Looking back to past years' performance

2011 was a difficult year for many investors including me. I had made very good gains up until August of that year only to see much of my year's gains evaporate the following month in September. I had in fact breached the half-million mark then at one point. To say that my mood was euphoric then would have been an understatement. Had I known then that the following month would end up being very bloody for my portfolio I would have exited the market completely.

When it became apparent things were really turning bad, I tried to cut my losses. I wasn’t fast enough. I did manage to eke out a small gain by the end of the year but it was nothing compared to what I had been enjoying just before the breakdown.

Above is a snapshot of how I did in 2011 and the two months so far in 2012. February is not over yet so the final figure for the month will still change, but things are definitely shaping up for the better. Early on, it looks as if 2012 will be a breakout year for Philippine stocks. The PSEi in fact has broken new highs and is set to go higher this year.

Looking back on my performance on a per year basis I can’t help but be excited. I believe I can outperform my best year so far which was 2010. 2009 by the way is incomplete since I only started recording my progress in May of that year but even discounting that, I know it wasn’t a particularly impressive year. Things are looking up though. Not even two months into the current year and I've already beaten my previous year's record. I hope I can sustain this. And, I hope my gut feel is right because what I sense is that the market is ripe for a very strong and sustained bull run.

Stock Investing is a vice

If stock investing is a “vice” then I am proudly hooked on it. There is thrill, excitement and very real danger – same as other vices. But none of the embarrassment of being caught overindulging. There is no social stigma to this vice because you don’t get STDs calling your broker. Neither will it make you susceptible to lung cancer, liver problems or any of the various health problems other vices bring. Best of all, the wealth-building opportunity is very real.

2012 is shaping up to be a breakout year for stocks in the Philippines in case you haven’t been reading the news. So come on now! Open a trading account today and get addicted.

Surviving 2012

For novice investors in Philippine stocks, if you are still unsure of what specific stocks to hold for 2012, here's a good place to start -- a model portfolio of 10 stocks presented by Maybank ATR Kim Eng during its 2012 Economic Outlook and Equity Strategy talk last January 27, 2012.

It is a list made up of four power stocks, three utilities, two banks, and one consumer stock. While I don't personally subscribe to this model portfolio (I'm more aggressive), I believe this to be a solid defensive portfolio. Those who wish to ease into stock investing and do not plan to make a lot of trades in and out of stocks are better off adopting a defensive portfolio design. In terms of liquidity and solid fundamentals, these stocks are all reliable. I noticed, all of them are index stocks and most importantly, most if not all have regular dividends.

What does this mean?

With equities still facing real market risks in 2012 with the problems in PIIGS and a weak US recovery, playing a conservative stance in stocks may yet prove to be prudent. Defensive stocks with proven value usually stay strong in the face of negative market sentiment, or at the minimum are the least affected. To put it simply, if the shit hits the fan and people panic and stock prices fall, it is the stocks with proven value that stay strong. More importantly, you still earn dividends. You won't see a record year of earnings, but you will survive while others suffer.

Remember the most important rule in investing -- always protect your capital. In difficult times, survival is the name of the game.

It gets easier

During a casual conversation one Saturday, I told a friend of mine who is a very successful businessman about my plan to retire by the time I reach 45, or earlier. I explained how I planned to live on the interest from my stock investments. With a faintly incredulous tone, he wished me “good luck”. I’m sure he didn’t believe I could do it.

He most probably meant well but I could read his skepticism as plainly as if it was written on his forehead. That’s perfectly fine. Until I have my millions to show, I will never be completely believed, I’ve accepted that. And even then, I’m sure many would still be skeptical. All this merely points to how hugely misunderstood stocks are. Come to think of it, I don’t think anyone of my friends actually takes me seriously.

Every day that my portfolio grows, I am brought closer to my dream of financial independence for me and my family. And closer to the day when I finally prove to everyone that it can be done.

Today my portfolio convincingly broke the half-million mark. This is a major milestone for me. It has taken me almost four years to get to this mark. To double my money to a full million, I’m projecting it will only take me about 16 months. Skeptical? I’m sure you are but I’ve tracked my monthly growth averages and it is very doable.

Then from one million to two million, the same, another 16 months. From two million to four million, again, another 16 months. From four million to eight million, another 16 months. You get the picture.

Doubling money from 20 million to 40 million is just as easy (or hard) as doubling from one to two million. It’s the same percentage growth of 100%. So if you really think about it, my journey to financial independence can only accelerate and get easier going forward.

