At par with par value

PLDT stock certificate

Let's get down to basics.

When a business entity is formed as a corporation, you need some amount of capital, let's say, 100 m pesos. Let's suppose there are five persons--the incorporators--and each of them equally ponies up 20 m for the initial capital. Their  share of ownership of the corporation would now be represented by--well, shares of stock of the corporation.

Theoretically, they could issue one share each to themselves, with each share representing 20 m, for a total of five shares. That amount represents the par value, or the initial valuation, of each share.

But then, down the road, one or some of them would like to sell their share of the corporation to the other incorporators, to outsiders, or to their kids as inheritance. Dividing a share to several persons would be inconvenient and impractical. To anticipate this probability and for a host of reasons (like conducting an initial public offering or IPO much later), the corporation might as well issue 100 million shares with each share now having a par value of one peso.

How convenient. But one peso, while the most common, is not the only possible par value. For example, most bank stocks have a par value of P10, while the speculative ones--the so-called penny stocks--have the ridiculous par value of 0.01 or one centavo. Back then, it might have made sense when you could buy something out of your ten centavos (like a bottle of soft drink, or the minimum jeepney fare).

Market stock prices on the other hand, are those that appear as transactions at the Philippine Stock Exchange (PSE), and the quoted price of a given stock is what the buyer (bid price) or the seller (ask price) thinks the share price of that particular company is, or should be. As the company's business flourishes with time, the perceived or market value would rise above par, and if the company has been in existence long enough, the market value would be far different than its par value. PLDT (PSE:TEL), which last traded at P 2988/share on March 27, has a par value of only P 5. If the company is going down the drain, the market value could tumble below its par value.

The issued equity amount you see in balance sheets, is based on par value.

Watch out for dividend announcements. A cash dividend of 10% refers to that percentage of the par value, not the current quoted prices.

By virtue of some corporate actions, the par value can change. If a company has been bleeding red ink for years, its capital (equity) would be depressed so much or it may turn negative. The board of directors may then decide to lower the par value to "wipe out" the deficit, which is actually an admission of permanent loss. Thus, if the par value started with one peso and ends up with 10 centavos and you are a stock holder, you lost 90 centavos per peso of your capital. Example, the par value of Atlas Consolidated Mining and Development Corp (PSE:AT) share has been lowered to P 8 from the original P 10.

The same board may also decide to split up its shares by lowering the par value to a fraction of the original. This is to increase the number of shares available in the open market, and to make the share prices to be perceived as affordable. But that  doesn't really change the fundamental ownership structure of the company.

An increase in par value is also possible. This is usually resorted to when the major owners would like to enhance the image of a corporation from that of a speculative firm (which has a par value of say, one centavo) to a more established kind. This usually happens when a dormant firm which started as a speculative oil or mining exploration firm is taken over by new owners who have different plans of business than the original. Recent examples abound, and if one understands the situation and acts quickly, one could profit handsomely in a short time.

Others are made higher for accounting and trading convenience since it would be easier to handle millions rather than billions of shares.Large companies like conglomerates which expect a significant fraction of their shareholders to be institutional foreign funds prefer larger par values (and market prices) since when prices are converted to other major currencies, the holders won't be talking of pennies or fractions of a dollar or euro. For example the par value of Ayala Corporation's shares (PSE:AC) is now P 50 whereas it used to be one peso.

You are more concerned of course with market quotations for trading purposes. However, it pays to know the par value to understand corporate actions which lead to better appreciation of investing in stocks.

Letting others do it for you

It is tempting to zoom through the smooth highway than take the bumpy road less traveled.

It is but natural. When you navigate through an unfamiliar city, your tendency would be to stick to major roads with clear signs and directions, otherwise you wouldn't want to end in a dangerous ghetto or a dead-end dump site.

The same thing is true for first time investing. While you have just hopped in on the steep learning curve, you may wish to let your savings work for you by letting others do it for you--in the meantime. There are many good reasons for entrusting your money to others to invest:

1. You are starting. You have very little idea where to put your money.

2. You have limited time. You have to report to the office daily, or you have call on clients for your direct-selling business.

