Investment Psychology

Based on my experience (and readings on investors I admire), an investor requires the following:

  1. Sensible investment process that fits his/her personality (whether it is under fundamental or technical analysis).
  2. Portfolio allocation skill
  3. Investment Psychology awareness

Item number 3 is often neglected.

Benjamin Graham defines an intelligent investor as “patient, disciplined, and eager to learn.” An intelligent investor is a trait more that of the character rather than in terms of IQ.

We are lucky that we do not need to “fall” so hard to realize how important psychology is in investing. All we need is to learn from the psychological mistakes of other people.

Follow the story of Bob:

Bob’s fall:

Bob’s redemption:


In my opinion, playing any single player sport (in my case tennis) is the fastest way in improving psychological awareness since you will artificially subject yourself to the same psychological and emotional condition that is present in investing. Single player sports require you to be composed psychologically and handle your emotions well, especially if your intention is to win. Learning not to be distracted by the crowd, the noise, cheers, who were watching and what your opponents gestures are already psychologically and emotionally challenging.

I encourage those who want to harness their emotions and attain psychological composure to watch Roger Federer play. Roger Federer is called perfection in tennis for many reasons but for me it is because of how he maintains his psychological composure and handles his emotions during the game. Djokovic, the current number one, screams and smashes his racket every time he misses a crucial shot but that is very understandable because that is the norm. All top players do that. What is not normal is Federer’s.

Amazing, My brother, Stock Thoughts: AT, VMC


Do you have five minutes to spare? Watch Chris Camillo’s interview in Bloomberg, the guy who turned $20k to $2 million.

Does his investment technique match your personality? Take only what is useful for your investment.


My brother

My brother is a mechanical engineer who now is already an MBA (he graduated last October). How can he take MBA despite his time demanding day job?!

Oh yeah right. I should start by not complaining about the constraints and be composed mentally and approach the problem at hand systematically. *inhale deep* *exhale slowly*



Surprising disclosure from AT:

Or is it really surprising?

89.92 million lbs. Cu and 12,333 troy oz. of gold will generate an EPS of P1.25~P1.30 for AT using the following assumptions:

Cu – $3.65

Gold – $1,600/ troy oz.

Profit margin – 20%

Forex rate – P40/$


Just meeting my projections here:

Meeting my projected EPS yet valued way above my projected valuation. Definitely overvalued.

My opinion only.

Adjusting my hypothetical conservative portfolio.



The company attracted me due to its deleveraging activities and diversification of revenue source through its entry to the power industry. I discovered VMC’s plan of entry in the power industry while doing my due diligence in GREEN last December but I only initiated position after Premier Network bought 20%+ interest of VMC from a huge shareholder that has been selling down VMC shares since the lifting of trading suspension.

More here:

The Basics a Newbie Should Know

What are STOCKS?

Stocks are shares of ownership in a company. When you buy stocks of a publicly listed company, you become a stockholder or shareholder of a company. In other words, you become a part-owner of that company.

As a part-owner, you participate in the company’s growth and future profits. Conversely, you may also lose if the company suffers a loss or performs below market expectations.

The number of stocks you acquire will determine how big or small your ownership is. As you acquire more stocks, your ownership stake in the company becomes greater.

How Do You Make Your Money Grow in Stocks?

There are two ways to make your money grow in the stock market:

1. Through an increase in stock price or capital appreciation

Capital appreciation is an increase in the market price of your stock.  It is the difference between the amount you paid when buying shares and the current market price of the stock. However, if the company does not perform as expected, the stock price may go down below your purchase price.

You cannot really earn from stock price appreciation unless you sell your shares. Otherwise it is only a book value gain, which means it is not yet converted to cash, and current price may change depending on market forces.

For example, if you buy a share of stock at Php100.00, and it rises to Php110.00, your capital appreciation or gain is Php10.00.  Keep in mind that you only realize your gain of Php10.00 minus applicable charges, if you sell at Php110.00.  If you choose to hold it and it further increases to Php150.00, your capital gain would be Php50.00. However, if your stock decreases to Php100.00, and you decide to sell it at that price, then your capital gain is zero.

2. Through dividends declared by the company

Dividends are paid out to shareholders, representing earnings of the company that are not going to be reinvested in their business.  There are two types of dividends: cash and stock dividends.

A cash dividend represents earnings declared by the company for every share of stock. So, if the company declares a dividend of 25 centavos per share, a stockholder with 10,000 shares will receive a cash dividend of (Php2,500.00 minus tax of 10% for individual Filipino investors)(Php0.25 x 10,000) in cash.