Thinking this, I can’t help but smile.

Huge loss and quick turnaround

Today, my portfolio reached all-time highs with me finally breaking the P400,000 mark. I’ve been gunning for that mark for the longest time. I had in fact been frustrated because I thought I should have had broken the half-million mark by this time actually. But stocks being stocks, volatile and unpredictable, I had to deal with losses early this year so my progress was somewhat slowed.

My biggest and most painful story this year was San Miguel Corporation. I had attended one of their roadshows a few weeks back and had gotten convinced that it would be a very good investment.

I was right but my timing was wrong. Awfully wrong. I had bought into the stock just when the speculation on it was at its peak. But I didn’t realize that until it was too late. The stock was pushed high because of speculation on its then rumored additional stock offering. When the final price of the offering was announced, which turned out to be 110, the price of SMC which was trading then at around 150 or so shot back down to 110 and even went as low as 107 at one point.

I lost a lot of money on one single day – P45,498 to be exact. I nursed my losses and managed to salvage some gains by buying SMC below 110 and reselling every time it strengthened. But the damage was just too huge. I held on to a core SMC position and decided to shift my portfolio to more promising prospects.

This was about the time when Gus Cosio talked to me about Lepanto Consolidated Mining. He was so convinced of the stocks underlying value and potential that his enthusiasm was simply too contagious. I ended up buying huge positions on the stock.

My timing on LC was as good as my ill-timing on SMC. So much so that as of today my LC position has netted me a 43% growth in just 70 days of holding the stock and today, LC continued its advance with a 10% single day gain. I expect it to continue tomorrow so these are exciting times for me.

But back to SMC, it has finally found traction and slowly built up volume and price quietly. It now trades at around 130 with many analysts placing its real value at around 170. For me, I believe SMC will be a very strategic long-term play and should be an important core stock in my portfolio. I can imagine SMC reaching 300 or more over the next two years or so.

As for LC, I am letting my profits run, and enjoying the ride.

The Philippine Stock Exchange Index

The Philippine Stock Exchange index is currently the easiest way to gauge the overall performance of the Philippine stock market. It is basically a score that is derived from adding the stock prices of a selection of the top 30 listed companies in the Philippines.

Certain companies are heavier in terms of weight in the index more than others. The differences in weight depend on the companies’ capitalization, meaning the bigger they are, the more weight they carry in the index.

The current composition of the index is the following 30 companies that represent the major sectors such as property, industrial, financial, services, and others.

The following are the companies listed on the PSEi (effective 09 May 2011):

1. Aboitiz Equity Ventures (PSE: AEV)
2. Aboitiz Power (PSE: AP)
3. ABS–CBN Corporation (PSE: ABS)
4. Alliance Global Group, Inc. (PSE: AGI)
5. Ayala Corporation (PSE: AC)
6. Ayala Land (PSE: ALI)
7. Banco de Oro Unibank, Inc. (PSE: BDO)
8. Bank of the Philippine Islands (PSE: BPI)
9. DMCI Holdings (PSE: DMC)
10. Energy Development Corporation (PSE: EDC)
11. Filinvest Land (PSE: FLI)
12. First Gen Corporation (PSE: FGEN)
13. First Philippine Holdings Corporation (PSE: FPH)
14. Globe Telecom (PSE: GLO)
15. International Container Terminal Services Inc. (PSE: ICT)
16. JG Summit Holdings (PSE: JGS)
17. Jollibee Foods Corporation (PSE: JFC)
18. Lepanto Consolidated Mining Company (PSE: LC and LCB)
19. Manila Electric Company (PSE: MER)
20. Manila Water Company (PSE: MWC)
21. Megaworld Corporation (PSE: MEG)
22. Metro Pacific Investments Corporation (PSE: MPI)
23. Metropolitan Bank and Trust Company (PSE: MBT)
24. Philex Mining Corporation (PSE: PX)
25. Philippine Long Distance Telephone Company (PSE: TEL)
26. Robinsons Land Corporation (PSE: RLC)
27. Security Bank Corporation (PSE: SECB)
28. SM Investments Corporation (PSE: SM)
29. SM Prime Holdings (PSE: SMPH)
30. Universal Robina Corporation (PSE: URC)

Since stock prices are always changing, it helps to be able to gauge the overall market trend without necessarily monitoring the individual stock prices of all the roughly 250 listed companies. The Philippine Stock Exchange Index or PSEi serves this need.