2. You have limited resources. You have P25,000 pesos which you don't need to spend immediately and you wish that that amount would work for you

3. You don't want to take risks by yourself. That's because you don't have much experience in investing yet.

If I were in that situation I would simply place my money on a unit investment trust fund (UITF) offered by most banks or a mutual fund which you could also avail of through banks. Both work similarly in the sense that your money is pooled along with those of others and invested in financial instruments which are otherwise inaccessible to us, small investors. The difference is mainly on the how they are structured and managed.

While you are at the mercy of the fund manager, you still have some control of your money by knowing and choosing the fund to invest in.

There are basically three types of mutual funds on the basis of where the money is invested:

1. Fixed-income fund. This fund invests only in fixed-income financial instruments such as treasury bills, money-market placements and government-backed bonds and the like. The risk is minimal but the returns are capped.

2. Balanced fund. This fund places its money mainly of income-generating instruments such as treasury bills, preferred stocks and bonds, which are debt instruments issued by corporations and the government,    but a portion of the fund is invested in blue-chip equities or stocks. A typical balanced fund would have 20% in stocks Hence, the name. You would also encounter a growth and income fund which is essentially the same.

3. Equity fund. As the name implies, this fund is tilted towards stocks, and therefore by definition is riskier than the previous ones. The potential reward is you earn more than the average compared to the other funds. The drawback is you could also lose big. I have examined some equity funds and the holdings seldom go beyond 50% stocks, except for a few ones. So it is not really that risky.

While I was searching for actual examples of Philippine mutual funds, I found this list, kindly provided for by another Filipino financial blogger.

You're on your way.

What to do with your greenbacks

Quick. Give it to me.

How I wish you would. Only a few Filipinos are lucky or persevering enough to earn in mighty (U.S.) dollars but thousands of our countrymen and women earn, aside from the US $, in various currencies ranging from the euro, Japanese yen, Saudi Arabian rial, Malaysian ringgit, or whatever. Virtually all the currencies in the world are represented.

Most of these however, are converted to U.S. dollars by the time the recipient (invariably, much of the foreign income is sent back home) gets the money if these are sent through the banking or the formal remittance system. These are spent on basic necessities like food, education and shelter, but a few families do manage to keep them intact usually in a dollar savings account earning next to nothing or negative interest.

Negative interest?

Yes, by the time you want to spend it, the value in pesos or goods is less than at the time you receive them. Especially these days that the Philippine peso and many other currencies of the developing world are appreciating versus the dollar. If you listen to our economic rah-rah boys, the situation won't be reversing soon because--well, they claim that the country is becoming an investment-grade haven, and foreign currency should be flooding in.

In the turbulent years of the 80s and 90s, and well into the first half of the new millennium, keeping part of your money in greenback was considered investing. It still is, but in a very different context. Every time you convert pesos to dollars, you are speculating against your own currency. It's only a small amount, you say, but multiply that by several thousands, and everybody is putting pressure on the peso.

It made much sense then. By the time I was aware of the currency exchange mechanism, the exchange rate was 6 pesos to the dollar, then it dropped to 8, 10, 12 up to 20 pesos per, when I left in the early 80s to spend some time abroad. People were hoarding dollars.

Four years later and after the EDSA people power revolution, I returned and got the shock of my life. The exchange rate was now 40 pesos to the dollar, which is roughly the present parity. The exchange rate even got worse diving to 56 pesos to the dollar during the coup years and the EDSA II.

All the denominations were brand new. I could not make out how much or what a P20 bill could buy. In my childhood, 100 peso bills were non-existent, but now Ninoy bills are exchanged more often than the 100s.

With a seemingly stable foreign exchange rate with the bias for the peso to appreciate against the greenback, it makes a weak argument to  stash your dollars in a savings or time deposit account. Remember that the bank will deduct a substantial amount from your account if the balance falls below a threshold.

So, if you really need to hold some dollars and if you are not ready at investing internationally, or the amount is no enough for such purpose, one should at least think of ways to preserve the value of your dollars. The biggest and most popular banks do have dollar-denominated investment funds which accept a minimum placement of as low as $500, but most require a minimum of $1,000.

