Saturday, July 20, 2013

A Starter for Financial Analysis

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Have you ever wondered how an analyst comes up with a fair value of a stock? I don’t know either. That’s why I started to study Financial Statement analysis. Oh yes, I am an accountant by profession and I do analysis every single day of my life. However, the analysis I am doing is quite different from the analysis being performed in the stock market. Part of my routine each day is to analyze the accounts of the companies I am handling. The analysis is confine within the boundaries of the companies I am handling and rarely do I consider the macro perspective of a company. Thus it is imperative for me to sharpen my skills, broaden my knowledge and take the necessary actions to become successful in stock market investing.

Financial analysis is the process of examining a company’s performance in the context of its industry and economic environment in order to arrive at a decision or recommendation.

An investor who buys stocks in the stock market is called an equity investor. In the same way, if an investor buys a stock in a private company (not listed in the stock market), he is still called an equity investor. The common denominator in this type of investors is that they are buying stocks of a company. Before buying a stock, an investor engages the services of a financial analyst to determine the price he shall pay for the shares. The analyst shall look at the capability of the company to pay dividends and grow its operations profitably.

A debt investor on the other hand is someone who lent his money to a corporation with the intention of getting back the principal plus interest. He is concerned on the capability of the company to repay its principal and plus the interest.

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Whether you are a debt investor or an equity investor, you should make your due diligence before coming up with a decision. Part of the due diligence you are going to make is evaluating the financial statements of the company. The financial statements are composed of the following: Balance Sheet, Income Statement, Cashflow Statement, Statement of Changes in Equity and the notes to the financial statements. Every year, a company must submit the audited financial statements to the Philippine Stock Exchange (PSE). In the Philippines, a publicly listed company must submit the Audited Annual Financial Statements and Quarterly Financial Reports. In addition, a publicly listed company must submit Corporate Governance Report, Quarterly Public Ownership Report, Quarterly Top 100 Stockholders, Statement of Changes in Beneficial Ownership of Securities, Changes in Shareholdings of Director and other information required by PSE. These financial reports and other information can be found in PSE (www.pse.com.ph) or company’s website. This information will form as the foundation of your research and analysis of a company.

Outside information are as necessary as the basic data provided by the PSE in order to arrive at a recommendation or decision.  These include the economy, industry, and comparable peer companies. For Philippine stocks, it is very common to compare a company against its regional peers (Asia).  Economic statistics can be gathered from the websites of various government agencies while industry date can be taken from industry publications.


Thursday, July 18, 2013

A Correction or a Bear Market?

According to Investopedia, bear market is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20\% or more in multiple broad market indexes, over at least a two-month period, is considered an entry into a bear market. 

 There is no doubt that the prices are falling although recently the PSEi has climbed back to 6,500.  I read in one article that said that the market is bearish. On the other hand my stockbrokers call the current downtrend a correction.

 Based on the prevailing sentiment that I have read through various articles, the common theme is that the current downtrend is just a correction but one must stay on the sidelines until the tide is over. I believe there is no widespread pessimism among the investors right now but rather opportunities to start accumulating for the long term. 

Here are some of the statements made after the biggest sell-off occurred last Jun 13, 2013:

 BSP Governor Amando Tetangco Jr. expected the pullout of foreign funds to be short-lived, saying the country’s macroeconomic fundamentals remained strong and attractive to investors. 

“What we saw was just a healthy correction in the equities market. People were thinking that the price-earnings ratio was becoming high, although there are fundamental bases supporting the expensive equities given the strength of the Philippine economy,” BSP Deputy Governor Diwa Guinigundo.

“I know it looks really bad. I’ve never seen it that bad (in terms of single-day decline in index points), but in terms of percentage, we’ve seen worse. Neither should we be entirely concerned because there’s no change in the country’s macroeconomic fundamentals, with a 7.8-percent growth rate still the best in the region and we have record-high GIR (gross international reserves) level,” Jose Mari Lacson, head of research at the local stock brokerage Campos Lanuza & Co. 

 "The market is not crashing. It is normalizing," said Jose Vistan of AB Capital Securities Inc.

