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InterAksyon.com
The online news portal of TV5
MANILA, Philippines -- Years ago, almost a couple of decades ago to be more specific, this writer wrote a mordant opinion piece about how the chief executive of the investment bank where he worked was feeling down in the mouth in the middle of a market bull run. It was 1993, and the corporate chief was being “mirthless in a bull run,” the writer lightheartedly described his boss.
Now, years later, this writer is bemused to be feeling the same symptom that comes from having an innate contrarian soul: to have the blahs amidst a bullish market. Probably with age comes better understanding. Or it could be that one’s contrariness increases as the years roll on by.
Whatever it is, the lasting image in late 1993 for this writer was to see the investment bank’s head honcho shout to the head floor trader: “Sell all my shares and don’t get ahead of me (in selling yours)!” That scene seemed funny since the market was hitting new record highs almost every day at the time.
But, as it turned out, that was just about the market’s peak before it metamorphosed into a bear market, and it took the market three to four years before reclaiming the lost ground in 1997. Which market peak again did not hold up for long, as the Asian crisis exploded and sank the market into a deep bear funk from which it recovered only 10 years later.
It’s a wild party when the market continues to hit new highs, share prices soar and even the proverbial monkey can make money by throwing darts at the stock quotation page. The last is not a joke, it’s a true story where, as an experiment, professional fund managers were asked to pit their stock picks during a bull market against a simian with a dart. The monkey won, of course.
Once when the party’s over, the market’s hangover can take years to dissipate. Contrary to the saying that this is all due to greed – that “bulls make money, bears make money, and the pigs get slaughtered” – the market’s post-festivities headache comes from having too bubbly valuations that drift away from its true fundamental values. These price bubbles eventually pop, and that’s how people lose money.
This does not mean that contrarians will not be in the market today. This writer has been fully invested in stocks for years, with a tendency to actually add to stockholdings (adding to invested capital) during bad years.
This year is not a bad year, by any means. As stated in the past columns, the local market index (the PSEi) would be fairly valued at around 5,000-5,100, for an annual return of around 15 percent. With the current frothy market, the upper target of 5,500-5,600 may be targeted, equivalent to an annual return of 28 percent.
This latter range would mean that the market is being “priced for perfection,” meaning that the dividend growth of 12 percent would be hit or exceeded, that the political leadership will not stumble, that the economic leadership will cross all the T’s, and that the local corporate chieftains will bring home the bacon, of the right weight and the right kind.
More likely, the market is mostly gaining from the tailwinds coming from the decline in bellwether interest rates, with the five-year Treasury rate now below five percent in the secondary market. In turn, this softening in the cost of money may be ascribed to the declining risk premiums due to perceptions of strengthening recovery in the US economy and anticipation of a denouement in the Greek crisis.
The key to successful investing in any kind of market, be it a bear, bull or a platypus, is not stock selection per se but more of portfolio design. Stock selection comes into play in terms of how it interacts with the returns of other stocks in the portfolio and, consequently, how much it contributes to the stability and performance of the overall portfolio of stockholdings.
This goes beyond simple diversification: select which sectors will do well in the current environment; then select which stocks in the sector will outrun their peers; then decide how much of the investible funds (weighting) will go to each stock.
There are two conflicting philosophies at work here. One, never put all your eggs in one basket, i.e., diversify. The other side says, put all your eggs in one basket and then guard that basket like a hawk.