Stock dividends are additional shares given to shareholders at no cost. If the company declares a 25 percent stock dividend, a stockholder with 10,000 shares will be entitled to an additional 2,500 shares of stock.  These shares can be sold anytime after the shares have been issued.

The Trading Schedule

In the Philippines, the only operating stock exchange is the PSE.

The PSE has two (2) trading floors in Ayala Center, Makati City and Ortigas Center, Pasig City—where trading participants trade daily from 9:30 a.m. to 1:00 p.m. except Saturdays, Sundays, legal holidays and days when the Central Bank Clearing Office is closed.

Effective January 02, 2012, trading hours are from 9:30 a.m. to 3:30 p.m., the morning session is from 9:30 a.m. to noon, while the afternoon session starts at 1:30 p.m. until 3:30 p.m. Note that you can start placing your orders 30 minutes before the market opens or at 9:00 a.m.

The PSE has extended the trading hours beginning this October, in a bid to attract more investors and prepare for cross-border trading with neighboring Southeast Asian nations.

Investors may post a buy or sell order even after the trading period. However, this order will only be entered and matched through the PSE’s new trading system known as the PSEtrade, the next trading day.

More on:

When to Sell a Stock

I came across a good article by Geoff Gannon in You can also visit his wonderful blog:

Geoff Gannon is a value investor whose influence, I presume, is more on Warren Buffett.


“Hi Gannon,

1) For a layman, when should one sell a stock?

For when to buy stocks there are so many formulas and screens: AAII screens, CANSLIM, Stockopedia, etc.

When to sell a stock is complicated.

A) Benjamin Graham said when the stock appreciates 50%, or two years

B) Magic Formula says rebalance with highest earning yield and highest ROI at the end of year.

C) Warren Buffett said never.

If I don’t watch my stocks for a year, if the fundamentals deteriorate in this year I might lose (fundamentals change every quarter). I asked this question to Validea and AAII. They said rebalance every month.

For the Benjamin Graham screen, rebalancing every month is not following what he said. For the Warren Buffett screen, rebalancing every month is not following what he said.

What is the simplest time and condition for a non-techie to sell a stock?”

Sell when your original idea has played out. Or when your original idea has been undercut. Never sell a live idea unless you need the cash to buy a better idea.

Never sell a live idea just because it’s been a long pregnancy. If you bought a stock a year ago because you had a good, valid idea and that idea is as good and valid today – but the stock price is no higher – that doesn’t matter.

The gods of finance do not reward patience. Nor do they punish it. They are indifferent. The world doesn’t care. It doesn’t care if you are getting bored. The lack of action that’s making you itch to sell is inside of you. The guy who buys your shares from you isn’t going to feel that itch. For him, it’s a new stock. The mental process reboots.

Don’t let that happen. Don’t sell a real thing from the outside world – a stock that might have a lot of value – just to scratch some mental itch. When deciding to sell a stock – it shouldn’t matter whether you bought it a day ago or a year ago.

So don’t relive your experience of owning the stock. Relive your experience of buying the stock. When you think about selling a stock – start by restating your reason for buying the stock. Then forget the time that has passed. That time is gone. All that matters is your past idea and the present reality.

The key to selling is knowing why you bought. If you don’t know why you bought – you can’t know when to sell. So, if you want a formula for selling – you need a formula for buying. If you trust the formula for buying – like Validea or AAII – then trust them for selling. I don’t trust them. I do my own buying and selling for my own reasons. And for the rest of this article, I’m going to talk to people who do that too.

I’m going to use something a blogger wrote as an example. Why? Because bloggers do the work all investors do. They just do it on paper. We can see their thoughts. And we can revisit their reasons for buying something.

In October, the blogger who writes Student of Value talked about National Western Life Insurance (NWLI).

At the time he wrote the post, he did not own the stock. It was “on his radar.” But since he was thinking about buying the stock – his post works just as well as what someone who did buy that stock might have been thinking.

Here’s what he said about the company’s value:

“National Western is selling for 40% (of) book. Life insurers at the start of the year were selling for 0.7x book on average, according to Damodaran’s data. Based on my analysis so far, I would think National Western is better than average. On top of this, the average is currently depressed. Assuming only the first part gets adjusted and the company trades up to par with the average life insurer equals a 75% price increase.”

We can boil down his argument into two ideas: 1) National Western is an above average life insurer. 2) National Western trades for a lower price-to-book ratio than an average life insurer.

This is the gap he wants to close. This is his idea. And it’s a live idea as long as nothing happens to ruin his reasoning. If he realizes NWLI is not an above average life insurer – then his idea may be ruined.

