So what do you do with falling prices?
[Photo credits to Philstar.com]
IMPORTANT EDIT 12/14/2016>> Concept: Every investor looks forward to the future. Nevertheless, the future itself can be approached in two different ways, which may be called the way of PREDICTION (or projection) and the way of PROTECTION.
-Ben Graham, Chapter 14, Stock Selection for the Defensive Investor, The Intelligent Investor
In this section, Graham outlines the difference between two approaches in the future. Based on the factors that determine market price, which are known set of facts and future expectations. One approach is offensive, and the other is defensive. The differences outlined here:
2 Approaches to the future:
PREDICTIONS (Projection) PROTECTION
-based on expectations -based on facts
-emphasizes future price -emphasizes current price
-offensive -defensive
-growth -safety
-predict future strength and -adequate margin of safety/value over price
growth in earnings to absorb future unfavorable developments
-qualitative approach i.e. prospects, -quantitative/statistical/protective approach
management, other immeasurable i.e. measurable relationships between price
& important factors that fall under and earnings, assets, dividends
the heading of quality
End of important edit.
The following article written beforehand mainly focuses on the first approach, the predictive approach.
Background
What do you do when prices are falling? Well you grab something that's not falling. One of the first things that come into mind is gold. Gold has always been regarded as the real money, a safe haven for investors in times of turmoil. Gold is commodity, among others such as barrels of oil, bushels of wheat, grain, rubber, palm oil etc. Holding these physical assets may help preserve value in case of currency devaluation, since these may be resold at fair value or exchange value.
Other options may be holding other assets such as real estate. Just imagine old kings, feudal lords, conquistadors, and haceinderos. Real estate has long been regarded as the real wealth succession strategy by the rich and powerful.
However, gold, commodities, and real estate are not the only options to preserve value. The concept of Utility tells us how something satisfies our wants and needs by reflecting on how much a person is willing to pay for it.
Anything that has potential use or utility or demand in the future may be used to preserve value or even make a profit, only if you can foresee the future need for it. For example, during times of crisis such as war, food may become scarce. Hence, if you can buy and accumulate canned goods before the war happens, it may be a good way to preserve value. The same can be said in operating a trading business. Buy items that you anticipate will have higher demand in the future, and hence fetch higher prices.
You can see that your main asset is the one in between your ears. As long as you can objectively look at the situation, make accurate assessments, and translate that into probable predictions, you have a higher probability of success.
Going back to your investment portfolio...
What would you do in the case of falling prices in the stock market?
Protecting your gains should be the priority. Going back to the basics:
-When you anticipate the market to go up, you either HOLD your existing shares or BUY even more.
-When you anticipate the market to go down, you SELL your shares.
Even to Benjamin Graham, it is in the investor's interest to sell shares when the prices are exceptionally high. It is acceptable because the investment is made when you buy below the stock's intrinsic value. The investor always has the option to sell his shares at an advantage when he is offered generous prices for it. Graham warns however, on focusing too much on the price since such an attitude inevitably leads to speculation.
To the average Filipino stock market investor, real estate, gold, and commodities may not be readily available. What else could he buy to preserve the value of his portfolio?
A more convenient alternative may simply be switching to another currency. A currency that is not only holding but even appreciating in value. Swiss Francs and Japanese Yen are recognized globally as a safe haven for currency traders, however, these might not also be readily available, unlike the US Dollar which is the global currency.
This now brings us to the question, "Should I convert my pesos to dollars?"
This question has been answered by financial planner Henry Ong in his opinion column in the Philippine Daily Inquirer on November 2013.
Henry Ong says, "The peso-dollar exchange rate is inversely related to the stock market so that when the market falls, the peso depreciates.
About 68 percent of the time, the movement of the peso-dollar exchange rate is explained by the stock market."
In other words, we may not be able to short the Philippine stock market, but we can buy the US Dollar with a 68% correlation.
And this happens as foreigners dump their Philippine shares for pesos, the peso supply increases and then as they convert their liquidated pesos back to dollar to repatriate back to their country, the demand for dollar increases, causing the exchange rate to go up.
During Christmas Season, the reverse usually happens. The peso appreciates when the OFWs send their Aguinaldo's and dollars back to relatives in the Philippines and the supply of dollar increases. The relatives will now need to convert these dollars to peso to spend for their Noche Buena and the demand for peso increases, causing the exchange rate to go down.
It will be useful for the currency speculator to foresee these changes in supply and demand, as well as other factors that might affect the value of the dollar and peso.
For example, what advantages are seen in favor of the US Dollar?
1) The US Dollar is still undervalued relative to a basket of currencies of its trading partners. This is shown in the US Dollar Spot or US Dollar Index (USDX, DXY). Currently these are the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. As long as the USDX is below 100, it means the dollar is undervalued relative to the currencies of its trading partners.
2) The US Elections this coming November 8, pitting Republican Donald Trump and Democrat Hillary Clinton are sending jitters to investors in the US Dollar. It is said that Democrats always have a good effect on the US economy, hence this should be a favorable development for the US Dollar. As of the moment of writing, surveys show that there is a high probability of a Clinton win, hence, this should be a favorable opportunity to buy the dollar before it materializes on November.
