Tuesday, December 27, 2011

GMA 7 is on MVP's Christmas Wish List


Are You Ready for the "Kaputid" Network?

I got this off one of my contacts in Facebook. Rumor has it that Manny V. Pangilinan, a.k.a. "MVP", has made an offer to the Duavit, Gozon, and Jimenez families for GMA 7, and that the offer figure is so "mind-boggling" that it's "impossible to counter." And if you think Ruffa Gutierrez is a reliable source, then it seems that this already is a done deal.

Haven't we seen a similar move from MVP months ago with the PLDT-Digitel merger? If the offer is true and if a deal does materialize, it would be interesting to see the following unfold in the next few days:

  • How much premium MVP is willing to pay to own the undisputed number one network in the country
  • If ABS-CBN would go the same way as Globe and try to block the deal (and how much political clout the Lopezes still have left)
  • How the stock prices of affected players (e.g., PLDT, GMA, ABS-CBN) would be affected 

If the offer is indeed as high as rumored, then we should see significant short-term gains for GMA (up around 5% as of this writing) and possibly a short term drop for PLDT (down around 0.08% as of this writing). If the tremendous growth of TV5 since MVP took control in 2008 is any indication, then a GMA7-TV5 "alliance" should eventually bear significant fruits in the long run; whether this additional value is worth more than the premium paid for the acquisition is another question altogether.

As for ABS-CBN, just like with Globe in the PLDT-Digitel merger, some would argue that the move will also benefit the second player since industry consolidation would decrease competition for the entire industry and all its players. Frankly, I'm not a really big fan of the network and I think I pretty much loath everything the "kapamilya" network comes to represent. Ever since the Lopezes regained control of ABS-CBN in 1986 from Marcos's cronies, it had been in the best position to innovate and provide high quality entertainment for Filipinos, but what it did in the next 25 years was serve regurgitated crap that just made everyone dumber. Anyway, enough about that; I just hope that with this additional pressure will force ABS-CBN finally try to live up to its promise.


UPDATE 28 December 2011, 2:22 PM via PhilSTAR.com

GMA has just denied the rumor:

“There is no truth to the rumor ongoing around in social media sites and the Internet that Mr. Pangilinan has bought GMA Network. In fact, there is no negotiation going on between GMA and Mr. Pangilinan regarding the latter’s acquisition of GMA-7.”

And now we know what the rumored "mind-boggling" offer is: 500 billion pesos, or 25 times GMA's current market capitalization of around 20 billion . Wow. Yeah, that can't be right.

GMA 7 shares are down around 0.5% today.

Saturday, December 24, 2011

1st Annual Holiday Rant 2011: Societal Trust

Episode One: Robinson's Pioneer

After spending a couple of days in Manila to meet some friends, I asked my sister to pick me up and take me to our parents’ place in Bulacan. I would have gone on my own, if I could, but I had this sealed big box of presents with me from Hong Kong. I already anticipated that I might be hassled by the guards when I enter the mall with all my stuff, but I really hoped that I would be able to charm them or at least reason with them.

As it turned out, I did not have any problem going inside the mall: I was able to reassure the lady guard that I was just carrying a box of gift toys and sweet talk her out of asking me to open it. Unfortunately, this same strategy turned out to be ineffective with another guard that I encountered a bit later. As I was waiting for my sister near the exit to the parking lot, another lady guard approached me out of nowhere and asked what I had in the box. In my sweetest tone, I answered “toys for my nephews and nieces” and explained that I already talked to the other guard about it. Still, she insisted that I open the box, and since by then I was already too tired to argue, I promptly ripped the box open (it was sealed, and I did not have a knife or any sharp object with which to open the box properly). When she saw the various boxes of toys inside the bigger box, she walked away with nary a word (I can only imagine how it would have turned out had I wrapped my gifts before flying to Manila).

Episode Two: SM Marilao

The other day I went out for last-minute gifts. I quickly bought a couple of Transformers movie toys from Toy Kingdom, then headed to the supermarket for a few supplies. As I was about to enter, the guard nonchalantly stopped me and asked me to “check in” my Toy Kingdom plastic bag. I was really surprised that she asked me to do this—the bag was small as it only contained two card-backed Transformers toys—so I asked her why I had to do this. She simply said that my toys might get mixed with my other purchases—or something to that effect—but instead of saying “so what?” as I probably should have, I just walked away.

So what?