If the average life insurer falls in price while NWLI rises – that may kill his idea. But that’s the point. He wants the idea to die by seeing that gap close. Once that happens, the idea will be dead. And the stock should be sold. Hopefully, at a profit.

Something like a 40% drop in all stock prices – including the price-to-book ratio of the average life insurer – could kill his idea without a profit. That would close the gap without NWLI going up in price.

When he wrote this article, NWLI was trading for 40% of book value. So, he saw 75% upside. Or we could flip that and say he saw a 43% margin of safety. That’s because the multiple paid for the average life insurer could fall from 70% of book value to 40% of book value (a 43% multiple contraction) and NWLI would still be cheap. It would still be a better than average life insurer trading for the price of an average life insurer.

So, when should this blogger sell NWLI? When it rises 75% to 0.7 times book value. Not exactly. He didn’t say 0.7 times book value was some magic number. It wasn’t a target set in stone. It was just the price an average life insurer was trading for. So, it’s not right to say he should sell at 70% of book value. Instead, he should think about selling when NWLI – which he thinks is an above average life insurer – trades for the same price-to-book ratio as an average life insurer.

Maybe NWLI will rise 75% and other insurers will rise 30%. Maybe the average price-to-book ratio for a life insurer will be 0.9 times book value at some point. At that point, maybe he should keep NWLI even if it trades at 0.7 times book value.


Because we have to keep his reason for buying in mind. His reason for buying was that NWLI is an above average life insurer. If he is right about that, then NWLI should not trade for less than the average life insurer does.

So, when should he sell NWLI?

He should sell NWLI when his idea plays out. His idea was that he was buying an above average life insurer for less than the market was paying for an average life insurer. As long as that’s a live idea – he can stay in the stock. Once that idea is dead – he should think about selling.

But that’s just the upside idea. Student of Value is a good blog. And like any good blog it doesn’t just look at the upside. It looks at the downside.

What is the risk in NWLI? What’s the downside idea?

Here’s what he said about that:

I came across news from late 2011 of Brazilian insurance regulator attempting to impose a $6 billion fine on the company. National Western has been laconic in its disclosure… From what I read, the claim is most likely just flexing muscles on behalf of the regulator. The amount seems highly incredible at 5x the company’s capital. If the threat were credible, it certainly would have affected both the stock price and A.M. Best’s financial strength rating of A (Excellent) with a stable outlook, reiterated on May 31, 2012. Yet, Brazil is National Western’s largest foreign market – about the annual size (by premiums and contract revenues) of the next 3 largest markets… Even if there is no big effect on the company, the fact that management hasn’t been more open about a seemingly big issue in its largest foreign market undermines the confidence I had in it.”

So here we have another reason why he might sell. He might sell because the risk played out the wrong way. He might sell because something changed that made him believe the Brazilian threat was real. Or because he lost trust in the CEO because of how he handled this problem.

The key to selling is to always go back to your original idea. Why did you buy the stock? What upside did you see? What downside did you see? Has the upside played out? Has the downside played out?

No. Then has the upside changed? Has the downside changed?

No. Then you should stick with the stock.

If the price-to-book ratio of the average life insurer fell from 0.7 to 0.4 while NWLI’s stock price stayed the same – maybe he should sell. It might feel like a defeat. But so what? His idea was an above-average life insurer selling for less than the average life insurer. His idea was not that all life insurers are undervalued. It was that this life insurer is undervalued compared to the others.

Before you buy a stock, do what Warren Buffett suggests: Sit down with a pen and paper and say, “I am buying shares of this company because…” Then put that idea in a drawer. And whenever you reconsider the stock – read that idea back to yourself. Is it still a live idea? Have you given it time to play out?

If you’ve squeezed all the life out of an idea – either because price rose or value dropped – then sell it. But if there’s still juice left in the idea – just hang on. Be patient. Never sell a stock for lack of action.

There is one exception. You can always sell one stock to buy another. That’s different. When that happens, you just compare the stocks. And you go with the one you are most comfortable with.

Now that we know the key to selling a stock is revisiting why you bought it – let’s think again about what Buffett and Ben Graham said about selling stocks.

Ben Graham said you should sell a stock when it rose 50%. It’s easy to see why. Graham said you should buy a stock at two-thirds of its net current asset value. If you buy a stock at two-thirds of NCAV and it rises 50% – you now have a stock that is trading around its net current asset value. That’s still cheap. And Graham knew it. But once you got beyond net current asset value – you would need to know more about the business to know if the stock was cheap. That wasn’t Graham’s style. So he said you should sell after a 50% rise.

