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Value Beat. Keeping investing simple.
About the author:
Zarr Pacificador is an Equity Research Analyst for
BPI Securities Corporation. He was a former
contributor for The Motley Fool UK and The
Motley Fool Blog Network, where he wrote articles
and provided investment recommendations about
publicly traded companies listed on the UK FTSE
100, Nasdaq and NYSE.
Zarr has a Master of Science in International
Finance and Banking degree from the University
of Bedfordshire, UK and a Bachelor of Science in
Management Information Systems degree from
Ateneo de Manila University.
Zarr is a fan of compounding and undervalued
companies with strong balance sheets, sustainable
earnings, and good growth prospects.
BPItrade.com
8F BPI Head Office., Ayala Avenue corner
Paseo de Roxas, Makati City
Tel.: (02) 816-9189 | 816-9274 |
845-5289 | 845-5617
Email: bpitrade@bpi.com.ph
GENERATION
VALUE BEAT:
5 Keys to Successful Investing
By Zarr Pacificador
10 December 2013
1. Invest in what you know.
“The best stocks to buy are the ones you already own.” – Peter Lynch
According to Peter Lynch, the legendary portfolio manager who grew the
Fidelity Magellan fund from US$200M to US$10B in 13 years, ordinary investors
can get good investment ideas just by looking at the things they usually buy.
You only need to look at the products you use daily or buy often, to know
which companies may be worth checking out. For example, you love to eat
Chickenjoy at Jollibee (JFC PM); live in a house built by Ayala Land (ALI PM); or
drink a lot of C2, a beverage produced by Universal Robina Corporation (URC PM).
Novice investors usually think that they have to look for obscure or high-
growth stocks to make money in the stock market. On the contrary, the best ideas
are right under your nose. The companies that create value–those with products
or services that are useful and enduring–are the ones you want to take a look at.
2. Do your homework.
Now that you have an idea which companies to look at, the next step is to
research them. It is not a good idea to invest in companies just because you like
their products. You have to take a look at their competitive position, earnings
prospects, financial health, plans for growth, and so forth. I’m afraid there’s no
way around this. Picking good stocks requires hard work and an investment of
time. You can’t expect to make well-informed decisions if you don’t know the
company.
It’s true that ordinary investors don’t have as much time to study companies
as investment professionals do. But contrary to what most people think, it only
takes a few hours of your time each month to study a company. There are only a
few metrics you need to focus on, such as measures of the company’s profitability,
financial condition, and relative valuation, and there are plenty of websites like
Bloomberg and Financial Times that already have these numbers ready for you.
Once you’ve whittled down your list to a few stocks, then you can start digging
deeper.
3. Simplify and focus on the big picture.
In this era of data at your fingertips, it’s easy to get lost in a sea of
information. Investors are bombarded daily with news about the financial markets.
Most of this information, however, is just noise. Before you fret about price-to-
earnings ratios, interest rates, retention ratios, overbought and oversold levels,
etc., remember: each company has a story, and this is reflected in the numbers.
The key is knowing the story behind those numbers.
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One way of keeping the investment process simple is by using checklists. List the qualities that you look for in a stock
and run the companies you’ve selected through this filter. Here is a sample checklist:

1. Financial health High or low debt-to-equity ratio?

2. Good record of
profitability
3. Excellent management
4. Good growth prospects
Value Beat: 5 Keys to Successful Investing
Sufficient interest cover?
Does the company generate free cash flow?
Does the company have a history of consistently growing revenues, earnings and dividends?
Are margins stable and healthy?
Are returns on capital and equity high?
Does management overpay for acquisitions?
Is the company transparent in its dealings with shareholders?
Does management usually accomplish its targets?
Is management pay sensible?
Is the company in an industry that is expanding or contracting?
Does the company have good long-term growth drivers?

5. Attractive price Is stock price cheap compared to its historical valuations?

Is the company’s estimated value at least greater than 15% of its stock price?

Develop your own checklists. It’s a good way of practicing how to think about your investments. Once you’ve gone
through this exercise, you’ll have a better understanding of the company and how you feel about its stock. Yes, it’s that
simple.

4. Do not confuse price with value.

“Price is what you pay and value is what you get.” – Warren Buffett

Investors should recognize that a great company is not necessarily a great stock. If you pay for a company’s stock at a
steep price, it might take a long time for the value of that company to catch up with the price you paid.

For instance, if you bought Ayala Corporation (AC) at P287 per share in November of 2006, when it was trading at a
price-to-earnings ratio of 35, which was quite expensive relative to its historical P/E, and held on to it until today, you could
have sold it at a price of P591 per share. AC would have given you a capital gain of around 105% in 7 years, which translates
roughly to an annual return of 11% per year. Very good returns, especially if you factor in dividends received during this
period. You could have gotten better returns, however, if you had waited and bought it at cheaper valuations in 2008-2009.

5. Invest for the long term and have the courage of your convictions.

“In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” –
Benjamin Graham

Buying a stock thinking of what the market will do tomorrow, or trying to predict the direction of the stock price based
not on fundamentals, but on what you think others will do, is speculation. Speculators regard stocks as pieces of paper, being
swapped back and forth in the hope of making a quick buck. This may prove to be profitable at first, but in the end, it’s a
loser’s game.

When you buy a stock, you are buying a piece of ownership in a company’s business. Therefore, you should expect to
profit from your investment in at least one of 3 ways: first, from earnings or free cash flow generated by the company, which
eventually will result in a higher share price or distributed as dividends; second, from an increase in the price-to-earnings
multiple that investors are willing to pay for the stock; or third, from capital gains–the narrowing of the gap between stock
price and the business’s fundamental value.

This means you shouldn’t worry about short-term market fluctuations. Since the value of a stock is determined by the
underlying value of the business, as long as the fundamentals remain strong—the company keeps growing revenues and
earning profits above its cost of capital—there’s no reason for you to lose sleep if stock prices decline. I can’t emphasize this
enough: it’s important to hold steady during times of market panic and have the courage to stand by your analysis, because
ultimately, stock prices reflect the fundamental value of the underlying business.

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DISCLAIMER:
Any opinions expressed herein are solely those of the author and may be different from the views expressed by BSC itself and
its other departments. This report is published for the information of the recipients only. This report is not to be construed as
a solicitation to buy or sell any securities, futures, options or other financial instruments, to participate in any particular
trading strategy or to provide any investment advice or services. Any recommendation contained herein does not pertain to
any specific investment objectives, financial situation and the particular needs of any recipient.
Value Beat: 5 Keys to Successful Investing