I was not really angry at these guards: while some guards could really turn up the power trip at times, ultimately they’re still just doing what they were told by higher ups. Well, maybe I was a bit pissed, not at them, but at these attempts to improve security and address threats to peace and order, because by now we all know that these efforts don’t work and just waste people’s time and resources; these policies were presumably designed for our benefit and interest as ordinary Filipinos but in truth are implemented at our expense. But mostly I was saddened because I realize that these practices just end up sowing a deeper, darker cloud of mistrust in Filipino society.


According to Francis Fukuyama,

“A nation's well being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in society.”

The successful consummation of every economic transaction is heavily dependent on how each party trusts the other to behave as expected since contracts can only address so many details and possibilities. Trust can also provide significant additional value to businesses by minimizing transaction and monitoring costs. So maybe it’s no coincidence that some of the most developed countries in the world trust their citizens enough so that individuals are not asked to open sealed boxes inside malls or open bags when entering train stations.

Some of you may point out that it’s a small price to pay for security—or at least, a sense of security—and I will have agreed if indeed these policies make us feel safer, but they don’t. Some of you may say that I’m just being petty and making too much fuss about nothing and I will have agreed were the amount of economic resources wasted on such practices trivial, but it isn’t.

I’m not trying to be a defeatist or an alarmist, because really, if this season means anything to me, it’s that things can always get better and that sometimes they do. Maybe what this post is really about, apart from being a venue for my rant, is how to convince ourselves to try to trust each other more, because really, no matter how bright and honest our president and all our leaders are, as long as we don’t trust the ordinary Filipino enough to just leave him be, let him do his business, and not think he will shoplift or set a bomb at the next opportunity, our nation will find it very hard to become great again.

Of course this is only possible if we become more trustworthy ourselves. Trust and trustworthiness is a chicken and egg thing, although knowing which one comes first matters less than actually getting the cycle started.

And it starts with me, of course.

Happy holidays, everyone. :)

Thursday, December 22, 2011

Watch "Inside Job" Online, For Free

I already mentioned this Oscar-winning documentary about the 2008 subprime crisis in a post a couple of months ago. If you have not seen it yet, here's your chance to (legally) see Inside Job online for free, and in high definition.

The film remains importantly relevant to this day as we find ourselves on the cusp of another potential global financial crisis.

Link for Inside Job (can't be embedded, unfortunately)

After watching, we can discuss the film in the comments section below.

Friday, December 16, 2011

5 Reasons Why the Philippines Will Fare Relatively Well in Another Financial Crisis

Last week, I attended a seminar entitled "Can Emerging East Asia Weather Another Global Economic Crisis?" "Emerging East Asia" pertains to the ASEAN 10 (Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma, Cambodia, Laos, and Vietnam), China, Taiwan, Korea, and Hong Kong. Key participants included Mr. Iwan J. Azis, head of ADB's Office of Regional Economic Integration, and representatives from the International Monetary Fund (IMF), the Hong Kong Monetary Authority, Barclays Capital, and the Korea Institute for International Economic Policy. In this post, I will highlight important insights that I gathered from the event and how these will affect the economic prospects of the Philippines in the coming years.

Mr. Azis opened the seminar with a presentation of key points from the Asia Economic Monitor for December 2011. ADB sees that if the debt problem in Europe is not resolved and contained in the coming weeks and months, it may lead to any of the following three scenarios: first, a recession contained to the Eurozone; second, a recession in Europe and, to a lesser degree, in the US; and finally, a full-blown global financial crisis.

Just as in 2008/2009, any one of these situations could result in heightened risk aversion among investors and a sharp drop in global demand for goods and services that would, in turn, adversely affect countries from emerging East Asia to varying degrees. The extent of the damage to any particular economy and the capacity of that economy to recover from the crisis will greatly depend on the following factors:

  • The "health" of the financial/banking sector and its exposure to toxic assets
  • The economy's exposure to European and US banks
  • The economy's dependence on foreign demand (i.e., exports) vis-a-vis local demand
  • The capacity of the economy to enact timely policy responses
In the worst case, ADB forecasts that regional growth will go down by 1.8 percentage points, assuming no policy response from the concerned economies.

How will the Philippines fare compared to other emerging East Asian economies? 

There are indications that the Philippines will fare relatively well in an impending financial crisis.

1. The Philippine banking sector remains conservative, and this will continue to shield us from the brunt of any financial crisis, just as it did in 2008. Also, efforts by the BSP to impose stricter capital requirements, particularly for thrift and rural banks, in the past couple of years further strengthen the banking sector as a whole.