Buffett said the best time to sell a stock is never. Or, at least he said something – “our favorite holding period is forever” – that means roughly the same thing. Buffett focuses on quality. He wants to pick as close to the perfect business as possible. Once you own a chunk of a perfect business – you don’t want to sell it. So he doesn’t. But if he picked wrong – he should sell.

These guys had different specific ideas about selling. But their general principle was the same. Don’t try to guess about things you don’t know. Keep a stock as long as it stays in your comfort zone. Once it ventures into the unknown – outside of your area of focus – let it go.

Once your original idea plays out – sell the stock.

Buffett’s original idea in something like Coca-Cola (KO) is that it’s a great business that will stay a great business. As long as it stays a great business – he sticks with the stock.

Ben Graham’s upside idea for a net-net is that it’s cheap. It’s cheap no matter how bad the business is. As long as the net-net is safe it is cheap. It doesn’t need any growth prospects. He didn’t worry about whether it was worth 5 or 10 or 15 or 20 times earnings. He worried about whether it was worth more alive than dead. Once the stock rose above its net current asset value – he couldn’t be completely sure it was still trading for less than it was worth. So he would sell the stock.

You mentioned Graham saying you should sell stocks after two years. I’ve looked at Graham-Newman’s holdings by year – and haven’t seen any evidence he actually did this. Fear of getting stuck in a net-net was often the biggest complaint Graham got. I think this is something he suggested amateur investors could do. It’s not something he did in his own fund.

Here’s my advice. If you don’t know when to sell a stock – the problem is that you don’t know why you bought it. You don’t really know what the idea was you had in mind. And you don’t know if that’s still a live idea. So you can’t tell the difference between clinging to a dead idea and just waiting.

Always err on the side of waiting too long. Few investors wait too long. A lot of folks I know sell too soon. For example, I know plenty of people who pick good net-nets and then don’t stick with them. They do good work. And they don’t make money from it.

Selling can’t fix a bad idea. But it can kill a good idea.

The one instance where I am always in favor of selling this second is when you know you misjudged the risk of catastrophic loss. If you totally misjudged a company’s risk of default, fraud, etc., go ahead and sell the stock right now.

Otherwise, revisit your original idea. And then decide whether it’s played out fully or not. There’s no rule that says you should hold a stock for seven weeks, seven months, or seven years. It all depends on why you bought it.

If you bought the stock to flip it at a higher P/E – and it’s seven weeks later and the stock is up 25% – I can’t blame you for selling so soon. But if you bought the stock because you loved the competitive position and the constant buybacks and the rising dividend – and you’re selling it within a year – I don’t think you’ve let your original idea play out.

So unless you buy stocks using nothing but a formula, you won’t be able to sell stocks using nothing but a formula. You’ll need to revisit your original idea.

Everything A Beginner Stock Investor Needs To Know!

There is so much you need to learn in stock investing and the first question that would come to your mind would probably be: WHERE DO I BEGIN?

Luckily, there are plenty of helpful website available in the net.

For beginners, please visit this website:
And shoot all your questions in this blog or in “Newbie Corner by michelli.”

Happy investing!:)

Stock Selection Dividend Approach

In selecting stocks with dividend as a consideration, take note of the following:

1.   Dividend Paying
2.   Company that is interesting to you
3.   Good payout ratio
4.   Good ROE
5.   Manageable or no debt
6.   Consistent revenue and earnings growth
7.   Business model that you can understand

Dividend Paying
Self explanatory

Company that is interesting to you

A company that is interesting to you is a company that you enjoy following and talking about with others. A company that is interesting to you will motivate you to learn more about that company.

Good payout ratio

The formula for the payout ratio is Dividends/Earnings. Basically, a lower payout ratio is better. Low payout ratios hints that a company may still have the capacity to increase their dividends in the future while plowing back enough money to the company. A good payout ratio is not more than 60%.

Good ROE

ROE or Return on Equity’s formula is profit/equity. A good ROE can roughly be defined as anything more than 10%. A good ROE is important because it indicates that a company can generate profit without much capital outlay. It also indicates that the company has strong market dominance and it should mean that the company is resilient.

Manageable or no debt

This can be determined through the use of debt to equity ratio. A debt to equity ratio of less than 200% is most desirable.

Consistent revenue and earnings growth

Generally, a higher growth rate in earnings and revenue is better than lower growth rate since the value of your shares will rise faster.

Business model that you can understand

Start with a company that you can understand how they make money so that you’ll know when they will make good and when they will do poorly.

Let’s apply what we had learned in real life! 🙂

(Selection is made on May 1, 2012 prices)

STEP 1: Dividend paying?