 My usual take is, know as much as you can about the nature of these funds. Know how the fund is invested: in corporate bonds, government securities, or even equities (stocks). Be aware of the fees involved, which is usually a percentage of the principal, which could eat up your interest or income earnings.

While, as the usual disclaimer says that "past performance does not guarantee future performance", it is desirable to at least know the consistency of performance of the fund in the past. Later on, you might want also to assess the performance of, and know its fund manager.

If you have them, you're lucky. I am green with envy.

My favorite broker

When you need to  BUY or  SELL  your shares of stock you need a stock broker, those guys and gals registered and authorized to execute the trade.

During my early years of the game, stock trading or investing wasn't in vogue yet--at least in my professional circle. One time, it so happened that a conversation drifted into stocks and a friend of mine who is a geologist, has been a punter (probably the best translation of tsupitero) in oil and mining stocks and introduced me to Mon, his broker.

Mon, a likable and helpful guy, dutifully carried out my orders. Sometimes he feeds me news on some developments in the market and even makes unsolicited advice on what to buy or sell. His messenger comes and collects payments for my BUY orders or delivers checks resulting from selling. Sometimes he alerts me to companies undergoing an  initial public offering (IPO)  and I actually obtained IPO shares through him. IPOs are special events and if you are lucky, you could gain a lot, percentage-wise in a matter of days. That would be an interesting topic to deal with in a separate post.

My favorite broker (actually, he is the trader) has been so kind and friendly that I followed him whenever he transfers brokerage houses.

Traders and brokers primarily earn their keep by commissions on every trade. The average trader would have you induced into making more trades than you need to. Brokerage houses also issue newsletters invariably labeled "for clients only" to make it appear that you have been granted exclusive peek at privileged information.

These newsletters ostensibly contain an analysis of the economy, sprinkled with Consumer Price Index data, movement in forex rates in the last 24 hours, closing numbers of the U.S. DOW and NASDAQ indices, and other trivia--public information really. But the bottom line is, the analysts who wrote those pieces would tenuously connect those figures to their stock recommendations--usually a BUY or HOLD; almost never a SELL. The rare times when you see a SELL recommendation, is when the stock has already been battered black and blue, and the so-called "strong hands" have already fled.

A classic case of closing the gate when the horses have already galloped to freedom a long time ago.

We will be examining the modus operandi of these brokers later from the point of view of the small investor.

The information contained in the brokers' newsletter is useful, mind you. But you don't have to take the analysts' words hook, line and sinker. You have to be discerning. Subject the data to severe stress tests. Find other collaborating or adverse information. Then take action based on your best judgment.

This is the recurrent theme in this website: taking charge of one's finances.

Now, what happened to my favorite broker? For several years, I have had my own ups and downs, and have shied away from the market. When I closed my person-broker based account last year, I was informed that my favorite broker no longer works there and I presumed he has retired.

Who is my present favorite broker?

None. At least in a human form. In the last few years I have shifted to online trading which is, in a sense, a liberating way of taking charge of oneself.

My bizarre introduction to stocks

Serendipity.

That sums up how I got into stocks.

During a university alumni homecoming which I attended (reluctantly, I should say), my name was chosen as a winner of a raffle contest. The emcee beamed and slowly announced (drums roll) the price: a board lot of shares of stock of Alcorn Petroleum and Minerals Corp., (PSE: APM) , a junior oil wildcatter then, courtesy of an alumna who happened to own a stock brokerage house. 
                                                                                                                                                              
It didn't register with me. I had only the faintest idea of what stocks are, what the company was doing, or how to trade stocks. The lady donor said that I have to get the prize at their office and all she gave was a note scrawled on a small piece of paper with her signature.

What a prize, I thought. I inserted the paper in my wallet and forgot all about it.

Months later, the Social Security System (SSS) offered to divest part of its shareholdings in electricity distributor Manila Electric Company (PSE: MER) to its members (all working people are). The beautiful part is, no cash out was needed; all one had to do was sign a promissory note that payment would be made in monthly installments through salary deduction. I signed in.

Then I remembered that piece of paper. At about this time, an oil discovery off the coast of Palawan named West Linapacan was announced in the papers. There I saw that APM was one of the consortium members, albeit a minor one.

