Thursday, June 30, 2011

4 Reasons Why You Shouldn't Buy into National Bookstore's Plan to Go Public


In a "dipstick" press release via, National Bookstore, the nation's largest book and supplies chain, is said to be "seriously mulling" an IPO to fund its expansion in Southeast Asia and China. National Bookstore is one of the few remaining "big brands" in the country that have remained privately-held despite the strong and continuous clamor for it to open its ownership to the investing public. With this announcement, do investors have sufficient reason to be excited, or should we expect another disappointing IPO, much like what we had with Cebu Pacific last year? Here are four reasons why I think National Bookstore is around two decades too late in considering going public.

1. It's major businesses are on their way to obsolescence...

Over the past decade, the continuous growth of Internet usage and major developments in information technology have laid many a business model asunder. In many parts of the world, traditional modes of content and media delivery--CDs for music, DVDs for videos, and print books--have almost been completely replaced by full-fledged online distribution systems from the likes of Apple, Amazon, and Google. Once-mighty media brands in the US have fallen victim to this trend--think Blockbuster (video rentals) and Borders (book retail)--and many more like Barnes and Noble continue to struggle to keep up with the times. Thankfully for National Bookstore, the Philippines is slow to adapt to these changes; still, adapt the market does. With the more Internet-savvy, younger generation leading the way to embrace these technological developments, it's clear where the local book and music distribution industry is headed in the foreseeable future--anywhere but up. As the biggest player in both industries, that's precisely the direction we should expect National Bookstore to go in the next five to ten years.

2. ... while its remaining reliable revenue stream is under constant threat from low-priced competition

In times past, National Bookstore could easily command high margins for basic school supplies because middle- and upper-class families were still willing to pay a premium for the convenience of shopping in an air-conditioned store. However, as more and more households become more budget-conscious and as the middle class continues to lose power in the country, Divisioria and other places have become the preferred destination of a growing number of Filipinos for inexpensive school supplies. To attract more business and protect its revenue base, National Bookstore is forced to lower prices, which of course erodes its once attractive margins. I just don't see how the firm would be able to reverse this trend in the foreseeable future.

3. The constantly growing threat of piracy

If you don't believe it yet, believe it now: EVERYTHING IS ON THE INTERNET. Let me clarify that, everything is on the Internet--FOR FREE (albeit illegal). Unfortunately for a retailer like National Bookstore, this means that most of what it sells--books, comic books, DVD videos, music CDs--are also freely available to anyone who has no qualms about piracy. And as Filipinos, you all know what out collective attitude is about piracy: what piracy?

4. Expansion in Southeast Asia and China?

In all probability, the markets in China and our other neighbors in the region are already as saturated, if not more so, than the book/music/supplies market in the Philippines; I mean, it's not like we're talking about a newfangled business model that other people haven't thought of yet. And who would not bet that piracy is just as bad in other Southeast Asian countries and much, much worse in China? So when the article mentions financing expansion into markets that already have established players and mature industries with pretty much the same high level of threats, I can't help but ask:

Who are you kidding?

I understand why the owners of National Bookstore would contemplate going public now: to preempt the business's inevitable demise and to get the most of what it can from the brand and reputation that the Ramos family has so painstakingly built over the decades. Unfortunately for them, this move would only work if investors are foolish enough to believe that there's still some growth left to the company. Sure, there's still maybe ten years of profitability left to the firm--as I said, Filipinos are slow to adapt to global technological trends. But as each year passes, as more and more of us find it "better"--for one reason or another--to read books using our smart phones, tablets, or e-book readers, we move closer and closer to catching up with the rest of the world and we find ourselves visiting National Bookstore less and less frequently.

Monday, June 27, 2011

You are What You Listen To: Music Preference and Attitude Towards Money

What does your music preference say about your financial habits? According to this recent study by Canadian researchers, quite a lot!

