First of all, I’d like to wish everyone who visits this site a happy and prosperous new year. I hope that you do not equate happiness and prosperity purely with money. I always believed that those that become very successful in money matters are those who are not afraid to lose it. I am not talking about compulsive gamblers because they eventually end up as the most desperate and destitute of people. I refer to people who are willing to take calculated risk with their capital.
In 2009, practically everybody who was in the market made money. I’m talking about people who came into the market when they saw that the direction had changed. Most of these people were not sure that the market was going up because the economy was still bad. These were people who were willing to risk it. I don’t know if the name Charlie Munger is familiar to any of you. Everybody knows Warren Buffet, but not everybody has heard of Buffets’s partner, Charlie Munger. I think Munger is as important to Berkshire Hathaway as Buffet himself. Every great investor has the humility in admitting that he does not know everything. That is why Munger is important to Buffet. He is able to identify pitfalls and outcomes for Buffet.
The first thing that an investor would learn from Munger is to measure risk. In 2009, the market had gone one way most of the time because prices had sunk to ridiculous levels and values were just very cheap. As we enter 2010, much of the value of stocks are probably in the price already. It would take new developments in profitability and earnings that could push prices further from where they were at the close of 2009. It is, therefore, indispensable that in taking new positions, one must identify the potential loss should things go against expectations..
In 2009, people initially thought that the global economy would continue to tank. When it showed some signs of recovery in the 2nd quarter, the outlook changed. As we go through the early weeks of 2010, people are thinking that the global economy will sustain the recovery although at a relatively slow pace. Essentially, the risk for global markets is that the world economy led by the U.S. could stall. For the Philippines, I think the biggest risk is still the budget deficit. Our market had always reacted inversely to the deficit. Looking back at 2009, the market started to consolidate in late July to September because budget deficit concerns started to plague the market. When the market tried to assault above the 3100 level, it was shot down by the larger than anticipated budget deficit.
The opening bell will be a toss of the coin, but because ours is a long only market (the infrastructure to short the market is not there), the only way to make money is to buy on the way up. Historically, January is an up-trending month. If the market turns down in the opening week, it will probably be a good time to buy. But unlike in 2009 when it was more profitable just holding on to positions rather than churning them, in 2010, you may need to stag the market just a bit more. My best advice is to avoid the tips that merely say that a stock going to be ramped up. There were many tips like those that came out in late 2009, but few ever delivered. I would continually go for fundamentally solid stocks and try to time entries and exits rather than rely on “tips.” I would encourage daily vigilance on stock that you choose to follow and buy them at levels you’re comfortable with. Your level of comfort is a price where you think the risk is worth taking. Charlie Munger’s first advise is to measure the risk. The succeeding advise is to be patient. Being patient will enable you to choose your battles. Be patient is your entry; be prudent in your exit. Remember, the rest of the year is still ahead of us. There will be many opportunities that would come our way if we pay attention and follow a market sense.
Have a profitable 2010.