[Vantage Point] Can the bear be slain?

One of my fondest memories of the late tycoon John Gokongwei was our frequent Thursday mid-afternoon sojourns in his humble office at the defunct Manila Midtown Hotel (now Robinson’s Manila) and then much later at Crowne Plaza, Robinson’s Galleria in Edsa. It was he who taught me, rather comically, the wisdom of investing your money no matter how much, or how little you have: “Money should not be kept in a vault. It gets too lonely and bored to be boxed in. Keep it happy by letting it loose. When it comes home, it will be bringing along some friends who have been told how wonderful you are for allowing it to have some fun. Then your money multiplies.”

In a nutshell, that is how free market goes. Money should be continuously circulating just like blood in our veins to keep us alive, and in the same token, the economy grinding. There should be continuous buying and spending in the market with our finance regulators ensuring such, even in times of calamities and financial meltdowns. This explains why central banks raise interest rates in times of inflation and the government pumps money into the system when the economy cools down.

Ever wonder why the economy usually shows a marked uptick during elections? There is too much money in circulation. These so-called economy boosters are election funds coming from politicians spending on advertising, merchandising, and greasing the palms of voters for their desired plum government positions. Result: increased consumer spending!

Fears of a possible global recession abound if we go by the doomsday forecast of financial analysts. Despite reassurance from regulators that everything is going to be well, the market is still spooked.

Entering the bear terrain

The Philippine Stock Exchange (PSE) is now in the bear territory. As this index summary shows, nothing has changed since the market plunged deeper in September amid fears over rising interest rates and their debilitating impact on the global economy.

The freefall came after the benchmark index lost 2% on September 28 as fears engulfed the market and jittery investors began dumping their shareholdings amid global recession worries and the falling peso.

Eagle Securities President Joey Roxas told Rappler that based on the market’s moving averages, the local exchange is indeed in the bear’s hand: “What triggers the fall as usual is fear.”

Globally, investors are indeed scared. They’ve helplessly watched their portfolios go under like an ingot this year. Even some of the S&P 500 companies saw bleak quarterly appraisals in recent days.

Despite the bleak forecast, many investors still believe that now is the time to invest. Others claim that the market hasn’t seen the worst yet; with the fear of a possible recession hanging like the Sword of Damocles over their head. But is there really something to be afraid of? 

Billionaire Warren Buffet advises investors not to submit to fears of the bear market, as summed up by The Motley Fool, an online investing service. In his 1986 letter to Berkshire Hathaway shareholders, he said that he tries to “be fearful when others are greedy and to be greedy only when others are fearful.”

Buffet believes that bear markets present great opportunities to buy stocks at attractive prices. A decade earlier, the iconic investor wrote in his 2008 letter to Berkshire shareholders, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” A decade later, in a 2018 interview with CNBC, he said, “The best chance to deploy capital is when things are going down.”

Don’t give in either, Buffet warns, to the temptation of waiting to buy stocks at even lower prices than they are now. In a speech he gave at Columbia University in 2009, he said, “Don’t pass up something that’s attractive today because you think you will find something better tomorrow.”

Clinging to cash, according to Buffet, is also neither prudent nor wise. “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” In today’s high-inflation environment, this is a piece of advice worth following.

Stocks to buy

I won’t dwell on buying stocks from specific listed companies because I’m not a licensed stock advisor. It would be reckless of me to discuss matters that could potentially affect the movements of publicly listed firms. Let me just state that you should only invest what you could spare – any amount that, if you lost it, would not dent your daily budget.

Investing in blue chips stock or those companies which comprise the PSE index is the safest. These companies are wealth creators. Aside from longevity, they have proven financial integrity and management expertise.

The PSE Composite Index – previously known as the PHISIX and currently as the PSEi – is a stock market index  consisting of 30 companies. As the PSE’s only broad-base index, it is frequently seen as a barometer of the general state of the Philippine business climate. The PSE regularly reviews and modifies the list, at least twice a year.

The biggest argument in favor of buying them for the long term is that their dividend increases should be well supported by earnings growth driven by the company’s earnings and expansion.

As Buffet recommends, focus on the business, rather than the stock itself. In his 2021 letter to Berkshire shareholders, Buffett wrote that he and his longtime business partner Charlie Munger “are not stock-pickers; [they] are business-pickers.” 

He is convinced that a company must be evaluated based on its competitive advantages. “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow,” the legendary investor once said, “but rather [in] determining the competitive advantage of any given company and, above all, the durability of that advantage.”

Buffet also thinks that valuations are important. “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

What happens in your money in the stock market?

Institutional and long-term investors do not frequently trade their stocks and just hold on to them for years; some with the intent of leaving them to their heirs or other loved ones. While these stocks experience downward and upward swings over time, the investors’ portfolio goes up in value over the long term. Often, these investors own wealth-creating or blue chips stock.

Supply and demand is the life blood of the free market. In the stock market, price fluctuations define whether you win or you lose.

Let us say that you purchased a stock for P10. If you sell it for only P5, you will lose P5 per share. You may feel that the money you lost will go to someone else, That is not exactly true. It doesn’t go to the person who buys the stock from you.

If on the other hand you were thinking of buying a stock at P15, and before you forked over your money, the stock price falls to P10 per share. You didn’t gain the P5 depreciation in the stock price. Instead, you got the stock at the current market value of P10 per share. In your mind, you saved P5, but you didn’t actually earn a P5 profit. However, if the stock rises from P10 back to P15, you have a P5 gain, but it has to move back higher for you to gain the P5 per share.

Can the bear be slayed?

US-based hedge fund manager and our resident analyst Eric Jurado feels optimistic that the stock market can rise up to the challenge: “Optimism is typically in short supply and shrinking fast. But it shouldn’t be.”

I couldn’t agree more. History tells us that there is always a silver lining. The yearly performance below shows that every stock market crash in the Philippines was able to recover.

As Jurado explains: “Every recession in the country turned into a growing economy. Every bear market ended. So there’s room for optimism. Bear markets allow intelligent and opportunistic investors to profit. It’s future wealth creation at its finest.”

This is true. Every incremental decline in the market is another opportunity for us to buy exceptional businesses and assets at lower and lower prices, thereby increasing our chances of getting a higher return in the future.

If we sit on cash, waiting for a signal to go all-in during a bear market, we won’t find any. A portent only shows up in the rearview mirror long after the opportunity has come and gone. Everyone, including the so-called experts, talking heads, and forecasters, will be wrong about the bottom. It’s best to just commit and buy more as prices fall.

Just think: If we invested in the Philippine market in 2007 and just held on, doing absolutely nothing, we would have earned a respectable 6.93% annual return.

The art of surviving and profiting from a bear market requires courage, patience, and humility. The courage to look wrong in other people’s eyes, while buying into a falling market; the patience to wait for the market’s eventual recovery, and the humility to know that we can never time the bottom – these are what sets a successful investor apart from the herd. – Rappler.com

Val A. Villanueva is a veteran business journalist. He was a former business editor of the Philippine Star and the Gokongwei-owned Manila Times. For comments, suggestions email him at mvala.v@gmail.com.