3) Low oil prices. Oil price is inversely related to the US Dollar. A falling oil price means higher US Dollar
4) Increasing perception of political instability brought by President Rodrigo Duterte's "inflammatory" and anti-US and EU rhetoric. According to reporter Karen Davila, when a country turns its back on the US, the first that suffers is that country's economy.
5) Doubts surfacing on the competence of the new administration with regards to diplomacy i.e. going into uncharted territory forging new alliances with China and Russia. There have been reports of some US and EU investors putting their plans on hold. The President has also been criticized by various groups on his Drug War with more than 3,600 people killed since the start of the campaign, handling of the issues at the West Philippine Sea, and various other issues, resulting in Filipinos erupting into a virtual "civil war" on social media.
And what might be the disadvantages?
1) A Trump win the upcoming US Elections.
2) Bank of America Merril Lynch issues a recession warning due to central bankers' stimulus efforts such as Quantitative Easing.
3) Removal of the US Dollar as world currency, which is feared by some groups such as Mike Maloney.
Given this data, it is our unsolicited opinion that the peso will continue to fall until the Philippine situation has been resolved peacefully and stability & confidence has been restored. The local Filipino investor can use this information not only to protect his gains from the previous bull market, but to provide additional income in the ensuing bear market while remaining vigilant for bargain opportunities.
The conservative investor is reminded that such an operation is speculative in nature, and anyone willing to engage must consider carefully specific events and understand the overall situation to increase the chances of success.
The preservation of value, wealth preservation or capital preservation is a major undertaking by many wealthy families and countries; from European royalty to American industrialists turned Wall Street asset managers.
For individual companies like Apple, remaining profitable means investing in R&D, research and development, creating new products and solutions, solving new problems, remaining in control of market share, and keeping the profits coming as the only way to maintain their formidable position and wealth.
For the general public, preserving value may mean maintaining their Purchasing Power amidst rising costs and inflation.
The only way to preserve wealth is to remain relevant, if not cutting edge.
Hence those who wish to preserve their wealth must always be on the lookout for opportunities waiting to happen and develop systems that enable you to automatically take advantage of these situations and opportunities.
References:
Article by Henry Ong entitled "Shall I convert my pesos to dollars?" published by the Philippine Daily Inquirer on November 13, 2013 [http://business.inquirer.net/152019/should-i-convert-my-pesos-to-dollars]
TED Educational video on Utility: [https://www.facebook.com/TEDEducation/videos/1272510129428857/?pnref=story]
How oil affects USD/CAD
[http://www.babypips.com/school/undergraduate/sophomore-year/intermarket-correlations/black-crack.html]
Bank of America Issues Recession Warning
[http://www.cnbc.com/2016/10/09/bank-of-americas-recession-warning-this-market-is-scary.html]
Crash Predictions by Mike Maloney
[https://www.youtube.com/user/whygoldandsilver]
US, EU investors put their plans on hold
http://www.philstar.com/headlines/2016/10/10/1632121/us-eu-investors-put-philippine-plans-hold
What do you do when prices are falling? Well you grab something that's not falling. One of the first things that come into mind is gold. Gold has always been regarded as the real money, a safe haven for investors in times of turmoil. Gold is commodity, among others such as barrels of oil, bushels of wheat, grain, rubber, palm oil etc. Holding these physical assets may help preserve value in case of currency devaluation, since these may be resold at fair value or exchange value.
Other options may be holding other assets such as real estate. Just imagine old kings, feudal lords, conquistadors, and haceinderos. Real estate has long been regarded as the real wealth succession strategy by the rich and powerful.
However, gold, commodities, and real estate are not the only options to preserve value. The concept of Utility tells us how something satisfies our wants and needs by reflecting on how much a person is willing to pay for it.
Anything that has potential use or utility or demand in the future may be used to preserve value or even make a profit, only if you can foresee the future need for it. For example, during times of crisis such as war, food may become scarce. Hence, if you can buy and accumulate canned goods before the war happens, it may be a good way to preserve value. The same can be said in operating a trading business. Buy items that you anticipate will have higher demand in the future, and hence fetch higher prices.
You can see that your main asset is the one in between your ears. As long as you can objectively look at the situation, make accurate assessments, and translate that into probable predictions, you have a higher probability of success.
Going back to your investment portfolio...
What would you do in the case of falling prices in the stock market?
Protecting your gains should be the priority. Going back to the basics:
-When you anticipate the market to go up, you either HOLD your existing shares or BUY even more.
-When you anticipate the market to go down, you SELL your shares.
Even to Benjamin Graham, it is in the investor's interest to sell shares when the prices are exceptionally high. It is acceptable because the investment is made when you buy below the stock's intrinsic value. The investor always has the option to sell his shares at an advantage when he is offered generous prices for it. Graham warns however, on focusing too much on the price since such an attitude inevitably leads to speculation.
To the average Filipino stock market investor, real estate, gold, and commodities may not be readily available. What else could he buy to preserve the value of his portfolio?