The results of the study show that young adults who regularly listened to ‘adult-approved’ music would be likely to save money, while youths who listened to ‘anti-authority’ music were expected to be more likely to spend their money impulsively. I don't know about you, but music is a very important part of my life; in fact, I can't even begin to imagine life without music (although the world would probably be immensely better off without "The Biebs" or Lady Gaga or both). My music is a big part of who I am and I take it very personally and seriously, so when someone tells me that what I listen to leads to a certain behavior or way of thinking, I tend to shut up, listen, and look at the fine print.

So what does the study exactly mean by ‘adult-approved’ and ‘anti-authority’ music? The authors initially classified various musical genres, based on previous studies, into the following
  • Adult-approved
    • classical
    • musicals
    • opera
    • world music
    • oldies
    • easy listening
    • alternative
  • Anti-authority
    • bluegrass
    • blues
    • hip-hop
    • rap
    • techno
    • trance
    • electronic
    • house
    • dance
    • R&B
    • reggae
    • heavy metal
    • punk
    • ska
    • new age 
As it turns out, the results show that not all genres belonging to a particular group have a statistically significant relationship with financial attitude. To be more specific, only the following genres were found to be significantly associated with spending and saving habits.

So what exactly do these results mean? It means young that young people who regularly listen to dance, electronic, hip-hop, house, rap, R&B, techno, and trance are likely to spend more and those who listen to punk, oldies, alternative, and contemporary rock are likely to spend less; also, young people who are into big band and classical music, musicals, opera, and world music are likely to save more.

With the limitations of the study and the statistical procedure employed (remember, correlation does not necessarily mean causation), we should take these results with a grain of salt. However, I can't help but smile and marvel at the plausibility of these results, especially when I think about the MTV Cribs episodes that I've watched and how many of my friends who are heavily into hip hop and R&B are actually big spenders. I don't have any problems with listening to more Sex Pistols and Pearl Jam--maybe Cats and Phantom of the Opera even--but I draw the line at Luciano Pavarotti! :)

Thursday, June 23, 2011

Estimating Real Estate Investment Returns

This ad was posted in Facebook by one of my students a couple of months back. I was interested in the ad not because I was looking to rent the place, but because I wanted to know if condos make good investments.

Real property, and condominiums in particular, have become investments of choice among Filipinos in the past several years. In various areas around the metro, we see a lot of activity from the condominium development industry; for example, along the 1.6 km stretch of Katipunan in the vicinity of Ateneo and Miriam College, there are at least three on going projects, with a couple more underway. This rapid expansion of supply is a reaction to the surge in demand from an increasing population of young professionals and OFWs who are looking for better returns than what bank deposits offer and who, for one reason or another, have a deep-seated aversion for financial investment vehicles like stocks and bonds. Just to illustrate, two of my colleagues at the Ateneo bought units at SM Development's Berkeley Place in Katipunan and at least three of my friends here in Hong Kong--Filipino professionals, all--purchased units at SMDC's other developments in Quezon City. 

So is real estate as good an investment choice as many of us believe? And given the available financing alternatives in the Philippines and prevailing interest rates, does it make sense to borrow to buy a condo for investment, even if you could easily afford future mortgage payments?

The approach in answering these questions is the same as the one we use for any investment or purchase decision: compare the cost of the investment or asset to its projected future benefits while accounting for the time value of money. To get some information that I'll need for the analysis, I asked my student a few questions about the unit that she was trying to let. The primary fruits of a real estate investment is rental income: my student's asking rent for her 36 square meter unit was 18,000 pesos per month, or down to 14,000 if the unit was bare. Her parents had just recently bought the unit for around 3 million pesos; this amount would be the initial cost of the investment.