 "Nothing has changed fundamentally. We know where investors are attributing the selloff: concerns that the Fed will scale back its bond buying. It's externally driven in that respect so what we're seeing today is an opportunity to buy," Before we end the bull cycle, we'll see higher highs.  It's still difficult to say if we'll return this year to record levels, but we think the bull cycle is still intact. said April Lee-Tan, head of research at COL Financial Group Inc.
 
See below chart. From the peak of 7,403.65 to the recent low of 5,678.73, the PSEi (Philippine Stock Exchange Index) lost 23%. Technically, we already hit the bear market because the PSEi breached the 20% downturn.

 However the 20% downturn must at least stay for two months in order to conclude that we are in the bear market.  The low of 5,678.73 occurred last June 25, 2013 and it must stay down until Aug 24, 2013.

 Fortunately, the PSEi is already back in the 6,500 level, above the 20% level. From hereon, analysts expect the market to consolidate in the short term before making its next big move.   That big move can either be up or down. According to Prof. Benjamin Diokno the worst is yet to come. “It would be a mistake to assume that the equity markets and currency markets will be sailing smoothly from hereon. I see the present situation as more of a lull before the storm. I expect more volatility in the next few months.

When the Fed starts to tighten, and the tightening will surely come, the tapering process will be sustained for a few months. When that happens, the risk of major corrections will increase.”

 Perhaps, the worst is yet to come. The recent sell-off maybe a correction only but keep in mind that a correction can be a precursor to bear market or a recession. 

Amid the bearish tone of some market pundits or cautious optimism of the others, in stock market nothing is set in stone. The PSEi may break the previous high of 7,403.65 registered last May 15 if the foreign investors will come back again in the market or it may go lower than the 5,678.73 registered last Jun 25. The market will dictate what course the PSEi will do in the next few months and a big part of this market are the foreign investors.
 

I am of the opinion that the current market action is consolidating and is waiting for a lead to make its next move. I’m staying with some cash just in case the market finds a way to complete its five year cycle. Based on the graph posted below, we are in the return to normal phase. We are still a long way from the bottom of the market. 

Wednesday, July 10, 2013

Sources of Knowledge

Have you ever read the book Think and Grow Rich by Napoleon Hill? If you did, then I am sure you have been astounded by the classic insights presented by the author. It represents the distilled wisdom of distinguished men of great wealth and achievement of America. I highly recommend that you buy a copy of it because it will help you immensely in your pursuit of success.

According to Napoleon Hill, there are three sources of knowledge, the Infinite Intelligence, the Accumulated Experience, the Experiment and Research.

Infinite Intelligence

From the word itself Infinite means endless, unlimited, vast, immeasurable and eternal. Intelligence means acumen, aptitude, wisdom, knowledge, and insights. If you combine the two, we have an endless source of knowledge (walang hanggang kaalaman o katalinuhan). Is it really possible to have all the answers in man’s quests for “hidden” knowledge which he “needs” to further man’s thirst for progress? Most of man’s inventions sprang not from the five senses that a man has but because of the Infinite Intelligence. Man’s knowledge is limited to the five senses he is using and yet most of America’s wealthiest persons and greatest inventors used the Infinite Intelligence in order to create their own fortunes and mark in the history of mankind.

The Five Senses

The five senses are hearing, sight, touch, smell, and taste. From these senses we are able to process information about our surroundings and the objects around us. We can perceive what an event, thing or situation is all about.

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Without the sense of hearing, a deaf person will never be able to decipher the sounds of the chirping birds, the honking of horns in the middle of the traffic, the flapping of the leaves and most importantly the sounds of I love you from his loved ones. He needs to use his sight sense in order to distinguish what is happening in his surroundings. In our advance society, we already have experts in sign language who teaches our brothers/sisters on how to communicate with others. There are various available devices in the market created for deaf people.1 In fact, an inventor already created a device that allows deaf people to “feel” the music by using their finger tips.2 Obviously, without the aid of these devices and of other persons, knowledge coming from sounds is limited and restricted to deaf people.

