Luck is a dividend of sweat. The more you sweat, the luckier you get. – Ray Kroc, the brain behind McDonald’s Corporation
I just think that most of us are more amused with luck than success. Notice how long the queues are in lotto outlets especially when the prize money becomes more than P100 million (AU$2.5 million). Whooaah tulo laway ko (I kind of drool with that amount). Who wouldn’t?
No wonder many of our countrymen line and buy lotto tickets, then call out the heavens praying they meet their lucky day one day. Unfortunately, most carry these tickets to their graveyards without winning even a single centavo.
According to a statistician, there are almost 29 million combinations out of the 6/55 lotto game. So your chance of winning here is close to zero. You even have a higher chance of being hit by a lightning, he says.
Do you know what separates a lucky guy from a successful one? A guy who wants to be lucky wants the price instantly without lifting a finger. The latter wants to achieve the prize slowly and steadily. In other words, if it is not consistent, it is luck. The true measure of success is consistency.
This brings me to investors in the stock market. Sad to say most want to be lucky! I’d rather be successful.
If 85% of the people in the market lose money and try to be lucky, don’t overlook the 15%! Be a part of the second group who most of the time, if not consistently, are making money.
When a colleague of mine happened to know that I was into stock market, he discouraged me. He had his reasons. His partner in the US lost lots of money during the 2008 financial crisis. I never listened to him. (Sometimes being stubborn brings good results). I read books instead. Lots of ‘em. I knew I can be part of the 15%.
And so I read books about Warren Buffett. Since my aim is to be successful in the stock market, I listen to no one but this billionaire. No one does it best than him. (Hey, I’m not a billionaire alright? So spare me). I believe we can learn from him. Even if we fall short, we may still end up as millionaires. Not a bad fall.
Let me share his approach to investing in the stock market.
1. Understand the business before you put your money
If you are planning to buy a food cart franchise, which I tried once and failed, you should know the ins and outs of the business. Is it known in the market? Are the existing stores making money? When will you recover your investment? Is the franchisor a person of integrity? That’s the same approach you should do when buying stocks.
Let me tell you a secret. If possible, keep this between us. Is that alright? Here it is: all of the successful investors I know did not listen to tips and did not do technical analysis (which is trading based on graphical patterns, volumes, trends). Zip your lips now.
When I visited my broker’s office one time, I was surprised that the security guard was doing trading (buying stock today hoping that its price goes up later or the next day). He listened to rumors from brokers! And I heard he was losing money. Don’t do like that. Know the business. Don’t speculate.
Ticker symbols (like MER for Meralco, GLO for Globe) are not like collectible cards to be traded. They are listed in the stock exchange for the main reason that they wanted capital from the investing public. In short, they are businesses; and businesses need to make profits to thrive further.
So, choose a business which you are familiar with, not the ones from the galaxies. Well, just like what my professor said, if you are really itching to buy and sell speculative stocks, go ahead. Just make it sure you are still single.
2. Choose a business which has an edge over its competitors
In the business world, this is called durable competitive advantage. Does the business you are familiar with possess an edge over others? And how will you know if it has an edge after all?
Let me tell you my learning experience (take note of the term learning before you condemn me) with URC, or Universal Robina Corporation, which makes Chippy, C2 drink, etc. Back in July 2010, which was my 10th month in the stock market, I bought this stock at P28.50 (AU$0.72). In December 2011, I got nervous I sold it at P50.50 (AU$1.28) for 77% return. Not bad I said.
Do you know how much it is as of this writing? Wait, let me gather myself first. I really have hard time telling it to you. . . . It’s P186.00 (AU$4.72)!!! Don’t bother computing how much I missed! And I know what you’re thinking! Don’t mention it. I never bought the shares back even though I knew Chippy and C2 were selling well as compared to others.
As what Warren Buffett says, time is the friend of the wonderful business. Ouch! Every time I look at URC, I tend to sing the song “Nanghihinayang” (feeling sorry). That has become my favorite song for a while. What can I do, I was new then. I have moved on. Talking about learning the hard way.
