Stock Investing Philippines: In Defence of Bro. Bo Sanchez
Updated: Mar 30, 2018
Recently, social media has been buzzing about Cemex and how the stock is down close to 50% from its IPO price. We understand that TRC has this in their model portfolio basket, and in the interest of full transparency, we too had this as a trading idea back when it was still at 11.30. We pegged our stop price at 11.12 and got out on the day the company’s 1Q17 earnings came in below market expectations.
I don’t think CHP was a bad call. The stock investment thesis about infra spending was solid but didn’t work out. The problem wasn’t the stock pick. The issue was the trading guidance and I blame Peso Cost Averaging for this.
What is Peso Cost Averaging?
In a nutshell, peso cost averaging is a method of setting aside funds for your investment over time. It doesn’t matter if intervals are fixed or irregular, the idea is that you’re better off doing peso cost averaging compared to someone investing everything one time big time. And the benefit of this approach is true to some extent. A person who spreads out purchases can minimize market risk from poor trade execution by doing it in several tranches. Peso Cost Averaging has had such a wide appeal to the investing public because of its simplicity.
The problem about peso cost average is that it oversimplifies stock trading and investing. It makes you think that as long as you diligently set aside funds for your investment, all will be well. More so the way it is taught to retail investors. The method is often associated (MISTAKENLY) to AVERAGING DOWN, which is a completely different animal all together. Pero, sa kasamaang palad, ganun ang nagiging application ng PESO COST AVERAGING.
The bigger problem with Peso Cost Averaging is that it doesn’t allow for RISK MANAGEMENT. At least not in the way that institutional investors apply risk management. Retail investors are taught to be in it for the long-haul because in the long-run time will help investors ride out the price volatility… so goes the theory. As such, risk management concepts like PRICE STOPS and TIME STOPS are glossed over even though these are very important elements of dynamic investment processes.
Kaya ayan, na-ipit!
In our experience, you cannot teach stock trading and investing without explaining the importance of CAPITAL PRESERVATION. Kadalasan, akala ng mga tao, dahil sabi mo okay ang isang i-stock, pwede na silang maging pabaya sa investments nila. You see, it’s one thing to be a long term investor in a stock that’s going up and another to be a long term shareholder na na-ipit.
Hindi po parehas yun.
In defence of Bro. Bo Sanchez…
I am not a TRC subscriber so I don’t know why they’re taking a lot of heat for their CHP reco. But the little I know about their stock investment process is that even though cutting losses is not part of their vocabulary, they do try to mitigate the risks by setting percentage limits per position. So in a standard model portfolio, the limit should be around 10% allocation per name. What this also means is that even if Cemex fell by 50% from the time it was added to the portfolio basket, the overall impact to the portfolio should be a mere 5%.
So kung nag-invest ka sa sampung stocks ng TRC portfolio tapos si CHP nalaglag ng 50% tapos hindi nagbago ang presyo ng ibang laman ng portfolio, para sa isang portfolio na Php1 million, ang talo mo lang dapat kung sinunod mo yung stock weights ay Php50,000 lamang or 5% ng portfolio. Kagat lang ng langgam ang 5% impact sa portfolio if you think about it. And if the portfolio was well designed, the other nine names should have been able to offset the impact of the CHP trade. More so if people applied stops to manage their risk.
CHP only becomes a problem when stock weights are ignored, which kadalasan ganun nga ginagawa ng mga tao. So intead of 10% allocation, I wouldn’t be surprised if nasa mga 30% or more ang exposure ng karamihan ng mga naipit sa CHP. Masakit na po ang 50% down if mga 30% exposure or more.
A better option is Trading by Portfolio…
Instead of Peso Cost Averaging, stock market experts should teach retail investors about TRADING BY PORTFOLIO. When you trade by portfolio, you remove the focus from stock picks and force investors to concentrate on the equity curve.
You see, what should matter to everyone are the daily changes in the value of the investment portfolio. Hindi importante kung sinong stock ang nag papa-angat sa portfolio mo. Ang importante ay umaakyat ang portfolio mo dahil sa mga tamang stocks na hawak mo.
Sa mundo ng professional traders, nahahanap lang ang mga tamang stocks by focusing on relevant, high quality momentum names, and rebalancing your port regularly.
Again, don’t blame Bro. Bo. Lost in translation lang yung process dahil sa concepto ng Peso Cost Averaging.
Say no to Peso Cost Averaging.