In the same way, without the sense of sight, how does a blind person going to distinguish the different colors of the flowers? How is he going to differentiate the buildings in the city? How is he going to identify the cars around the streets, and the jeepneys that populate the roads? Scientists said the some blind people can see through their ears. 3 In fact, they can even “see” visual images when they dream. 4 However, a blind person from birth never saw anything. He cannot see black because he did not know what black is. He see abyss.

Infinite Intelligence is abstract and intangible. I had a difficulty understanding its concepts by just reading a couple of chapters. I had to reread the entire book and I promised myself that I will never stop until I fully understand the very detailed nature of this phrase.  
There are factors or stimulants to which our minds can reach the state of creative imagination. These are:

a.    Desire for sex expression
b.    Love
c.    Burning desire for fame, power, financial gain, money.
d.    Music
e.    Friendship
f.     A Mastermind alliance between two or more people in pursuit of a common objective
g.    Mutual suffering
h.    Autosuggestion
i.      Fear
j.      Narcotics/Alcohol

Based on the above stimulants, a man can find himself in an above average plane of thought where the five senses do seem of no use.

When you have that burning desire to get rich and get out of poverty, you will burn all the bridges in order to achieve your goal.

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There was this great warrior who succeeded by removing all options to retreat. It’s a win or die situation. He ordered his soldiers to load all the equipments and armaments that they will use in battling their enemy into their boats. Once they reached the shore of their enemy, he ordered his soldiers to unload all of their equipments and armors. After the soldiers have finished unloading their stuffs from their boats, he instructed the soldiers to burn their boats. He then shouted to them “You see the boats going up in smoke. We cannot leave these shores alive unless we win! We have no choice, we win or we perish!” Their enemy is powerful and vastly outnumbered his soldiers. They won.

It’s the same thing in life, you need to burn your boats and will your mind that it is either you win or you remain broke for the rest of your life. There is no retreat, no comfort zone, and no looking back to the naysayers, to the negative people, to the unhelpful “culture”, and to your nagging past of failures. It is a difficult task and yet when you willed yourself into the realm of prosperity, nobody can stop you. Yes, nobody can stop you.

Obviously, Infinite Intelligence as a source of knowledge is too general to apply its principles in stock market investing. However, it is a very useful tool in discerning on what path you should take as far as getting rich is concern. Maybe the road to success for you is not even stock market but rather other forms of investment vehicles like real estate or business or anything that the Infinite Intelligence may share with you. One thing is for sure though, if you use Infinite Intelligence as a source of knowledge, it can lead to drastic changes in your financial life so long as you apply its known principles.

Accumulated Experience

If you are wise, you will learn from the mistakes of others. You will apply what the learned has accumulated in their own lifetimes, by their own experiences. Indeed, more gold has been mined from the thoughts of men than has ever been taken from the earth.

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Remember the old cliché, “Experience is the best teacher”? Experience has taught us to respond better if a familiar situation appears before us. For example, you’ve always been asked to speak or give some comments on special occasions. Being a shy guy/gal, you always stutter when you speak. And then as you go along, your mind becomes blank. This experience will help you become prepared the next time you are asked again to speak. You visualize yourself delivering an excellent speech in front of an appreciative and animated crowd. You began to prepare and avoid the same mistakes again. You turn an experience into a lesson and you become a better speaker.

Most of the struggles, problems, difficulties and worries that you have encountered are already experienced by other people. You are not the only person who has that kind of problem. It was experienced by others already. These experiences have been mostly recorded in the books. Read them, read the solution and act on them. Now, sometimes, the problem has been encountered by your parents or your neighbors or your friends or your classmates. You can ask them, their response and the results that have followed so that you can make at least a perspective on what you are going to do to your situation. 

Research and Experiment

Sometimes, you will encounter a situation you are not familiar with. The circumstance dictates that you must respond into it by doing an experiment or research. In science, when they want to test if a certain mix of chemicals is useful in curing a disease, scientists do research and experiment. Since they do not know yet the formula for curing a disease, they keep on experimenting until the right mix of chemicals produce a positive result in curing a disease.

In life, it also the same. You must research and experiment when knowledge is not available through accumulated experience. You must use your creative imagination in certain situations.