As of writing, the PSEi closed the day at 4,350.09. Although lower than previous day’s close, we are relatively doing well considering the index had languished below the 4,000 level for quite a long time.

There is much speculation from financial analysts that the index could reach 5,000 by yearend. I think this is very possible. The economic fundamentals of our country are sound and we’ve been attracting a lot of foreign interest of late.

The trick then is to choose the stocks most likely to lead the way for the remainder of the year. These will be the stocks with the best underlying value for the long term. I personally am invested in San Miguel Corporation (SMC), Semirara (SCC), and RFM Corporation (RFM) to name a few. I am also heavily in Lepanto Consolidated Mining (LC and LCB). I think these are a few of the many stocks that hold promise for good returns this year.

Stock Trading Basics

Reprinting this invite I picked up from a social networking site. Out of curiosity, I might attend. For those who are just starting, I think you should consider this or other similar seminars to get you started. For me, learning never stops.


Learn how to start making money fast

A 1 and 1/2-day seminar on how to start trading the Philippine stock market designed for beginners.

All you need is a small capital to start, common sense, basic mathematical skills, and the right frame of mind. Last and most important, you need TIME to grow your investment.

So don’t delay. Start today. We’ll teach you how to trade stocks systematically and successfully. After taking this seminar, you should be able to do it on your own and start growing your money meaningfully.

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Topics Outline

Day 1:
Introduction to Stocks
Basic concepts on risk management
Getting started
Summary

Day 2
Methods of Investing
Fundamental Analysis
Technical Analysis
How to Pick Good Stocks
Stock Market Outlook for 2011
Stock Picks
Personal Financial Planning

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Event Details:
Day 1- July 1, 2011 Friday 6-10pm
Day 2 – July 2, 2011 Saturday 9am to 5pm
Venue – Baseline Restaurant Conference Room,, Juana Osmeña St., Cebu City, Philippines

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Speakers' Profiles:

Jane Abing-Solon
Chief Finance Officer, iCOMM International, Inc.
Active Stock Trader
Financial Planner and Advisor
Was Director of SGV & Co. Financial Services and Risk Management Group – 2007 to 2008
Head of Disbursements Section – Vismin in Globe Telecom – 2002 to 2005
Accounting Officer of Shopping Center Management Corporation - 1999 to 2001

Orven Enoveso
Self-taught stock trader
Marketing Communications Manager, Lexmark
Faculty member, University of San Carlos, Fine Arts Dept.
Marcom Manager, iComm International, Inc. 2006-2010
Art Director / Creative Director, ASAP Advertising, 2001-2005

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Seminar Fee (inclusive of materials, meals and snacks)
Regular - Php 2,000 per pax
Extra Saver – Php 1,800 per pax (to be paid in full one week before the seminar/workshop)
Early Bird – Php 1,500 per pax (to be paid in full two weeks before the seminar/workshop)
Value Pack – 5 + 1 (to be paid in full one week before the seminar/workshop)

Freebies:
Entitled to one free session within 1 year from the date of seminar attended
Free general financial consultation with the Speaker/s*

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Payment Terms
o Regular Fee - 50% of the Seminar Fees must be PAID at least two (2) days prior to the seminar/workshop. The balance to be paid on the seminar day.

o Check payments must be crossed ‘A/C Payee Only’ and made payable to “JANE A. SOLON”

o For bank payments, please deposit to BDO or BPI:
BDO
Account Name: Jane A. Solon
Savings Account No: 2510-0676-60

BPI
Account Name: Jane A. Solon
Savings Account No: 1029-0694-99

Send scanned copy of the deposit slip to janesolon.trader@gmail.com OR fax deposit slip to 032-4158180 Attention Jane A. Solon

o All fees are non-refundable unless the seminar is canceled due to unforeseen circumstances.

o In case the registered delegate is unable to attend the seminar, a substitute delegate is always welcome.

Limited seats… so hurry and reserve by calling these numbers -- 032-3161877, 09173291575 and 09228880348




*On availability of speaker

Expensive lessons learned

The first two months of 2011 have been tortuous for my portfolio. I got hit with a 3.37% loss in January and in February so far, I am nursing a 1.87% loss to date.

However, going through the blogs of other investors, I was floored reading that some are already suffering more than 10% or 20% losses year to date. Even Gus Cosio, an investment guru whose blog www.guscosio.wordpress.com I closely follow says in one entry that he was nursing around 7% losses on his portfolio already this year.