All of the companies that compose the PSEi are dividend paying except for BEL and FGEN so we are going to eliminate it from the list leaving us only 28.
1.   AC
2.   AEV
3.   AGI
4.   ALI
5.   AP
6.   BDO
7.   BPI
8.   CEB
9.   DMC
10.   EDC
11.   GLO
12.   ICT
13.   JFC
14.   JGS
15.   MBT
16.   MEG
17.   MER
18.   MPI
19.   MWC
20.   PX
21.   RLC
22.   SCC
23.   SM
24.   SMC
25.   SMDC
26.   SMPH
27.   TEL
28.   URC

STEP 2: Interesting to me?
Here, personal preferences vary but let’s just assume that I find all the companies interesting.

STEP 3: Good payout ratio?

Using this formula: Payout ratio = 2011 dividend / 2010 EPS

We are going to screen the stocks with payout ratio not beyond 60%.

STEP 4: Good ROE?

As stated in the previous post, we assumed that a good ROE is above 10%. We used 2010 ROE since some companies had not yet released their
2011 financial statements.

Now we have a narrowed list.

STEP 4: Manageable or no debt?

We are looking for a company that has a debt not more that 200%.

All the companies passed the screen.

STEP 5: Consistent revenue and earnings growth?

It appears that our selection is trimmed down to only two:

STEP 6: Business model that you can understand.
Another subjective criterion in this approach is determining whether the business model is simple to understand or not.

Describing the company in one simple sentence is a good exercise to determine whether it is understandable or not to you.

This is what’s going on in my mind if DMC and JFC are mentioned:


They make money by selling good chicken joy and jollyhotdog and they also have Mang Inasal as a subsidiary which I like to go eat with my family and friends.

After grueling screening, we ended up selecting JFC.

JFC @ 112.10

Gold Fundamentals

Gold is mainly used for jewellery, industrial application like electronics, dental purposes, and as investments in the form of gold bars and coins.

Source: World Gold Council,

To derive more insights, take a look at the supply side of gold.

Source: World Gold Council,

Notice how the Central Banks shifted from the supply side in earlier years to the demand side starting 2010? For a clearer view, kindly see the chart below:

Source: World Gold Council,

This change in trend is the reason why gold soared in 2011.

It is important to understand that Gold is not just a commodity but it is money. To compare money and gold:

For centuries, the gold standard existed. There are three types of gold standard:[1]
1.   Gold specie standard – it is where actual gold coins circulate in the monetary system.
2.   Gold exchange standard – it is where a metal of lesser value circulate in the monetary system but authorities guarantee a fixed exchange rate with another country that is on the gold standard. In effect, the country in gold exchange standard can maintain its currency in parity with gold without maintaining large gold reserve.
3.   Gold bullion standard – gold coins do not circulate but authorities maintain a fixed exchange rate between the currency and gold.

On August 15, 1971, the gold standard officially ended after President Nixon of the United Stated ended the direct convertibility of the dollar to gold.[2]

At present, no country uses gold standard as the basis of its monetary system but instead some hold substantial gold in percentage of their total reserves. Statistics of a few countries that might interest you are as follows: [3]

The cash that is in your pocket right now is called currency. Currency is a unit of account, a medium of exchange but never a store of value. Currency has value because the government declares that it has and hence the term “fiat money” (Fiat is a Latin word for “let it be done”). Any central bank can just print more currency and cause inflation thus in effect reduces the value of the currency.

Gold is recognized around the world as a protection against inflation and it is for a good reason. Currencies are steadily depreciating against the value of gold.


Central Banks recognized this reality and started to diversify their dollar exposure to the real money which is gold.  The Bank of Korea acquired in September this year 16 metric tons of gold, increasing their reserves to 70.4 tons.[4] Kazakhstan expressed their plans to increase the gold it holds from the current 15% to 20% of their total reserves. Kazakhstan Central Bank will be buying 24.5 metric tons of gold this year.[5]

The Central Banks have become the biggest supporter of the price of gold. Institutional investors are also being optimistic in the price outlook of gold as Goldman Sachs Group Inc.[6], Bank of America Merril Lynch[7], and Barclays Capital[8] anticipates another round of inflation from the US.

1.   Gold Standard;
2.   Nixon Shock;
3.   Latest World Official Gold Reserve;
4.   “Korea Raises Reserve Third Time Since June Last Year
5.   ”Kazakhstan Plans to Increase Gold’s Share to 20% Of Reserves
6.   “Goldman Stands By Gold-Rally Forecast Even as Price Drops
7.   “Blanch Says Gold May Reach $2,000 After QE3”
8.   “BarCap banks on gold as prices hit 2-month lows