How I wish I wasn’t that enthusiastic telling you my story, huh. If we happen to meet in the future, I beg you don’t mention that to me. My scar may open again.
So, how will you know if the company you know has durable competitive advantage? If for example that company produces consumer products, you need to check supermarkets if they are the most preferred goods by consumers.
Are they the first ones to be out of stock? If they are, most likely that company possesses an edge over others, and could be making more money as well. You need to check the financial statements of that company though.
3. Choose a company which is managed by people with integrity
Sounds daunting isn’t it? For it sounds like, do I need to have research or interview managers before I invest? Nope. Rather, watch and read the news! I know you know the Ayalas, the Gokongweis, the Sys, the Consunjis, the Aboitizes, the Medels (oopppps typo error). As far as I know they’re the top billionaires in our country and they do honest business. Why not partner with them?
Doing so eliminates other companies where the managers you haven’t heard of. I’m not saying they’re dishonest, it’s just that we don’t have all the time in this world to know them all. And so you limit your choices to few good companies run by honest people.
Yes I mentioned partnering with them. Does it sound cool to partner with Tony Tan Caktiong of Jollibee? That’s right, if you buy shares of a company you own a piece of that company. “What?! You’re a shareholder of Jollibee?” Sounds cool right?
When you happen to visit a store, you cannot however tell the manager you’re a shareholder and request for free Chicken Joy. He might think you’re crazy.
So, don’t just buy shares. Think like you’re a business person buying a great business managed by able managers. If you don’t have that high business intelligence (we are many don’t worry), the wisest thing you can do is partner with these savvy businessmen. If their businesses profit, you surely profit.
4. Buy when the Price is cheap
This is one of the most difficult, technical, lengthy, and debatable things to discuss. When it involves number, same as you I take Biogesic or Panadol. Good if you don’t take one.
If you happened to check the website of the Philippine Stock Exchange (pse.com.ph), you’ll see that every company has a corresponding price. And that amount is the price of each share of the said company. So far the highest price right now is of TEL (or PLDT) which is at P3,124 (AU$79) a share.
The lowest prices? They’re in centavos. They are the ones called penny stocks, as opposed to blue chip stocks (I will tackle this in my future articles). I don’t know them. I don’t want to know them. And so I don’t put my money on them.
So, if a stock is priced at P3,124, is it expensive? If it is in centavos, is it cheap?
I remember my colleague who bought shares of a company. Its price then was P1 (AU$0.03) a share. Sounds cheap right? So he bought 20,000 shares (costing him P20,000 or AU$ 507 excluding tax and broker’s commission).
The last time I checked its price it was at P0.20. He lost 80% of his money! The company actually did not pass the first three criteria I mentioned.
If you are buying a good business, you should ask how much it is worth. Is the offer price cheap or expensive? You won’t be able to know it unless you check the financials of the company.
This is a lengthy discussion I told you. If you are really serious about this, you can check Pat Dorsey’s book, The Five Rules for Successful Stock Investing.
But hey, don’t be caught up with the computation. Here is what I can tell you, buy when there is panic selling, recession (just like in 2008), market correction, bear markets, pessimism and bad news. All of these instances make great stocks so cheap that they are so attractive to buy. Remember, the stock market is not always up.
Let me cite an example before I end this. During the 2007 bull market, JHF (Jollibee) peaked at P61 (AU$1.55). During the 2008 bear market, it bottomed at P32 (AU$0.81). As of this writing, it is priced at P196 (AU$4.97).
If you want to be part of the 15%, lift a finger. Don’t just put your hard-earned money and then toss a coin. If others can consistently make money, you can do it as well.
I just thought that Ray Kroc is right even in the arena of stock market. The more you sweat, the luckier you’ll get. The more you do your homework, the more you’ll find good investment opportunities.
Disclaimer: Stocks that are mentioned are not recommendations for you to buy or sell them.