I guess I’m doing just a little better than many investors then. Small consolation though since a loss is still a loss. It would have been much worse though if I did not learn from all this. As we Pinoys like to say: “charge it to experience.” That I will do.

Here are a few of my expensive lessons learned as I struggled to survive in this market being sold down by the foreign funds:

Cut losses systematically
When the market gets choppy, like it has gotten lately for the PSE, cut your losses quickly. Review your trades and tighten cutloss levels. Getting out quickly when cutloss levels are touched is critical to protecting your capital. This has proven painfully difficult when just days earlier, the same stocks I had to cut had been enjoying modest gains. To sell at a loss does mean locking in exactly that – losses. But to not do so exposes your trading capital to huge risks. Protect it by all means. You cannot trade without capital. Now is not the time to fall in love with your stocks. If it drops below support and hits your preset cutloss price, own up to the failed trade and cut quickly.

Be technical
I believe in buying stocks for their fundamentals. But in choppy markets, it makes sense to pay more attention to what the charts are saying. Fundamentals may win out in the end but you should never discount market dynamics. Clearly down-trending stocks should be avoided. If you don’t want to exit the market totally, at least buy stocks with their bullish trends still intact. Surprisingly, in this market, there still are stocks that fit the bill. SCC is one. NIKL is another.

Lighten up
One of the best nuggets of wisdom I learned from my technical analysis teacher, Danny Go, was that “cash is a position.” Nobody is forcing you to trade. Just because you have capital doesn’t mean it has to always stay invested. When too many successive trades break down, the market is telling you something. When stocks are moving sideways, stay away and stay liquid. Raise cash even. The sentiment will change, that is a given but be patient. When the time is right, you’ll be glad you have cash to buy back into bargains.

Stay unemotional
Don’t be pressured by your losses into buying into losing trades just because you want to win back what you lost. Stay unemotional and concentrate on finding and playing the intelligent trades. Losses are all part of the dynamics of trading. Learn to deal with it. Don’t let it cloud your better judgment.

Solid though not spectacular 2010 for me

2010 draws to a close as I write this. There are only 2 trading days left so my current portfolio value is most likely close to what it will be when the trading year finally closes. 2011, here we come. But before that, let me close this year with a quick report and a snapshot of my performance on my Master Plan matrix.

Some highlights I would like to point out:

I had a record-breaking September where I gained P50,156 on the back of an 18.84% month growth. The biggest gains during this period came from my holdings in EDC, FPH, FGEN, AP and AEV. Of note is that all stocks I mentioned are essentially power plays.

I lost almost 10% in November, the month the market corrected. What made it painful was that I watched it all happen helplessly. What happened was exactly on the days the market started correcting, I was travelling from Kentucky back to the Philippines, returning from a business trip. That meant 36 hours of total travel time the way my schedule worked out if I counted the hours I spent at airports. Anyway, I could not trade on the exact hours the Philippine markets were open because I was flying. Plus, when I finally arrived in Cebu, I had to spend the remainder of my week in an off-site company activity which required total disconnection from the grid. Tracing the market action during the off-market hours, I watched helplessly as my stocks tumbled for five days. I could only start cutting my losses on the Monday of the following week. By then, a lot of the damage had been done.

Overall though, for the year, I am happy with my performance. Although a 2.65% monthly gain is below my informal target of 6%, my growth actually isn’t bad. Not spectacular, but still solid. I’ll take what I can for the year and just try to outdo myself in 2011.

Good luck to all of you as well and happy new trading year.

Volatility

I read in one of my investment books that people are naturally risk-averse. People prefer the predictable to the volatile. In the study I read about, people were shown two charts with bar graphs of daily gains/losses on theoretical investments. A horizontal line in the middle ran across the graph indicating zero. Bars above that line indicated gains and bars below that line indicated losses.

The first graph (not the one posted here) showed short but relatively similar sized bars that all sat on top of the zero line, meaning small but regular gains much like what you would expect from instruments such as treasury bills. The second graph showed longer bars but scattered above and below the zero line. Much like the red bar graph I have in the image I posted here.

The participants in the study were asked to choose from the two charts which they preferred assuming they represented real money investments for them. Most chose the first graph. Very few found appeal in seeing losses on their investments. However, when the corresponding line graphs of investment values for both theoretical investments were shown, they quickly changed their minds when they realized that the second choice actually gave them much bigger gains in spite of the intermittent losses.

