What is your investment style?

Before you start investing, it is best to first gauge the investment style befitting you and your financial goals. That way, you can approach your investing in a more disciplined and organized manner.

Your investment style will typically be determined by the following factors:

  • Your temperament (i.e. your patience, the amount of effort you are willing to put in, the amount of risk you are willing to stomach)
  • Your profile (i.e. your age, income, wealth)
  • Your financial objectives

Discerning and articulating these very personal factors is a fantastic first step for any investor. What answers you reach from your discernment will guide you in finding the best investment style for you.

We broke down the most commonly practicable ones here for your consideration.

Active vs. Passive

An active investor picks his own stocks. A passive investor typically buys shares in an index fund such as BPI’s Philippine Stock Index Fund or the ATRAM Philippine Equity Smart Index Fund, effectively outsourcing the whole stock selection process. The active investor believes in his own ability to pick stocks to outperform the market. The passive investor believes that the most efficient way of producing long-term returns is by investing in the market as a whole.

The active investor bypasses the investment management fees charged by investment funds and stands the chance of finding great investment opportunities ignored by the market. The passive investor bypasses all the heavy research conducted by active investors which is not necessarily always fruitful.

Growth vs. Value

In terms of stocks, a value investor looks for companies selling at below their intrinsic value, preferably with a significant margin-of-safety. A growth investor looks for companies offering the possibility of above average growth, regardless of price in relation to intrinsic value.

Some famous value investors include Warren Buffett, Benjamin Graham, and to an extent Peter Lynch (although his style often also verges on the growth investing side). Some famous growth investors include Thomas Rowe Price, Jr. and Philip Fisher.

Investors could also consider investing in companies promising “growth at a reasonable price”. This approach blends elements of value investing and growth investing. In effect, the investor hopes to find stocks that may deliver above average growth but are not too expensive in relation to their intrinsic value.

How do I use a stock screen?

After Hours is an editorial column more loosely covering our opinions on a variety of topics in finance.

The ugly truth is that it is impossible to go through the financial statements of all available companies in the world’s stock exchanges. There is just not enough time. And although the potential for reward could be higher if you sift through each and every one, that would still mean sifting through a lot of dirt.

This is where stock screening comes in. It’s just easier and more straightforward. You pick a few criteria, making sure none are too restrictive, and then you exclude any stocks that do not meet this criteria. It is neither the most graceful practice nor the most thorough, but it quickly cuts down your universe of stocks to a smaller, more manageable group.

We have adapted some criteria borrowed from Chapter 14 (“Stock Selection for the Defensive Investor”) of Benjamin Graham’s The Intelligent Investor to serve as a starting point for any who wish to employ stock screening into their investment research process.

  1. Debt-to-Equity Ratio must be less than 1.0.
  2. Total Debt-to-Net Working Capital Ratio must be less than 1.0.
  3. Current Ratio must be more than 2.0.
  4. Company must have consistently paid out annual dividends over the last ten (10) years.
  5. Net Income must have grown by at least 33% compared to ten (10) years prior.
  6. Price-to-Earnings Ratio must be less than 15.0.
  7. Price-to-Book Ratio must be less than 1.5.

What is a Mutual Fund?

Description

A mutual fund pools the capital of many individual and institutional investors which it then uses to invest in assets it hopes will rise in value or produce cashflows over time.

Mutual funds mainly turn a profit by buying and selling securities or receiving cashflows from the aforementioned securities (in the form of dividends if through stocks and interest if through bonds). The profits are then passed onto the mutual fund’s shareholders after relevant expenses have been deducted.

To this end, mutual funds may be actively or passively managed. Actively managed funds make investments based on the research and work of their management team. Passively managed funds attempt to mirror the positions of a benchmark or another fund (a “target” fund). Actively managed funds typically charge higher fees than passively managed funds.

Mutual funds thus allow investors to buy an immediately diversified basket of assets without needing to actively put in the work managing their portfolio. As a result, mutual funds have grown to be popular investments for those hoping to set up retirement funds for themselves or tuition funds for their children.

Minimum initial investments for mutual funds typically run between PhP1,000.00 to PhP5,000.00 which is lower than the PhP8,000.00 and above usually needed to invest in actual stocks and bonds. Recent developments in financial technology have also given investors the option to invest in mutual funds for as low as PhP50.00 such as through GCash’s GInvest program. (See our step-by-step guide to learn how.)

Types

As per the PIFA, there are mainly four (4) basic types of mutual funds in the Philippines, namely:

Stock (or Equity) Funds

Stock funds buy and sell company shares of stock. Stock funds are usually deemed the most aggressive form of the four “standard” fund types given their potential for substantial gains but also proportionate potential losses. Nonetheless, stock funds remain very popular among investors given that stocks have typically performed well over the long term.

Bond Funds

Bond funds invest in securities such as treasury notes issued by the government or commercial papers issued by companies. Bond funds are considered more conservative compared to stock funds and they typically focus more on capital preservation than outright growth.

Balanced Funds

Balanced funds invest in both stocks and bonds. Investors who thus want some of the growth potential offered by stocks and the defensive nature of bonds may find balanced funds to be an ideal addition to their portfolio.

Money Market Funds

Money market funds are essentially the same as bond funds only they invest in securities which have maturities of one year or less. Money market funds thus generally have lower promised returns than bond funds but are considered more secure and defensive than bond funds.

Tips

  • Make sure to do your own research before buying shares in your mutual fund of choice. Most of all, make sure management is capable and trustworthy. Make sure the fund is registered with relevant regulatory bodies.
  • As with any investment, only invest what you can afford to lose. If you need the money any time soon, it probably isn’t wise to just throw it all into an investment scheme.
  • Even with mutual funds, diversify. In theory, the more shares you hold from different funds, the more you can potentially limit the risk of any one of them wiping you out.