That got me excited and went to the brokerage house mentioned and claimed my prize. The signature was honored, but I had to come back after two weeks, because the share ownership had to be transferred to my name. I saw my first stock certificate (scripless trading did not exist then) which looked like a diploma to me. But I still didn't know what to do with it. The value was a few hundred pesos.

The real break came when then government-owned Philippine National Oil Company (PNOC) conducted an initial public offering or IPO of shares of its subsidary Petron Corp. (PSE: PCOR) as part of the privatization of government assets in the middle 90's. I used to work for another subsidiary of PNOC, so we employees were given a chance to obtain IPO shares. Again, payment was through salary deduction, but the shares have a lock-up provision of 365 days or one year. That means we could not sell those shares within that period.

By law, major shareholders of a company undergoing an IPO will have their remaining shares subject to lock-up for 6 months to one year. This is to prevent manipulation of prices by insiders, among others.

The IPO was a big event. It was considered the catalyst for the growth of the Philippine Stock Exchange (PSE) from lethargy.

I got to know a broker to trade stocks for me, and there was no stopping from here.

It was curious education for me. You dear readers,  are luckier with information you need  are now freely flowing.

Epilogue: The share prices of PCOR soared weeks immediately after its IPO but we could only scratched our heads since our shares were under lock-up. I disposed of my APM shares which I obtained for free, but MER tanked. That was because the Company was ordered to reimburse some P 32 billion to its customers when the High Court ruled that the company has been overcharging its customers for years through a technicality.

How not to invest

Many activities considered investing shouldn't be.

Take for example, saving which many think they are investing for the future.

If you hand in your well-earned money to the bank teller for safe-keeping, you are not investing. You are lending your money to the bank at ridiculously low rates close to zero. If you factor in escalating inflation and expansion of your expenses, the value of your money in the bank is slowly being corroded and eroded.
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Note added on March 19, 2013: If the capital markets around the world and in the Eurozone especially are roiled, blame it on Cyprus, the third smallest economy of the zone. To avert a default of its bloated banks, the European Union revealed a  € 10 billion rescue package to the country. Part of the attached conditions is a one-time tax of 9.9% for deposits greater than € 100,000 and  6.75% for lesser amount of deposits. The tax is on the principal, not on the interest. Talk about safety in deposits. 
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About the best thing of letting your money sit on the bank is, it is physically out of reach to thieves coming into your house.

Don't get me wrong. Saving is a good habit. It should be instilled into your kids while they are still young. But it is a poor and risky investment.

Oh, yes. There 's a redeeming value of saving. It is liquidity. The ease of converting your assets into cash. Every time you need cash when you need to buy a gift for your inaanak or your roof starts leaking, you can always go to the nearest ATM and touch your savings. If you consider an undeveloped lot you have been amortizing as an investment (which it is), try selling it at an attractive (your) price when a major expense arises.

Liquidity should be a major consideration when choosing investing options. This will be a recurring theme in future posts.

A second example is lottery.

One time I was with my five other co-workers on a provincial sortie when we had to stop for lunch at a mall.   As soon as we arrived there, they seemed to be looking for something other than a good restaurant. That puzzled me.

"Are you not joining us?"

"What?"

"The lotto jackpot is now P143 million."

"No, I don't play the lotto. The odds of losing are just too great."

"C'mon, it's just P20."

I read somewhere that the odds of hitting the jackpot is something like 1 to 49 million. Maybe greater. The odds are just too much stacked against the bettor. If you spend P100 pesos, you increase your chances  5 times (which one of my friends did), but your overall chance has not increased significantly.

I steadfastly refused to be dragged into parting my P20.

When the lotto results came out the next day, none of my friends became an instant multi-millionaire. So did the thousands who lined up at the lotto booths around the country. It also turned out that nobody hit the six winning number combination this time.

I still had my P20. In investing parlance, that is preservation of capital, a basic tenet of investing.

This is another recurrent theme in investing which we will visit time and again in future posts.

The small investor

In the preceding post, we have partially defined the typical small investor as a tsupitero, an essentially ill-educated investor with meager who tries his luck in the capital markets with the hope of hitting it big (in terms of returns) on the basis of inadequate information.