Since we don't have actual values for the other information that are needed in the analysis, we would have to make some assumptions.
  • The maximum life of a condominium project as defined by law is 50 years. In our analysis, we assume that the condo will be fully depreciated by this time so that the terminal value of the investment is zero.
  • We assume an annual rent increase of 2%, for conservatism.
Our analysis recognizes two financing alternatives for the purchase: your own money and debt. For the debt scenario, we would have to estimate some parameters.
  • Downpayment as a percentage of the loan amount (or purchase price)
  • Mortgage rate, or the interest rate of the debt. Rates offered by Pag-Ibig and banks are based on the term of the loan (years to pay). Ranges from 5% to 11.5% per year.
  • Years to pay, the loan term. Typically ranges from 5 to 15 years for bank loans to as long as 30 years for Pag-Ibig.
  • The monthly amortization or payment is computed automatically from the three inputs above.
Real property owners are taxed on two levels: the real property tax and the tax on rental income. Real property tax is easy to compute: residential property in Metro Manila is taxed at 2% of 20% of the assessed value of the property, which we'll assume to be just equal to the purchase price, for simplicity (you can take a look at this World Bank primer for more details). Rental income tax is a bit more complicated to compute; since the income tax schedule looks at the total income of an individual, we have to assume a figure for annual income from other sources (such as employment), compute for the income tax without and with rental income, and treat the difference as the tax amount that's attributable to the investment. We may also specify the rate at which non-rent income is assumed to grow per year to make our model more realistic. 

Using the assumptions found on the "Main" worksheet above, we see that we will earn around 6% on our investment per year if we are to use our own money, and just 4.53% if we finance our investment with debt. Given that the assumption that we will be able to rent out our unit continuously every month for 50 years is on the optimistic side, I find the resulting rates of return to be not so attractive. At least based on our assumptions, this particular investment does not seem to be extraordinarily profitable. (You can click on the "Cash Flows" tab to see the annual cash flows).

Of course, we can always improve the attractiveness of our investment is by getting a less expensive condo at a given rental level, or by asking for higher rent for a given investment amount (or by increasing the annual rent growth rate). However, we should keep in mind that pricing, more often than not, could not be easily adjusted since it is primarily dictated by market supply and demand.

In analyzing the potential returns of your own real estate investment, feel free to modify the inputs of the analysis (cells with the light-green highlight) according to your specific circumstances (here's a copy of the spreadsheet above in Excel format). How does your own investment fare against the example above? Using the template, you can also try to modify the terms of the housing loan option; you'll find that in situations where the mortgage interest rate is lower than the "own money" investment return, the borrow option becomes more attractive. 

Monday, June 20, 2011

The Rule of 72: Compound Interest in Action


If you can earn returns on your investment at 6% per year, how much will it take for your money to double? The "Rule of 72" is a simple tool that we can use to answer this question. According to the rule, an investment earning r% per year would approximately take 72 ÷ r years to double; in our example, the investment would double in approximately 72 ÷ 6 = 12 years.

Rule of 72
Number of years for an investment to double = 72 ÷ r

The Rule of 72 is a direct application of compound interest, which we have discussed in the previous post. Recall that if you invest an amount p at compound interest r per year, you will get the following amount after t years:

Total amount after t years = p × (1 + r)^t 

Plugging in the result of the example above into this equation, we'll see how closely the rule approximates the true answer.

2p = p × (1.06)^12
2p ≈ 2.012p

So you see, for practical purposes, the Rule of 72 actually produces good-enough results. It wouldn't take much more effort if you insist on getting an exact answer to the question, though: all it takes are a few algebraic manipulations to the compound interest formula.

2pp × (1 + r)^t  
2 = (1 + r)^t
ln 2 = t × ln (1 + r)
t = [ln 2] ÷ [ln (1 + r)]
t = 0.6931 ÷ [ln (1 + r)]

Since ln (1 + r) is approximately equal to r when r is small, we get

t = 0.6931 ÷ r

If we redefine r% as the interest rate or percentage return of the investment in question (as we did when we introduced the Rule of 72 earlier), we can restate the equation as

t = 69.31 ÷ r

Some people prefer using the "Rule of 69" or "Rule of 70" instead since these lead to more accurate estimates, as can be seen from the above equation. However, a lot more people prefer using 72 since it makes clean, mental division by many more numbers--1, 2, 3, 4, 6, 8, 9, and 12--possible; whatever accuracy is lost is more than made up for in convenience.

