By Malaya Laraya
With the local market setting new historical highs recently, market participants have been enjoying extremely good returns – with double digit annual returns almost being the norm rather than the exception. In fact, if you were to examine the 31 issues that comprise the PSE index, you would see that, aside from two or three exceptions, the rest are trading at levels at or near their 52-week highs. This basically means that, if you had bought any of those issues within the last year, there is a very good chance that you would be making almost 30% or more during that period.
Considering that the index is supposedly composed of the most developed, stable, and mature companies in the country, it is quite incredible that they are posting growth rates that are normally associated with start-ups and speculative issues. The local market has actually performed so well that, as of September of this year, we were among the best performing markets in the region. And with foreign fund managers willingly pumping billions of pesos into local equities, it seems that this bull run seems set to last for quite a while. However, before you start pulling out your funds from fixed-income or other less volatile instruments, keep the following things in mind:
First, as tempting as it may be to just jump into the market and buy the latest hot issue, this is actually one of the worst things you can do at this point. Though issues do seem set for growth in the short-term; long-term growth can only be attained and sustained if a company has strong fundamentals. So before you commit any of your money, be sure to do your homework on the companies you will be investing in. Try to discover if any growth potential is based primarily on the company’s actual strengths and not on mere market sentiment. Specifically, if you cannot see any reason for a company’s price to rise other than the fact that everything else in the market is also rising, then be very cautious in placing any money there.
Second, before you actually buy anything, make sure you are very clear as to where your exit points will be – when you will take profits and cut losses. And make sure to stick with it. This is critical because it is very easy to be so taken in by the hoopla that surrounds a bull market that one actually forget to make money.
For example, let’s say you had bought shares in GMA-7 earlier this year at about six pesos per share. If, when you had bought the shares, you had set a growth target of 20%, then you would know that when GMA broke through 7.20, it would be time to sell. Regardless of what happens after that, the fact remains that you achieved what you set out to do — and you should be happy about it. (Unfortunately, a significant number of people would actually still feel bad if the issue they bought continued to rise after they had sold – clearly preferring to focus more on the paper “gains” rather on the actual profits they realized.)
If, on the other hand, you buy into something without an exit strategy, you are definitely setting yourself up for a stressful couple of weeks or months. Specifically, you would always have to keep asking yourself, “Do I sell now? Will it still go up? It’s gone down, do I sell now? What if it keeps going up?” And unless you have a lot of time on your hands, you would always be pressured to find ways to update yourself as to where the price has gone.
Third, keep in mind that a big driver of the market’s current growth has been the strong inflow of foreign funds. Given the lack of growth stories in a majority of developed markets, foreign fund managers have embarked on a concerted strategy to place their funds in developing markets like ours. Termed as “hot money” due to the speed with which they enter and exit markets, these funds can definitely leave as fast as they came – especially if they see signs of economic or political instability. With that in mind, any signs of another coup or civil unrest and these funds will immediately dump their holdings for safer options. And when that happens, all the gains that we have seen can very easily be reversed.
Lastly, never forget that the stock market is a very cyclical creature. Yes, things are extremely good now – and they seem set to continue that way for the near future, but never assume that it will do so indefinitely. History has consistently shown that market bull runs do weaken and turn around – and if you aren’t prepared for it, you can easily get trampled and lose your shirt.