The second graph shown in the study looks almost like my actual daily chart posted here (the red bar chart at the bottom). If you study how my portfolio behaves by just looking at that bar graph, you’d probably squirm at the notion of losing 3 or 5 thousand pesos on many days. Looking at the line graph on top though shows you that the value of the portfolio is actually increasing albeit not in a straight line.

I believe this is what plagues many investors – shortsightedness. They cannot see the bigger picture. Investing should be viewed on longer time horizons. Investors who squirm at losing a few thousand pesos in one day usually get rattled and end up selling their positions, not realizing that doing so makes them lose the gains that they would have enjoyed in the longer run had they stayed put. I’ve started tracking my portfolio’s daily closing values and graphed them for some time now. It has helped me a lot. Losing thousands of pesos a day doesn’t rattle me as much anymore because I see the big picture. You should do this too.

Quick Report

Last August 4, 2010, I broke the quarter of a million pesos mark on my portfolio’s total equity value. If I double my current portfolio, I'd have half a million. Double that, and I finally get my first million! Things are looking good. I am way ahead of my original targets when I first started. In fact, I am now looking to retire by age 45 instead of age 65. And instead of upwards of P10M, my target now is upwards of P40M.

This is my first quick report which I hope to do regularly from now on.

The first is the hardest

They say that the first million is the hardest to achieve. But once you’ve reached that milestone, the next million becomes so much easier. And the succeeding ones progressively so.

I’ve read this comment before, though I can’t recall exactly from where. I also heard the same idea mouthed by a successful local businessman. This truism, at least I hope it is, is quite reassuring. If one examines the mathematics though, this idea is assuredly valid.

At the rate I am going now (currently, my 5-month moving average portfolio growth is at 5.91%), I should be able to reach my first million by March of 2012. If I count from the month I opened my Citiseconline.com trading account which is when I started keeping meticulous records of my progress, that would be 35 months since I started. Or practically 3 years.

If I count from the day I truly started trading (using a traditional broker), the actual length would be at least 4 years. Let me stress that: roughly 4 years to get to my first million. Along the way, I suffered huge losses – tuition fee for the school of hard knocks – before I finally got my act together with a successful trading system. Raising one million is truly hard.

But here’s where things get sweet. Looking at my master plan, what I’ve come to call my monster of a spreadsheet, I am comforted by the future prospects because the succeeding million won’t take another 4 years. The next million will come in only 11 months. And the next after that in 6, then the next in 5 – it gets easier!

Ok, I may sound too optimistic and I may not be able to maintain my monthly growth rates. But then again, who can say for sure that I won’t? Who’s to say that this year, we might see the start of a strong bull run for Philippine equities, which is very plausible by the way considering global capital is currently migrating to the more robust Asian markets. And even if my performance won’t be as rosy as 6%/mo, the picture will still be similar, with each succeeding million coming in faster than the previous.

The point I wish to make is that the first million will be difficult, that is a given. But mathematics assures us that the next ones will be progressively easier. This of course assumes a consistent performance. All this then makes a stronger case for proper money management to protect your growth.

Given if you follow a strict trading system then, project your earnings far into the future and be assured that at some point, one should be earning a million every month at least!

Compound monthly, not yearly

One of my biggest leaps of enlightenment as I was tinkering with my spreadsheets was when I realized the true value of my monthly percentage growth. As I kept track of my portfolio’s performance, I would note the balance of my portfolio at the end of the last trading day of the month. From there, I would subtract the amount of money I added to my trading account inside of that month. Then, I would subtract my previous month’s ending balance. That would give me my earnings for the month. Formula is below:

End of Month Balance – Cash Invested – Previous Month’s Balance = Earnings

From there, I would divide my Earnings with my Previous Month’s Balance to get the percentage value of my month’s growth. Again, formula is below:

Earnings / Previous Month’s Balance = Percentage Growth

I would get percentage growth numbers that averaged around 2% in my early months. I thought this wasn’t impressive until I compounded this month on month; I was pleasantly surprised to find out that 2% every month doesn’t give you 24% at the end of the year, it gives you 26.82%.

I then computed different monthly growth rates and put together the table below:

Things got more exciting after that. Studying the table I had put together, I realized that if I could raise my monthly growth average to 6% every month, I’d end up doubling my money after 12 months. That’s a whopping 100%. Actually, 101.22% to be exact and based on my computations. If I raised my monthly average further to 10%, I’d end up with total growth of 213.84% after 12 months. That means I’d have more than tripled my money! Whoah!