The simplicity of the rule leads to many practical applications; playing around with the concept will let you answer related questions like "How much returns should I earn if I want to double my money in three years?" You can even try to figure out similar rules for tripling or quadrupling your investment. Do I hear "challenge accepted?" (googling the answers defeats the purpose, of course. :))

Thursday, June 16, 2011

Back to Basics: Simple vs. Compound Interest


Interest rates affect us mortals in different ways in different situations, depending on the role we take on as participants in financial markets. As investors and owners of debt securities like bonds, interest rates define how much periodic income we earn, in the form of coupon or interest payments. As borrowers and consumers, interest rates determine how much it costs us to use capital and enjoy goods and services now while delaying payment to some later date. At first glance, it seems simple enough: high interest rates attract investors while low interest rates spur borrowing. However, as we have seen in a previous post about add-on interest, the different ways that interest is presented or computed could often lead to confusion and inefficient economic decisions.

In this post we'll take a look at two more common forms of interest rate that many of us, unfortunately, still don't completely understand. Learning these basic concepts by heart will help us better evaluate the numerous economic choices that we encounter in real life and save or earn us a considerable amount of money in our lifetimes.

Simple vs. Compound Interest

With simple interest, interest is earned only on the original investment or principal. For example, if you invest 100,000 pesos at 5% simple interest per year, you will earn 5% of 100,000 or 5,000 in interest per year; at the end of five years, your investment will have grown to 125,000, or 25% more than your initial investment.

Year 1: 5% of 100,000 = 5,000 + 100,000 = 105,000
Year 2: 5% of 100,000 = 5,000 + 105,000 = 110,000
Year 3: 5% of 100,000 = 5,000 + 110,000 = 115,000
Year 4: 5% of 100,000 = 5,000 + 115,000 = 120,000
Year 5: 5% of 100,000 = 5,000 + 120,000 = 125,000

You might have already figured out the short cut in computing how much you'll have at the end of t years if you invest p pesos at r simple interest per year:

Total amount after t years = p × (1 + rt

And the total interest you will have earned is

Total interest in t years = prt

Compound interest pretty much runs along the same lines, with one very important difference: earned interest is added to the principal at the end of every period, leading to a higher interest in the next period. In other words, with compound interest, earnings are reinvested so that interest also earns interest, a process which is referred to as compounding. Using the same example above but this time with 5% compound interest per year, we get:

Year 1: 5% of 100,000 = 5,000 + 100,000 = 105,000
Year 2: 5% of 105,000 = 5,250 + 105,000 = 110,250
Year 3: 5% of 110,250 = 5,512 + 110,250 = 115,762
Year 4: 5% of 115,762 = 5,788 + 115,762 = 121,550
Year 5: 5% of 121,550 = 6,078 + 121,550 = 127,628

The results of the above computations show why it is important to distinguish between simple and compound interest: as investors, we earn more if interest on our investment is computed as compound interest than as simple interest, at 127,628 vs. 125,000.

Computing for the future value of an investment with compound interest is a tad more complex than what we had with simple interest. At a compound interest rate r for t years, a p peso investment will grow to:

Total amount after t years = p × (1 + r)^t 

And the total interest you will have earned with compound interest is

Total interest in t years = p × (1 + r)^t - p

In many real-world applications like credit cards and bank deposits, interest is treated and computed as compound interest. However, there may be situations where unscrupulous individuals would try to pass off "5% interest per year" as either simple or compound interest, depending on which definition works best for them (and against you). That's why it's important to be sure of which kind of interest you are facing--simple or compound--by reading the fine print or by simply asking questions. Remember, knowing is half the battle. :)

Monday, June 13, 2011

On Frugality and a Simple Lifestyle

A GUEST POST by Anonymous

This is my (Investor Juan's) bike. 
She and I have a love affair,
but I've never ridden her while wearing a suit and tie.

Yes, it is the "want" part and not the "need" part
That gets us all into a tight spot
Some of the things we own, we need
The rest is what we want
Just for "show off"

So we buy things we don't really want
With money we don't really have
To impress people we don't really care about

There is a Dutch saying that goes like this:
"I won't buy a new car, just to let my neighbor see me wash it"
Been to Holland, and it is common to see people there riding a bike to work
I even saw a guy in a suit complete with a necktie riding a bike!!!

