Young and foolish by Gus Cosio

Today is traditionally the day of the “innocents” in the Philippines.  It is the counterpart of the West’s April Fool’s Day.  Well, it is no day to be a fool in the market.  An old English saying goes “A fool and his money are soon parted.”  A fool doesn’t invest his or her money wisely, that is why he loses it quickly.  Making impulse decisions and buying stocks on pure instinct is a fool-proof way of getting into portfolio trouble.  If one is to make a move today, make sure that your objective is clearly defined.  Do not buy a stock simply because you are afraid the market will leave you behind.  Nor should one panic because a share price is down. I was doing a bit of reading over the long weekend.  One idea that struck me from  a book entitled Rule Makers and Rule Breakers is that if a stock goes down 40%, you should  start to question your investment.  Of course, the author was writing about long-term investing.  In our market, I think the threshold ought to be much shallower.  I would consider a 20% deterioration from an average price in a prescribed period should be a cause for serious re-evaluation if not a loss cutting exercise.  There are various norms for capital preservation by traders and investors.  For traders, a shallower cut-loss level is more useful.  I know a few whose level is 15% from entry which is a good way of swallowing your mistake as a trader.  A trader normally buys on momentum, so a 15% move to the opposite direction is a definite sign that momentum has waned. For the investor who buys on value, I think 15% from entry is too soon to cut.  For the value investor, I usually recommend not to put all the cash into a stock at one single ticket or price.  I would put in an initial 30% of the allocation  and watch how the investment goes.  That way if the stock goes down, there is cash left to average down.  If the price moves up, buying again would put your average cost still below the market.  It is at the second entry point that I would evaluate my 20% or 30% cut loss possibility. Anyway, today’s trading will likely be overshadowed by the interest rate story from China who raised rates during the holidays.  This was no Christmas present to the Shanghai Stock Exchange, but it did not seem to be too negative for the major developed markets.  Nevertheless. if the market dips today, it should be a good opportunity to accumulate.  Among the stocks that I would buy on dips would be the major banks – MBT and BPI – because I think consumer spending in the Philippines will further gather momentum in 2011.  Having said that, I would push the money envelope into SM and SMPH as well, not to mention URC and possibly the long shot – RFM. Those are just a few ideas today.  I must mention also that mining remains to be a good theme since in the major markets, materials have picked up steam.  My shortlist for mining are NIKL, ORE, PX and AT.  While I see a bit of activity in LC/LCB, I am not brave enough to move in that direction. Happy hunting.