A more convenient alternative may simply be switching to another currency. A currency that is not only holding but even appreciating in value. Swiss Francs and Japanese Yen are recognized globally as a safe haven for currency traders, however, these might not also be readily available, unlike the US Dollar which is the global currency.
This now brings us to the question, "Should I convert my pesos to dollars?"
This question has been answered by financial planner Henry Ong in his opinion column in the Philippine Daily Inquirer on November 2013.
Henry Ong says, "The peso-dollar exchange rate is inversely related to the stock market so that when the market falls, the peso depreciates.
About 68 percent of the time, the movement of the peso-dollar exchange rate is explained by the stock market."
In other words, we may not be able to short the Philippine stock market, but we can buy the US Dollar with a 68% correlation.
And this happens as foreigners dump their Philippine shares for pesos, the peso supply increases and then as they convert their liquidated pesos back to dollar to repatriate back to their country, the demand for dollar increases, causing the exchange rate to go up.
During Christmas Season, the reverse usually happens. The peso appreciates when the OFWs send their Aguinaldo's and dollars back to relatives in the Philippines and the supply of dollar increases. The relatives will now need to convert these dollars to peso to spend for their Noche Buena and the demand for peso increases, causing the exchange rate to go down.
It will be useful for the currency speculator to foresee these changes in supply and demand, as well as other factors that might affect the value of the dollar and peso.
For example, what advantages are seen in favor of the US Dollar?
1) The US Dollar is still undervalued relative to a basket of currencies of its trading partners. This is shown in the US Dollar Spot or US Dollar Index (USDX, DXY). Currently these are the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. As long as the USDX is below 100, it means the dollar is undervalued relative to the currencies of its trading partners.
2) The US Elections this coming November 8, pitting Republican Donald Trump and Democrat Hillary Clinton are sending jitters to investors in the US Dollar. It is said that Democrats always have a good effect on the US economy, hence this should be a favorable development for the US Dollar. As of the moment of writing, surveys show that there is a high probability of a Clinton win, hence, this should be a favorable opportunity to buy the dollar before it materializes on November.
3) Low oil prices. Oil price is inversely related to the US Dollar. A falling oil price means higher US Dollar
4) Increasing perception of political instability brought by President Rodrigo Duterte's "inflammatory" and anti-US and EU rhetoric. According to reporter Karen Davila, when a country turns its back on the US, the first that suffers is that country's economy.
5) Doubts surfacing on the competence of the new administration with regards to diplomacy i.e. going into uncharted territory forging new alliances with China and Russia. There have been reports of some US and EU investors putting their plans on hold. The President has also been criticized by various groups on his Drug War with more than 3,600 people killed since the start of the campaign, handling of the issues at the West Philippine Sea, and various other issues, resulting in Filipinos erupting into a virtual "civil war" on social media.
And what might be the disadvantages?
1) A Trump win the upcoming US Elections.
2) Bank of America Merril Lynch issues a recession warning due to central bankers' stimulus efforts such as Quantitative Easing.
3) Removal of the US Dollar as world currency, which is feared by some groups such as Mike Maloney.
Given this data, it is our unsolicited opinion that the peso will continue to fall until the Philippine situation has been resolved peacefully and stability & confidence has been restored. The local Filipino investor can use this information not only to protect his gains from the previous bull market, but to provide additional income in the ensuing bear market while remaining vigilant for bargain opportunities.
The conservative investor is reminded that such an operation is speculative in nature, and anyone willing to engage must consider carefully specific events and understand the overall situation to increase the chances of success.
The preservation of value, wealth preservation or capital preservation is a major undertaking by many wealthy families and countries; from European royalty to American industrialists turned Wall Street asset managers.
For individual companies like Apple, remaining profitable means investing in R&D, research and development, creating new products and solutions, solving new problems, remaining in control of market share, and keeping the profits coming as the only way to maintain their formidable position and wealth.
For the general public, preserving value may mean maintaining their Purchasing Power amidst rising costs and inflation.
The only way to preserve wealth is to remain relevant, if not cutting edge.
Hence those who wish to preserve their wealth must always be on the lookout for opportunities waiting to happen and develop systems that enable you to automatically take advantage of these situations and opportunities.
References:
Article by Henry Ong entitled "Shall I convert my pesos to dollars?" published by the Philippine Daily Inquirer on November 13, 2013 [http://business.inquirer.net/152019/should-i-convert-my-pesos-to-dollars]
TED Educational video on Utility: [https://www.facebook.com/TEDEducation/videos/1272510129428857/?pnref=story]
How oil affects USD/CAD
[http://www.babypips.com/school/undergraduate/sophomore-year/intermarket-correlations/black-crack.html]
Bank of America Issues Recession Warning
[http://www.cnbc.com/2016/10/09/bank-of-americas-recession-warning-this-market-is-scary.html]
Crash Predictions by Mike Maloney
[https://www.youtube.com/user/whygoldandsilver]
US, EU investors put their plans on hold
http://www.philstar.com/headlines/2016/10/10/1632121/us-eu-investors-put-philippine-plans-hold