That's frugality and simplicity applied

Friday, June 10, 2011

Investing in Philippine Stocks, Part 2: The PSEi


Dear Investor Juan (naks),

If I wanted to emulate the PSE index performance how would I do it?

A.  Buy equal numbers of shares of listed companies. or
B.  Buy equal peso values of shares of listed companies. or
C.  Something else.


Dear JP,

Seven years ago, when I was taking my first finance course in the UP MBA program, the first question I asked my professor was, "What is the Phisix?" (at that time the PSEi was still called "Phisix" or "PSE Composite index"; it was not until 2006 that the PSE's main index was named "PSEi"). The PSEi is the "face" of the stock market; it's what the media quotes whenever it reports goings on in the exchange or the state of the economy. Unfortunately, many of us do not sufficiently understand what it is. So, as what my great finance professor did all those years ago in our finance class, I will use this opportunity to explain what the PSEi is and how investors like us can use it to make better investment decisions.

1. What is the PSEi? 

In its simplest sense, the PSEi reflects the general "health" of the stock market; it's high when stock prices are high, and low when stock prices are low. With the index, investors can gauge the overall condition of the stock market without having to look at the prices of a bunch of stocks since this information is already built into the index.

Technically, the PSEi is a collection of the 30 "most important" stocks in the exchange; inclusion in the index is based on a specific set of criteria, but is primarily based on the stock's total market capitalization of the firm (number of shares outstanding multiplied by the stock price) and how actively the shares of the company are traded in the exchange.

2. How are the component stocks of the PSEi selected?

As was already mentioned, the most important determinants of the inclusion of a stock into the index are size and trading volume. Based on these and other criteria, the composition of the PSEi is reviewed every May and November of the year.

3. What is the current composition of the PSEi?

As of May 2011, the PSEi is composed of the following stocks:
  1. Aboitiz Equity Ventures (AEV)
  2. Aboitiz Power (AP)
  3. ABS–CBN Corporation (ABS)
  4. Alliance Global Group, Inc. (AGI)
  5. Ayala Corporation (AC)
  6. Ayala Land (ALI)
  7. Banco de Oro Unibank, Inc. (BDO)
  8. Bank of the Philippine Islands (BPI)
  9. DMCI Holdings (DMC)
  10. Energy Development Corporation (EDC)
  11. Filinvest Land (FLI)
  12. First Gen Corporation (FGEN)
  13. First Philippine Holdings Corporation (FPH)
  14. Globe Telecom (GLO)
  15. International Container Terminal Services Inc. (ICT)
  16. JG Summit Holdings (JGS)
  17. Jollibee Foods Corporation ( JFC)
  18. Lepanto Consolidated Mining Company (LC / LCB)
  19. Manila Electric Company (MER)
  20. Manila Water Company (MWC)
  21. Megaworld Corporation (MEG)
  22. Metro Pacific Investments Corporation (MPI)
  23. Metropolitan Bank and Trust Company (MBT)
  24. Philex Mining Corporation (PX)
  25. Philippine Long Distance Telephone Company (TEL)
  26. Robinsons Land Corporation (RLC)
  27. Security Bank Corporation (SECB)
  28. SM Investments Corporation (SM)
  29. SM Prime Holdings (SMPH)
  30. Universal Robina Corporation (URC)
4. How is the index computed?

The index is computed in real time using this formula:

The "free float shares" of a company are outstanding shares which are freely traded in the market, as opposed to shares which are closely held by major stockholders of the firm.

As you can see from the formula, changes in the PSEi are just based on the changes in the prices of the component stocks. The base level of the index is 1,022.045 reckoned on February 28, 1990, the PSEi's base date (its starting point at t = 0).

5. How can investors use the PSEi to make investment decisions?

Since the PSEi provides a snapshot of the general level of stock prices, investors, especially those who invest in investment funds that mimic the performance of the market as a whole, can use it to time market entry or exit (or when to buy or sell). Analysts can also use trends in historical PSEi levels to forecast the future movement of the market (an exercise that is considered futile by some), or to compute for quantities like "beta" that are essential in fundamental analysis.