I was blown away. I have since worked hard and have been able to improve my performance to a current monthly average of 6.45%. I’m using a simple 4-month moving average. If I can keep that up, I’ll have phenomenal growth years down the line. Plus, I’m still adding money regularly to my trading account every month which further boosts my capital – more money to grow.

Tracking my portfolio on a monthly timescale does wonders for my investment perspective. It allows me to better gauge how I’m actually doing against my long term growth targets. I feel better about my performance because even though I’m slow and steady, I can see very clearly that I am right on track. Excel is now officially my most important app. It used to be Photoshop because of my job.

My recommendation then to you is do track your portfolio monthly and keep meticulous records. If your current time scale is per year, you end up waiting too long to see your numbers. By the time you check your performance and can make adjustments, one year will have already passed. That’s too slow. Tracking on a shorter timescale allows you to be nimbler. You can make changes mid-course and be more efficient.

In closing, I exhort you to change your perspective. When compound interest is discussed, the examples given are usually interest per annum. I used to think 20% per year was impressive. I now know that that is nothing compared to 6% a month which when compounded for 12 months is phenomenal! Make that leap of understanding and see your investment in a new, more exciting light.

My evolving trading system

My trading system continues to evolve the more I learn from studies and from experience. I thought it would be important to note what my current trading system is considering this current iteration has proven to be most successful for me.

Here it is below. Feel free to let me know if you want me to explain certain points in more detail.

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Version 1.3 - June 18, 2010

Trading System

1. Stock selection:

- Choose stocks purely on fundamentals. No speculation.

Currently, I exclusively buy only stocks that have a ‘buy’ rating with ATR Kim Eng. So far, their analysis and stock picks have been generally accurate. It works for me so why should I agonize over not being able to do my own research when ATR can do a much better job. Of course, my preferences for certain companies and industries still come into play but only among those ATR recommends. It keeps my stock selection process easy and, more importantly, successful.

2. Trade Plan:

- Limit acceptable loss to maximum of 1/3 of potential gain.

- Set your cutloss level based on maximum acceptable loss.

- Maximum acceptable loss per trade should never be more than 2% of total current value of portfolio

Limiting my risk exposures for every trade to specific levels protects my portfolio. A simpler way of putting this is if I win, I look to win big. If I lose, I keep my losses small.

3. Timing:

- Time buying into stocks using technical analysis. Buy on lows, near support or after big drops.

I studied technical analysis by reading books and by joining seminars by Absolute Traders (http://www.absolutetraders.com/newsletter/). I’m using what I learned now to time my trade entries (and exits) but not for stock selection. I believe buying a certain stock purely on technicals is tantamount to a follow the herd mentality or betting on whichever stock everyone else is betting on. It may work but I’d rather build my portfolio on more solid fundamental footing.

4. Portfolio:

- Build up portfolio by buying more of the stocks with higher upsides

- Limit number of total stocks owned to only six. Do not overdiversify.

Every month, I set aside money to add to my trading account. I don’t look for new stocks to invest in. I simply add to my current positions and try to keep the whole portfolio balanced. No single stock is greater than 30% in value against my total portfolio. And I only hold on to a maximum of 6 stocks at any single time. That way, I can track stock movements better. Also, and more importantly, I enjoy maximum benefit from strong movements in one or two positions. Too much diversification would have dampened my growth. I can manage the higher risk since I watch my portfolio more closely.

5. Realizing gains:

- Sell only when fundamentals tell you it’s a sell. Never liquidate a rising stock.

If the trade goes my way, I hold on to the stock until it reaches the target price. Only then do I consider selling it. If however the trend is continuing, I hold on to the stock and just trail my stop just below support levels. If during the trade, the fundamentals change and the stock’s rating (and consequently its target price) is downgraded, then I sell. Even downgraded, a stock may still have some upside left but I’d rather pull out my investment and go with another stock with a higher upside.

Turnaround!

I am very proud to say that my new trading system worked. So far, since I 'rebooted' my portfolio in February this year, I have seen three months of consistently good returns. I described my changes to my portfolio in an earlier post.