That's a mouthful. In reality, the small investor ranges from totally uninformed and relies solely on tips, rumors and recommendations from his broker if he is into stocks, or on her banker and amigas where to park her money which is not of immediate use, if she is completely ignorant of the stock market. She is the type who in her desire to increase her returns, who could easily fall prey to get-rich-quick or Ponzi schemes, more commonly known as pyramiding.

But a more technical classification would be in terms of the amount he could spare to "play" in the stock market.  For now, we will not concern ourselves with the ultimate objective of the investor on how he will use this money in the future, although the professional financial advisor would insist to know the investor's objectives and time frame.

What is the minimum decent amount one could spare in order to be considered a small investor?

Let us look at the possibilities where he could invest his money. For those merely looking at returns higher than a savings account, his friendly banker (usually the front office employee of a bank) would suggest putting some amount into the bank's UITF, or Unit  Investment Trust Fund which is essentially a pooled amount from the depositors and invested by the bank in higher yielding instruments such as Treasury bills and other money market placements. For the more sophisticated, the bank could offer mutual funds of which there are several types, depending on how the pooled money is allocated. These range from fixed income, balanced and equity funds, each of which has certain characteristics and degree of risk. Most of the time the average small investor does not want to be bothered where it is invested. All he wants to know is the potential return.

All of these are passive investments because you let somebody anonymous to invest the money for you at a cost which is a fraction of the amount invested. What's the minimum? Normally, 5 or 10 thousand pesos, although I have seen some UITF accepting as low as 1K.

At the racetrack, er, stock market, you can purchase stocks by a minimum board lot, which is the minimum number of shares you can buy for a given security (stock) of a listed company. The board lot can vary depending on the current price of the shares of the company. For stocks trading about  one peso per share (of which most are) or less, the board lot is 10,000; higher than that, say up to the double digits (price), the board lot progressively drops to 1,000 then 100. At the extreme high end, at the current trading of P2,900 a share, the board lot for PLDT (PSE:TEL) is mere 5 shares. At the lower end, the so-called penny stocks (centavo stocks?) which trade well below 10 centavos, sometimes below 0.01, the board lot goes up to 100,000.

So, for a minimum board lot, you are set back by 5K to 15 K, more or less. There is the so-called odd lot, or tingi-tingi but let us not be distracted by that complication.

By law, any company wishing to be listed at the stock exchange through an initial public offering or IPO, must set aside 10% of the offered shares for the small investors (that's us!). You can avail of a minimum of one board lot, or usually a maximum of 25K.

So, at the start, you need a broker or the person authorized to execute your trade (more on this later on how to choose one). So you need to enlist to one, and if you are confident of yourself and technical savvy, you opt for online trading. I have listed some online traders at our Philippine Stock Exchange (PSE) on the right. Either way, the minimum amount you need to ante to open an account is 25K. I don't know if you could find lower than that.

So, let's say you need a minimum of 25K to get the ball rolling  investing in the above instruments (UTIF, mutual funds and stocks).

But what's the maximum cut- off amount in order to be considered a small investor? Hard to say; and any limit is arbitrary.

You need some sort of diversification. It would be boring if you only bought one type of stock, and watching its price gyrates. You might also need to leave some amount of cash for opportunities that suddenly arises and park a portion of your hard-earned money to a "safer" mutual fund.  And since you have more than the minimum amount, you create a portfolio of 4 to 6 stocks that you are comfortable monitoring with.That would be around 100K.

For those who are luckier to have more play money, and for those who have been on the trade for sometime now, and who could actually draw regularly some additional income from his investments, the amount we are looking a t would be in the order of 1, or even 2 million pesos. Above that, most brokers would consider you a preferred client, and you would look down on the small investors stock program as a pittance. Then you are no longer considered a small investor.

Ok then. For our purposes let us limit the small investor as one who has between 25 K and 2 m to invest in the capital markets.

Does that include you?

Tsupitero rising

If you look at the web address of this blog, you would encounter the word "tsupitero" which you wouldn't find in any standard dictionary. It's well known however, in the stock traders' lingo. (As used here, the term has no gender limitation. Is there a word tsupitera?)

