Wednesday, June 9, 2010

A Conversation with Sam


Note: This conversation took place while I was waiting for Al Gore’s “An Inconvenient Truth” Philippine run to start yesterday, conveniently while I was reading Robert Shiller’s “Irrational Exuberance.” So don’t be surprised if my replies seem slant ever so slightly towards the idea that stocks are currently overpriced.

I don’t know where Sam was since everything happened using text messages. All messages were translated to straight English and filtered of all traces of jejemonism. Statements in parentheses are my rants.

SAM: Sir! I need money investment advice. Where is it good to invest 1 million pesos? Equities market? Corporate bonds? Or mutual funds? I’m also okay to diversify.

INVESTOR JUAN: Hi Sam! It depends on several factors. For example, are you okay with the possibility of losing money in exchange for higher possible returns? Or do you want principal protection? How long can you afford to part ways with your money?

SAM: No! I don’t want to lose money! According to my “friend”, equities provide long-term returns of 10% per year. But that’s long term. Anyway, I think I won’t need the money for at least five more years since I still have mommy and daddy (classic Sam). I’m already talking to someone about my options (the “friend” quoted earlier), but of course I trust you more. Hahahaha. (The laughter was really there, with an unmistakable hint of sarcasm, if I might add)

INVESTOR JUAN: Sam, remember that equities are very risky. Even if you invest for ten years, there’s no guarantee that you’ll be able to keep your investment intact, much less earn 10% per year consistently. Most especially if you invest in individual stocks. But if you really want to invest in equities, you might want to try BPI’s PSEi index fund. The minimum investment is 100,000 pesos. Much better than investing in individual stocks, in my opinion.

SAM: Really? My “friend” said it’s okay: the stock market was down two years ago, but up 40% this year. Hahaha. But I can lose my principal? Hmph. I have been talking to a multinational investment house, but it was my “friend” (who evidently works for this firm) who offered the options they have.

INVESTOR JUAN: Remember Sam, you cannot be 100% sure that what happened in the past will also happen in the future. Also, what your friend said is precisely what you should look out for: the current good performance of the stock market just means that stock prices are now very high, which means it’s not really a good time to buy stocks. And I’m just saying that there’s a possibility that you’ll lose money: nothing is ever certain when it comes to these things. If your “friend” tells you there’s no such possibility, either he’s lying or he does not know what he’s talking about. :)

SAM: It’s a “trend”, according to my him (or her). He (or she) was insisting that returns are high in the long run. But he’s only been working there for six years. So you have more experience, sir. Hahahaha. (Notice the not-so-subtle jab at my age.) So you suggest I go for corporate bonds? Do you think PNOC is a secure corporation?

INVESTOR JUAN: Yes, if you don’t want to risk losing principal, I suggest corporate bonds. That’s 8 to 10% interest from 7 to 10 years; not bad, considering the relative safety of the investment. Just make sure that the issuer is trustworthy. I believe PNOC is well managed enough, but of course you still have to do your homework and do a bit more research about the company.

SAM: PNOC’s bond has a tenor of 5 years, with a coupon rate of 6.91%, net (of taxes and transaction fees, I would guess). It’s tempting; I can buy 500,000 pesos worth. Aboitiz, two years at 6% per year.

INVESTOR JUAN: Yeah, the coupons are lower because of the shorter tenors. But that’s 60,000 to 70,000 pesos per year for your 1 million, not bad at all.

Moral of the story: Be wary of the advice of someone who’s trying to sell you something.

Maybe I should start a business based on this: financial consulting and advisory services through text, only 5 pesos per message. What do you think?

Nah. Maybe some other time.
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