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Stock Investing; It’s a business

Most people fail at the business of stock market investing because they do not have understanding of what makes a profitable business in the first place. The principles that go in to making a successful business are the same as are part of successful investing.

Perhaps the worst business venture that you could possibly go into is the restaurant business. A study from Ohio University in 2016 found that 60 percent close in the first year; 80 percent of restaurants fail within five years. Yet a successful restaurant over time is a business with one of the highest cash flows possible and one of the most profitable in terms of net margins.

But if you read any of the multitudes of books on why restaurants fail, the most common answers are bad customer service, bad food, bad ambience, not enough working capital, bad management, bad location, and bad promotion. Sometimes buried near the end of the discussion is the core reason why almost all businesses fail; bad pricing.

The same is true for the stock market.

The failed business operator usually whines about having a great product or service that for some totally unknown reason, not enough people wanted to buy. It is like I have said many times before; ultimately it is the buyers that determine the price and the sales of everything.

Of course unlike in the ‘real’ world of people buying something that they intend to actually use – like food from a restaurant – the financial markets run primarily on speculation. That is, buying something with the intention of selling to someone at a higher price in the future. But when you think about, that is exactly what your neighborhood retail operation whether it is clothes at a department store or food from a super market is engaged in.

As much as the department store would like to sell a t-shirt for Php10,000, the successful owner must lower the price to a level where buyers come in. And that is exactly how the stock market works. Unfortunately, most investors find that unreasonable and hard to believe, thinking that a company’s ‘value’ should - by some magic formula - determine the price. The only magic formula is what buyers are willing to pay.

Metro Bank (MBT) has dominated the news because of the fraud and there is great wailing and gnashing of teeth that the price has gone from Php95.00 to Php86.00. But the price of MBT has always gone from Php95.00 to Php86.00 and lower even when there wasn’t any fraud. MBT could not sustain Php95.00 in May 2013 and fell to Php70.00. In April 2015 Php95.00 failed and Php68.00 was the bottom. It happened again at Php95.00 in April 2016 and the price recovered at Php71.00. Once again in 2017, Php95.00 was the top two weeks ago.

Buyers were not willing to pay more than Php95.00 when the earnings were Php8.02 per share, Php7.15, Php5.70 or Php5.60. MBT did not need a scandal to lose Php18 billion of market value. Buyers took care of that for the past four years. For investors that are looking for the Holy Grail of Fundamental Analysis, Php95.00 was the top when the Price Earnings Ratio was 11, 13, and 16.

Investors would like to believe that there is some sort of ‘real’ or intrinsic value of a company that should be reflected in share price. But even the hard assets of a company are based on market value. Once again, the ‘price’ of everything is determined by how much the buyer is willing to pay.


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