The term refers to you and me, the small investor, who attempts to earn something from the stock market by trading in and out a stock position (s) on the basis of rumors, tips and supposedly inside information. The label is hurled with derision, oftentimes from so-called analysts and traders who seem to delude themselves that they alone are the masters of the trade (pardon the pun). The term connotes ignorance, gullibility and associated words.

The closest to the term is the word "kibitzer" which in chess lingo refers to a woodpusher who watches a game between masters and grandmasters and offers analysis and recommends "better" moves on the sidelines.

In short, nag-memeron (my apologies to non-natives).

That situation was truer then before the digital age. Now that data and information (these are disparate things) can be easily be obtained through the internet, theoretically, the professional and the kibitzer are playing on a level field. With the stock exchange evolving into more professional market, more and more information are available to everybody at no cost which were hitherto found only within the domain of the old-boys' (and girls') club of traders and brokers.

Take quarterly reports. Before, if you want to know how a company performs on a quarterly basis you have to go to the stock exchange library to browse them, and you have to present an acceptable ID and an alibi why you are interested in such-and-such report. Now, with a click of the mouse, you have a pdf copy right into your hard disk. You don't even have to download them; just let them stay in the Cloud and pluck them when you need them.

Reforms done by government regulatory bodies allow us, tsupiteros to access previously privileged information on listed companies such as buying and selling of insiders (the Statement of Changes in Beneficial Ownership of Securities) or ownership (Public Ownership Report). These may not concern the average investor, but insights can be gained just by snooping at them.

The point is, with some basic financial knowledge, common sense and reasonable diligence, the tsupitero can be at par with the seasoned traders, brokers and analysts when it comes to investing and trading.

In some areas, he may even have an advantage. He has no ax to grind. Unlike the professional analyst who covers a security, he is at liberty to decide when to sell or buy a stock. The analyst on the other hand, would have a hard time recommending a SELL to a stock he is covering, especially if he has developed friendship with the company's investor relations guy, or if his boss, for unknown reasons, disapproves of his recommendation.

I wouldn't be offended if the term is bestowed upon me. I like it. I consider it a badge of independence and confidence of oneself when it comes to investing.

You should not, too. Now is the right time to take charge of oneself . Arise, tsupiteros.

Prepare your weapons and ammunition. Load up on provisions. We are going to wage war.

Under Construction

Prior to the digital age, the above sign is normally seen near construction areas.  Nowadays it is more likely seen on websites that are--well, under construction such as this one.

What is this site for?

As the name implies, it caters to anyone of us who wants whatever savings we have, after deducting daily expenses, to hopefully grow. 

There are numerous money sites out there--from personal finance, playing the stock market, placing in mutual funds, and plain business pages. 

Many are informative, while at the extreme end, are  the pure scams. Have you received an email from a Nigerian prince who wants to share his riches locked up in a Swiss account? Or have you been swindled by Aman Futures-like schemes which promise ridiculous returns at a short time?

There are those who pretend to help by giving advice the hapless individual who is considered a small investor, but mind you, they are after your money for investment fees and commissions. And if you reveal that the amount you intend to invest does not reach six figures, chances are, you will not  hear again from the fellow (or girl) at the other end of the phone line or who sent you that email.

You can google "small investor" and thousands of sites will leap out of your browser. Who wants another one? 

Well, this is not your usual small investor website. I merely want to share with you my experiences as micro investor, small triumphs, my follies and losses, my thinking process during investing, information that I have unearthed about certain companies, and so on. If someone avoids a disaster upon reading the posts here, then I am considered rewarded.

First caveat: I am primarily an energy consultant, not a professional investor. I am trained in hard sciences and have no formal training in accounting or money matters. I am more familiar with the analytical balance than the reading  a balance sheet. But somehow, you plod along.

Perhaps being a non-money guy (is there a term?) could give one an advantage since he is not tied to the industry biases, its misconceptions and pre-conceived notions about where and how to invest. Maybe, you are more knowledgeable in this area than me. But our experiences would be different.

In any case, I hope to contribute something to the so-called small investor, whom we shall somewhat define in the next posts.

Please bear with me while this site is being constructed.