As you can now see on my RoadMap snapshot I've been able to slowly build up my portfolio. A quick run through of important numbers I'd like to point out:

• Under the Month Gain/Loss column, you'll see that since I changed my strategy, I've made P12,553 in March, P18,493 in April, and P3,551 in May.
• The average monthly growth I posted for the last three months is 6.57%. Compound that going forward and you'll have more than doubled your money after 12 months!
• My total earnings for the last three months was P34,598

Going forward, I plan to stick with this new strategy. It's a developing system but I feel more confident about it every day. I will share details to my trading system on a future post.

For those of you who are looking for good stocks to buy, here are my recommendations, which by the way, are the exact same stocks that I am holding right now.

• AP (Aboitiz Power) - Closed today at 16.75. AP actually exceeded the old target price of 13.5 already but ATR Kim Eng has said that it is yet to review the numbers but will most likely upgrade their valuations of this stock. Pending their advise, I am holding on to it.
• FGEN (First Gen Corp) - Closed today at 11 with a target price of 14. That's an upside of 27%
• FLI (Filinvest Land, Inc.) - This is extremely undervalued. This one closed today at 0.92 while ATR Kim Eng places its fair value at 1.30. As it is, that's an upside upwards of 40%.
• FPH (First Phil. Holdings) - Yes, I am liking power so much but for good reason. I bought FPH at 54 with a target price of 77 for a whopping upside of 42%!
• HLCM (Holcim) - Cement manufacturing is bullish. It closed today at 5.30 but fair value is estimated to be 8.00 for an upside of 50%. I had bought it at around 4 so I am already enjoying 20% growth so far on this stock already.
• SECB (Security Bank) - Currently 61.5 with a target of 73.50. Remaining upside is 19%. Still not bad.

Top 10 Trading Tips from my broker

Here’s a top ten list of trading tips from Citiseconline.com, one of two brokers I use, the other being ATR-Kim Eng. I have taken the liberty of adding my comments after each item. Those new to investing should find these helpful. Those who’ve been trading for quite some time but haven’t been able to grow their portfolio significantly, if at all, need to revisit these fundamentals and reexamine their trading system.


1. Plan your Trade then Trade your Plan

Before one goes into a trade, one must have done the requisite research. I do this by reading reports mainly from ATR-Kim Eng and by actually putting down a plan in writing. In very simple terms, before any trade, one should plan:

• What exact stock are you buying? Choose and choose well. Understand what industry this company belongs to and what are its fundamentals as well as that of the industry.
• How much stock are you buying and what is your purchase price? Remember that you should allow for the fact that price movements may prevent you from buying at the price you want. You may want to set a ceiling on your purchase price instead and aim to buy a stock for as low a price as you can get.
• What is your target price? The broker’s reports will usually state their price target. You can plot your own based on that figure. A lower target if you want to play it conservative or higher if you want to be more aggressive. From purchase to target price, you can then compute your percentage growth and your projected profit.
• What is your cut-loss price? If things go south – and you should accept the fact that not all of your trades will be successful -- at what price will you decide to cut your losses and sell quickly? This is probably the most important number in your trading plan.

Put this down in writing (I put down everything in a matrix on an excel sheet) and stick to it. Do this for ALL your trades and keep a record that you can review and study. Learn from your good and bad trades and keep improving your trading system.


2. Cut your losses short and let your profits run

Tip #1 helps you to do this. When a trade is losing and the stock’s price has touched your cut-loss level, don’t hesitate to sell right away. Your trading plan is there to protect you. Use it. However, when a stock hits your target price, you can choose not to sell right away. Nicolas Darvas, in his book “How I made $2,000,000 in the Stock Market” recommends that you should never sell a rising stock. If a stock is trending upwards, hold on to it even though it has surpassed your target price. Just watch it for potential signs that the trend is reversing and exit with a comfortable profit. Many of my early trading mistakes was exiting too early and missing out on long term trends that would have given me upwards of 150% growth. I enjoyed 20 – 30% growth on my target prices which by the way isn’t bad at all. But it’s a pittance compared to more than doubling your investment!


3. Take windfall profits when you get them

Don’t be shy to cash your huge profits when you get them. While you should let your profits run, at some point you should cash in and lock in your gains. When to do this? Alas, that is a decision you have to make yourself. On one end of the spectrum, Warren Buffet is known to hold on to stocks for decades! And on the extreme short end, some trading gurus are exponents of shorter trades taking advantage of price movements counted by mere hours or even minutes. I don’t recommend the latter. Don’t feel guilty cashing in on huge gains made in a year or less. Be comforted that there are many other opportunities to make even more money in other stocks or even other investment vehicles.