6. What's the answer to JP's question?

I just realized that I haven't really answered your question yet :), but based on the formula above, it's clear that the answer is C. The weights of the stocks in your portfolio should be based on the free-float shares of the component stocks of the index. However, I hope that you're not actually planning to construct such a portfolio on your own; it's more convenient and maybe even cheaper to just invest in a diversified portfolio of stocks like UITFs since these fund providers benefit from economies of scale and you most probably won't.

That's it. I hope our readers will now be able to better understand financial news that often use the PSEi in discussing the economy or the stock market. Hopefully, we would be able to eventually learn and be comfortable enough to use this information to make informed investment decisions.

And I hope I was able to adequately answer your question, JP. You may want to refer to the Guide to PSE Indices for a more detailed discussion of the above points.

Tuesday, June 7, 2011

The Value of Finance


Sometimes we focus too much on the thing that we think matters most that we lose sight of things that really do.

Thursday, June 2, 2011

Investing in Philippine Stocks, Part 1: The Basics

A GUEST POST by Renzie Doem R. Agutaya

Let's say you closely follow Investor Juan's "6 Step Guide for Newbie Investors" and have painstakingly worked your way to step six: you've erased your debt, built up a solid emergency fund, invested in UITFs, set aside a regular portion of your income for investment, managed a well-diversified portfolio, and now feel mentally and financially prepared to invest in individual stocks. But then you realize that apart from the general information about stock investing that you learned from this blog, you don't know enough specifics to actually start investing.

There are five basic things that an investor should know in making a stock transaction. These are:
  1. Ticker symbols
  2. Board lots
  3. The bid price
  4. The offer or ask price
  5. The trading hours of the Philippine Stock Exchange (PSE)
Throughout this post, we will use Jollibee as an example to describe the above topics. Below is a screenshot of Jollibee's information page on the PSE website.

 1. Ticker or stock symbols are unique identifiers for the securities traded in the market. Jollibee's ticker symbol is "JFC," which of course stands for Jollibee Foods Corporation. Knowing the ticker symbol of the stock that you want to trade allows you to retrieve information about the stock (by typing the ticker symbol on the "Symbol Lookup" box on the upper right corner of the PSE website's main page and clicking "Go") and, most importantly, to actually buy and sell the stock.

2. A board lot is a standard number of shares that a particular stock should be traded in, based on the stock's price and a schedule defined by the Philippine Stock Exchange. The purpose of board lots is to facilitate more convenient trading by making it easier to match the number of shares of a stock demanded by buyers to the number supplied by sellers.

Based on the board lot table on the PSE website, JFC at its current price range may only be bought or sold in multiples of 100 shares.

3. The bid price is the price that a buyer is willing to pay for a security. At the moment the screencap below was taken, the highest price ("Best Bid Price") for which investors are willing to buy JFC are 88 and 87 pesos. The bid price basically tells you how much you'll get if you sell shares of the stock.

4. The offer or ask price is the price a seller is willing to sell the shares for, so it's the number you'll want to look at if you want to buy shares of the stock.

As you can see in the image below, the ask price is higher than the bid price, as it should be since buyers always try to buy shares at the lowest price possible and sellers always try to sell shares at the highest possible price (imagine what would happen if it were the other way around). The difference between the bid price and the ask price is called the bid-ask spread.

5. And the last, and perhaps most important, thing that you need know is when the market is open for trading. The PSE's trading hours are from Monday to Friday (except on legal or special holidays), 9:30 AM to 12:10 PM.

Now that you know the above information, I think you're now pretty much ready to buy your first stock. In my opinion, the most convenient way to invest in stocks is through online brokers. I've tried BPI Trade, and I also heard good feedback about Citisec Online. There are other alternatives, subsidiaries of large Philippine banks, like First Metro Securities and RCBC Securities. As far as I know, RCBC charges the lowest commission at 0.25% compared to the 0.30% charged by other platforms.

Wishing you the best in your investments!

Renzie is a CPA who is currently working for a brokerage firm in the Philippines. He is not in any way connected to the online brokerages mentioned in this post.

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