2. The Philippines has a lower exposure to European and US banks compared to other countries in the region.

3. The Philippines has significantly reduced its reliance on US and European trade in the past couple of years.

4. Philippine households have remained financially conservative, especially compared to other economies in the region. Of course, the figures below most probably does not capture informal debt, and so may be understated.

5. (This is just my opinion) The Aquino administration's efforts to hold the previous administration accountable for past transgressions has and will continue to lead to stronger investor confidence.

Although no one particular country was discussed in the seminar, this final slide from ADB clearly supports the conclusion that the Philippines will fare relatively better than other economies in the region in a global economic crisis scenario.

Which should be very good news for most of us, although I'm not particularly ecstatic about all this since most of my investments are here in Hong Kong. Oh well, I guess I would just have to boost my Philippine holdings as much as I can.

As for the question "Can Emerging East Asia Weather Another Global Economic Crisis?", Mr. Azis' answer was straight to the point: "Yes, but we have to prepare for the worst."

And here's a gratuitous shot of Hong Kong harbour from the event location.

Tuesday, December 13, 2011

Decision Making According to Economists, Part 2: Diminishing Marginal Utility

Let's go back to where we left off in Part 1.

In a game of chance, you pay a fixed fee to enter, and then a fair coin will be tossed repeatedly until a tail first appears, ending the game. The pot starts at 1 peso and is doubled every time a head appears. You win whatever is in the pot after the game ends. Thus you win 1 peso if a tail appears on the first toss, 2 pesos if on the second, 4 pesos if on the third, 8 pesos if on the fourth, etc. In short, you win 2^(k − 1) pesos if the coin is tossed k times until the first tail appears.

What would be a fair price to pay for entering the game?

We can estimate the "fair price" of this game using expected value, for which we need the payoffs and probabilities that correspond to each state of nature.

The game could end after the following number of tosses:

1   2   3   4  5   ...   k   k + 1   ...

Please note that it is possible (although, of course, very improbable) that the game would go on indefinitely.

The payoffs for these possible outcomes are as follows:

1   2   4   8   16   ...   2^(k -1) ...   2^k   ...

Now we turn to the probabilities. For the first outcome, the probability of getting a tail on the first toss is 1/2. For the second outcome, you'll need to toss heads then tails, for which the probability is 1/4. The third outcome consists of heads, heads, and tails, and the probability is 1/8. So now, we should see that the pattern of probabilities is:

1/2   1/4   1/8   1/16   1/32   ...   1/(2^k)   ...   1/(2^(k + 1))   ...

The expected value of an alternative is just the weighted average of the payoffs, using probabilities as weights. Therefore, the expected value of playing the game is:

1*1/2 + 2*1/4 + 4*1/8 + 8*1/16 + 16*1/32 + 2^(k - 1)*(1/(2^k)) + 2^k*(1/(2^(k + 1))) + ...
= 1/2 + 1/2 + 1/2 + 1/2 + 1/2 + 1/2 + 1/2 + ...
= infinity

(Kudos to reader "Maykee" for getting it right, and thanks to everyone who tried.)

So, would you pay that much to play the game? How about something significantly less than infinity, like say, 1 million pesos? It does not sound so attractive, right? In fact, I'll bet that you'll even have trouble finding someone who's willing to play the game for 100 pesos (how many tosses would it take to win more than this?). This is why people have referred to this game as a paradox--the St. Petersburg Paradox, to be precise.

The game was invented by Nicolaus Bernoulli, nephew of the Bernoulli that we encountered in Part 1. "St. Petersburg" does not pertain in any way to Nicolas, however, but very interestingly to the work of another famous Bernoulli, his cousin Daniel. According to Daniel Bernoulli, it is not appropriate to use expected value to solve the problem since

The determination of the value of an item must not be based on the price, but rather on the utility it yields…. There is no doubt that a gain of one thousand ducats (some form of ancient money) is more significant to the pauper than to a rich man though both gain the same amount.

Daniel Bernoulli
What is utility? In its most basic sense utility is the satisfaction or benefit that one gets from choosing or doing something. Economists want to play safe, however, and just say that utility is that something which makes decision makers choose one thing over another. And Daniel Bernoulli's simple idea--that of diminishing marginal utility--revolutionized the study of economics and decision making in the next couple of centuries.

Diminishing marginal utility means that the utility that one gets from receiving or consuming one unit of something--be it pesos, ducats, fame, or beer--decreases as one amasses more and more of that something. It explains why the first bottle of beer tastes oh-so-much better than your fifth, and why receiving a 5,000 peso bonus when you're just earning 10,000 pesos a month is more satisfying than receiving the same amount when you're already a millionaire.

