all, you don't complain about paying fire insurance because your house didn't burn down. You can afford to cut small losses. It is the big ones that ruin you.

3. Do not average down
Under normal circumstances, I am against the death penalty, but not for those who break this commandment. They should be barbecued slowly over a fire while concentrated hydrochloric acid is dropped upon them. All the people I know who went bankrupt averaged down.

In 1996, the market climbed steadily, accelerating in the final months. A client entrusted me with P4 million and, as the market was so strong, he opened a margin account for another P4 million. After a year of hectic trading, his portfolio was worth P22 million in cash. At that point, I told him that I was returning to London for a week to see my mother because it was her 90th birthday, and not to buy anything while I was away.

Unfortunately, he went to a company meeting where a director told him (and 100 other people) to buy the shares at P5.40 as there was going to be a secondary offering between P10 and P12 the following month. He invested all his capital in the purchase of four million shares. When I returned, he told me what he had done and I lost my temper. "I can't sell," he said, "because the shares are now only P5, and I would lose P1.6 million plus expenses." "But I made for you P18 million," I said. "Why can't you take a loss?" Well, he refused and the shares kept on falling, P4, P3, P2, P1, P0.50. Eventually, we parted company and as far as I know, he never sold them. The shares fell to P0.03 and have now been de-listed, after the company filed for bankruptcy.

Another client bought 20 million shares at 54 centavos on the advice of his neighbor who was a director of the company. I was acutely unhappy because they had risen from their par value of 1 centavo. Not only would he not sell at 50 centavos as I suggested, but also he averaged down at 40 cents, 30 cents, 20 cents and 10 cents. He had to sell his house and his business to raise the money. Finally, the shares stabilized at 1 centavo, the price they are still at.

If you follow the second commandment, such disasters cannot happen to you, so you will never be faced with the decision of whether to average down.

4. Do not overtrade
If you are trading everyday, the only person making money is your broker. The expense involved is too high. You have to pay two commissions, usually 0.5 percent plus value-added tax, and a 0.5-percent sales tax. In addition, there is the difference between the bid and offer price, usually about two percent. So you have to make four percent just to break even. This is fine, so long as you BUY just as the stock is turning up, but if you deal constantly, the expense will ultimately cripple you.

That small percentage is enough to make all the incredibly costly casinos in Las Vegas profitable. They can afford to give free rooms, free food and drinks, and free shows to high rollers because they know that a percentage advantage of 3.6 percent is enough to guarantee the house a sure profit over the long run. Trade only when the technical indicators tell you to. For the remainder of the time, do nothing. Patience is a virtue.

5. Do not trade on tips
In England, we say, "Where there's a tip, there's a tap."

I am sure you all remember BW Resources, now Fairmont Holdings. The shares were run up deliberately by a consortium that, by tips and cross trading, created enormous volume and sent the shares from P0.40 (under a different name) to P108. Almost everyone got sucked in, mostly at the higher levels, and those speculators who did not use stop losses saw their shares go all the way down to P0.40 and below. One old lady wrote to me that her broker had recommended it at P104. Would she ever see her money back? I replied, somewhat unkindly, "Only if you believe in reincarnation." These days, few people follow tips and public participation is minimal, as can be seen from the low net turnover.

6. Do not chase prices
When I recently recommended Pilipino Telephone Corp. (stock symbol: PLTL) for long term, subscribers bought at around P1.88 and a week later readers bought at P2.04. But those who did not read the article until the evening piled in next day, paying up to P2.55. This was sheer lunacy and I told subscribers to SELL and wait for a correction. The SEC has now stated that Smart Communications does not have to make a tender offer after all, as they bought the shares at P0.2059, so it would have been an appalling waste of time and money. I repeat that there is nothing to go for in the short-term, but if you can take a one-year view, the shares should go up to at least P3.

When shares take off, they usually fall back. Look at MAC, up and down like a yo-yo. OPM jumped from P0.0032 to P0.0060 and then dropped back to P0.0032. At that point, I recommended them in my newsletter as a SPECULATIVE buy and in four days, they were up 30 percent. At least, there is some substance because they are part of a group drilling for oil. No, I do not hold any shares.

7. Be wary of inactive stocks
The documentary stamp, which made trading in shares well below their par value prohibitive, has been removed. As a result, trading has increased tenfold and, numerically, third-liners comfortably exceed leaders. But in value, out of 122 stocks that traded last Friday, only 10 traded P10 million and accounted for over 90 percent of turnover.

I have a computer program that tells me when a stock increases in price by five percent, and its volume is 50 percent above its 50-day moving average. This alerts me to inactive stocks that suddenly become more active. Often, the spread between bid and offer is too great or the number of shares available is too small to be of any interest. But occasionally, it throws up something interesting. MAB was a case in point and it has doubled over the past 2 weeks on large volume.

8. Buy low priced stocks
By this, I don't mean stocks quoted at a fraction of a centavo. I mean decent stocks standing around, or above, their par value of P1.00. Obviously, it is easier to double your money on a low-priced stock than on a high-priced bank or insurance company. Even Philippine Long Distance Telephone Co. (stock symbol: TEL), my most successful recommendation (up over P1,000), is not likely to double from this level. I expect it to reach P1,500 next year, but in percentage terms, this is only 15 percent. There are not many stocks worth looking at, but there are one or two.

The last commandment is

9. LEARN TECHNICAL ANALYSIS and I will tell you where to get information.
Learn technical analysis

THE ABOVE commandment is slightly misleading because if you desire to become a really competent investor, you must also learn global economics and fundamental analysis.

By global, I do not mean that you have to study every country, but you must at least know what is happening in the United States.

Wherever the American stock market is heading, the rest of the world will follow. After the 9/11 attack, the US market got battered for a few months and every other stock market followed the downtrend. When the US market finally got back on its feet, every other market recovered.

How do you learn about the American stock market? First, listen every night to Bloomberg, assuming that you have cable TV, and tune in to CNN.

Listen to Chairman Alan Greenspan when he addresses the Senate or Congress. This usually starts at 9:30 p.m. or 10 p.m., but I must admit that he is not the easiest person in the world to understand.

If you cannot do this, then read his speeches in the newspaper or go to the Internet and check on CNN Money.com or Bloomberg.com and also read the commentaries.

When Wall Street sneezes, the rest of the world catches pneumonia.

Basic knowledge

For the local market, the business section should give you all the necessary information. But if you want more details, go to the websites of the National Economic and Development Authority or the Philippine Stock Exchange and listen to Channel 21, which is largely devoted to the economic and political situation of the Philippines. You can also enroll in courses at universities and colleges.

Next, you should have a basic knowledge in fundamental analysis.

This means that you need to know all about companies. You must know how to read a balance sheet, calculate the earnings per share and from this, the price/earnings ratio.

You need to understand what a yield means, how many times a dividend is covered, and what preferred and convertible stocks are.

You should know book value and understand such concepts as debt and cash flow.

You can take a course in accounting or business management, and there are plenty of books, local and imported, in all the major bookstores.

Do not ask me to recommend one because I studied accountancy in 1951 and have not read any books since then.

By now, you are probably too discouraged to read on, but don't despair because help is on the way.

If you want to buy a simple but excellent technical analysis book, try TECHNICAL ANALYSIS OF THE FUTURES MARKET by John Murphy, available possibly at local bookstores or at amazon.com.

It was written years ago but is still considered to be a classic. Every aspect is explained simply and it can be used for trading stocks, commodities, currencies or futures.