4. The trend is your friend

Recognize a trend and ‘befriend’ it. Don’t fight it. Some of my friends enjoy looking for exotic stocks with questionable fundamentals and weak trend lines. I could never understand their fascination for them when fundamentally strong stocks with solidly trending prices are there to see in plain sight! Just ride the wave.


5. When you are not sure, stand aside

I cannot overemphasize this. If you can’t read the trend, then don’t trade. If the trend is strong but the fundamentals are weak which leads you to doubt, stand aside and don’t trade. If a stock suddenly jumps for no apparent reason, don’t trade. So what if you miss out on “the biggest trade of the year”? Sudden price jumps are usually followed by steep drops so don’t be tempted to join the bandwagon. I’ve lost too much money doing this before. I was stubborn. Don’t make the same mistakes I did.


6. Never add to a losing position

Early in my trading career, I tended to do this a lot. I figured if the stock was going down, I could buy more of the stock at lower prices and bring down my average purchase price. I only learned later that this strategy has a name -- averaging down. Does it work? More often than not for me, it didn’t and only worsened my losses. My recommendation is to follow tip #1 and #2. When your trade is losing, be unemotional about it and cut your losses immediately at your preplanned cut-loss level. Just make up for your loss on your next winning trade.


7. Always look for good odds; maintain a 1:3 Risk/Reward ratio

Risk/Reward ratio allows you to better assess potential trades. A 1:3 risk/reward ratio means you should look for a potential gain of P3 for every P1 that you risk. Here’s a crude example, URC or Universal Robina Corporation is priced at P21 and you believe (or your broker projects) that the price will go up to P24. This is a potential price movement of exactly P3. To keep a good risk/reward ratio, you should only allow yourself to lose P1 for the potential to earn P3. Therefore, you should set your cut-loss price at P20 which is P1 lower than its current price in tandem with your target price of P24 which is P3 higher than the current price.

If the price wavers and drops to P20, sell right away and cut your losses. If the price moves up, wait until it reaches at least P24 before selling. Better yet, let your profits run (tip #2). The idea is that if you practice this on ALL your trades, then you can be correct only half of the time and still make a profit overall. This is because even though you lose on half of all your trades, your total winnings will still be larger than your total losses. This is risk management and it is the single most important task a trader must do to ensure trading success. Ironically, this is most often overlooked and is not discussed enough in stock investing discussions and strategies.


8. Trade active stocks; avoid thinly traded issues

My rule of thumb is to trade only stocks whose daily value traded is more than P5,000,000 on average. If a stock trades only a few hundred thousand pesos worth of stocks in a day or less, don’t trade it. You’ll have trouble buying or selling it at the prices you want. Also, it’s boring.


9. Do not overdiversify: concentrate on a smaller list of well-selected stocks

I totally agree with this and must recommend this tip. Carefully choose a few really good stocks and no more. My rule of thumb is 6 stocks maximum. If I have more money I want to invest, I just time a good entry using technical analysis and buy more of the same stocks effectively just adding to my existing positions. Overdiversifying dampens growth in your portfolio. For example, if you own 30 stocks and three of them suddenly rallies, you’ll hardly notice the growth in your overall portfolio if your other 28 stocks remains unchanged. But if you own only six stocks, a jump in three of them dramatically affects your whole portfolio. Owning only one stock however is far too risky. If that one stock goes down, your whole portfolio goes down with it. The whole point of diversification is achieving a certain level of protection against losses. My technical analysis teacher recommends owning only four stocks. I however think six stocks is a good balance. It’s certainly worked for me.


10. Visit CitisecOnline’s Research Page regularly for the latest Top Picks

Citiseconline.com is a wonderful trading tool and their technical assistance is superb. They always answer my questions by email in a timely manner. I don’t recommend their research and reports however. They are a good starting point for sure, but I have found ATR-Kim Eng’s reports (my other broker) to be much better in terms of quality and depth. Their track record has been really good. In fact, I now use their reports almost exclusively whenever I assess potential trades. Currently, I don’t buy a stock unless ATR-Kim Eng hangs a “buy” rating on it. As of this writing, all my six stocks have grown by an average of 17% and I’ve only held on to them for 65 days, or just over 2 months. What are these stocks? Just check out my previous blog entry. I listed 5 there. The 6th stock I own is RLC – Robinson’s Land Corporation which I bought using ATR-Kim Eng.