This concept is also very important in finance because it defines a decision maker's attitude towards risk. An individual for whom a particular reward has diminishing marginal utility is risk averse with respect to that reward: he or she is the stereotypical decision maker in economics, someone who is willing to pay to avoid a very small probability of a big loss (e.g., someone who buys insurance)--that is, how most of us usually are. Someone for whom the same reward has increasing marginal utility, on the other hand, may be seen as risk seeking, like someone who will pay just to have even a small chance of winning something big (e.g., someone who plays the lottery)--that is, how most of us are in certain situations, sometimes.

Going back to the game, if we assume that for a typical player the game's prize has diminishing marginal utility and that this utility is a slowly increasing function of the player's initial wealth plus his winnings, then the utility of the additional payoff from a toss of heads will be smaller than the utility of the one that came before, which should result in a finite fair price.

I know a lot of you have already had your fill of theoretical mumbo jumbo this past month, so we'll get back to more practical matters in the next post. :)

Thursday, December 8, 2011

Life Insurance


Dear Investor Juan,

I am writing to you because I'm somewhat new to this financial literacy thing and I want to know if it is possible to know your two cents about life insurance? Almost all the articles I've read about financial literacy says that the first step is getting protection (life insurance) or maybe after budgeting and saving but before investing. I think you've already scratched the surface about this topic on some of your articles. And from what I understand, you prefer term over traditional and VUL or "buy term invest the difference". Lastly, maybe you could recommend a life insurance product here in the Philippines or what features to look for when getting a life insurance. Again, thank you for your time and God speed on your future endeavors.

Kind regards,


Dear Aaron,

Most probably you have already read my introductory post several weeks ago about insurance, but for the benefit of those who haven't, I will start this post with a definition. In the simplest sense, insurance is a contract between two parties: one party, insurance company, promises to pay specified amounts to the other party, the policyholder, conditional on the occurrence of future events such as death, car accidents, or pirate attacks; in return, the policyholder, pays the insurance company insurance premiums for this transfer of risk to the latter. There are three major types of insurance that we all should be familiar with: life insurance, health insurance, and property and casualty insurance. I will limit my discussion to life insurance in this post and just talk about the other types in future posts.

Life insurance, as the name suggests, insures against death: the life insurance company pays the beneficiary of the life insurance policy in the event of the death of the insured. Life insurance doesn't benefit the policyholder personally, but rather his or her dependents. So in a sense, life insurance would be more important to those with families and other dependents than to those who are single with no dependents.

There are two primary types of life insurance: term life and cash value life insurance. Term insurance is the simplest type: you pay the premium for the amount of coverage that you want (i.e., the number of years and for what amount) and lose coverage when your policy lapses and you choose not to renew. You don't "earn" anything with term life so it does not have any cash or investment value (which isn't saying it does not have any value).

The other class of insurance--cash value or permanent life insurance--is generally a combination of term life insurance and an investment product that has a cash or investment value. Usually, policyholders have an option to withdraw from this value, borrow against it (i.e., use it as collateral for a loan), or just let in mature and receive a "bullet" payment or a schedule of payments.

We can also classify cash value life insurance even further, based on whether the cash value is guaranteed or variable and whether the required premium is fixed or flexible. The four combinations and their general characteristics are presented in the table below.

Guaranteed Cash Value
Variable Cash Value
Fixed Premium
Whole life insurance
- Guaranteed build up of cash value
Variable life insurance
- Policyholders are allowed to allocate their premiums among several investment accounts
Flexible Premium
Universal life insurance
- Greater separation between term insurance and investment components
- Premium payments are flexible, but there is a minimum initial premium
Variable universal life insurance
- Same as variable life but premiums are flexible

Everything looks dandy. So why do I advise against cash value insurance?

In general, I recommend just buying term life and investing on your own for two main reasons:

1. You lose flexibility and liquidity with cash value life. Back in the day when there was just term life insurance, people would buy it for several years, not die, realize that they're just losing money, and eventually cancel the policy. So in the 1800's some guy named Henry Baldwin Hyde came up with cash value life insurance to prevent people from cancelling their policies (since with cash value life, you lose your investment if you cancel too early). With the term life + DIY investment option, you can cash out on the investment part any time you want, even at little or no expense.

2. Cash life policies cost too much. Why? Because you pay someone to do something you can do yourself, arguably better, for much less.

So there. If you think you need it, then buy term life. Investing is a different decision altogether, and in general you'll be better off doing it on your own than getting cash value life. In choosing among insurance companies, I would make a decision based on cost (because term life is basically a commodity--it's the same thing regardless of who it comes from) and reputation.

I hope I was able to sufficiently answer your questions. Good luck!

Tuesday, December 6, 2011

Decision Making According to Economists, Part 1: The Expected Value Criterion

In a previous post, I introduced two approaches in studying how people make decisions. In this post, I will discuss the first of these approaches in greater detail: normative decision making.

The normative or prescriptive approach deals with how people should make decisions: it looks at decision making from the point of view of an ideal decision maker--one who is fully informed, able to compute with perfect accuracy, and fully rational--in a environment where information about all available alternatives are known. The normative approach is generally quantitative and involves formulas that range from the basic to the insanely incomprehensible, and thus usually falls within the exclusive purview of economists and mathematicians. The first important normative decision making criteria--expected value--shall be the focus of this post.

Making decisions using expected value

The scenario below illustrates a typical decision problem

ABC Realty has recently purchased land for the development of a new luxury condominium complex. ABC is in the process of selecting the size of the project that will lead to the largest profit given the uncertainty of the demand for condominiums.

Using the four steps in making good decisions that we discussed previously, let's take a closer look at the details of this problem.

1. Identify all available alternatives. ABC needs to choose the size of the condominium project. Let's say the following alternatives are available:

d1 = a small condominium complex
d2 = a medium condominium complex
d3 = a large condominium complex

3. Identify uncontrollable or unpredictable circumstances that may affect the payoffs of alternatives. The project's profits will be affected by the demand for condominiums. Since these possible occurrences, referred to as states of nature, are beyond the control of the decision maker, they are just assigned likelihoods or probabilities. For example, let's say that according to ABC's analysts, there is an 80% chance that demand for condominiums in the foreseeable future will be strong and a 20% chance that it will be weak, or

probability of strong demand = P(s1) = 80%
probability of weak demand = P(s2) = 20%

It should be pointed out that since s1 and s2 cover all possibilities for the demand for condominiums, P(s1) and P(s2) should sum to 1 or 100%.

2. Determine the costs and benefits of alternatives. Both ABC's choice for the size of the project and the demand for condominiums would affect the project's profits or payoffs, which are presented in the following table

We see from this payoff table that the decision is not straightforward since the best alternative--the one with the highest payoff--changes with the demand for condominiums: whereas a large complex would take advantage of strong demand, it would lead to losses if demand turns out to be weak because of (presumably) the higher cost of construction.

4. Evaluate alternatives using some criteria or rule and make a decision. One commonly used criterion in making a decision given the information presented above is the expected value criterion.

The expected value of an alternative is the weighted average of its payoffs under different states of nature, using the probabilities as weights

This concept was first formalized in Jakob Bernoulli's groundbreaking work, Ars Conjectandi, published in 1713.

Jakob Bernoulli
We compute for the expected value of each alternative as follows

According to this rule, since alternative d3 or building a large condominium complex results in the highest expected value, ABC should choose this alternative.

While the expected value rule does make a lot of practical sense, we should be careful in interpreting the numbers that result from our analysis. An expected value of 14.2 million does not mean ABC will earn that much if it decides to build a large complex: ABC will either earn 20 million or lose 9 million depending on what demand for condominiums will be. 14.2 million is ABC's average profit if it faces this scenario several times and makes the same decision to build a large complex each time; in other words, it's what ABC stands to earn in the long run.

Expected value in practice

The most common practical application of the expected value concept that I can think of is in gambling, particularly in poker. If you play the Texas Hold'em variety or any similar variant, you may have heard of this strategy rule: join the game if the probability of making one of your outs (i.e., your number of outs divided by the number of cards remaining) times the pot is greater than the required bet. The first part of this rule--the probability of making one of your outs times the pot--is the expected value or payoff of joining the game, so if this is higher than the cost of joining, then it makes sense to call the bet.

Something to think about

We'll end this post with something that has puzzled the greatest minds for the longest time until it led to another groundbreaking concept in the study of decision making, which will be the topic of Part 2 of this post.

Think about this scenario for a while.

In a game of chance, you pay a fixed fee to enter, and then a fair coin will be tossed repeatedly until a tail first appears, ending the game. The pot starts at 1 peso and is doubled every time a head appears. You win whatever is in the pot after the game ends. Thus you win 1 peso if a tail appears on the first toss, 2 pesos if on the second, 4 pesos if on the third, 8 pesos if on the fourth, etc. In short, you win 2^(k−1) pesos if the coin is tossed k times until the first tail appears.

What would be a fair price to pay for entering the game? Read Part 2 to find out.

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