Kakabakaba Ka Ba? (FQ Mom’s Take on the Stock Market Roller Coaster Ride)

June 19, 2013 - 12:00am

The last few days at the Philippine Stock Market have been a roller coaster ride. From a 2012 yearend index of 5,812.73 it zoomed up to a dizzying 7,392.20 on May 15, 2013, only for it to make a sudden drop to 6,114.08 on June 13, 2013, reminiscent of those Disney and Universal Studio rides!

I asked the questions, â€œHow do you feel about your equity investments right now? What are you doing?â€ in several social media investment groups. I received various answers from sad, to happy because itâ€™s bargain time, to I shouldnâ€™t have put all my eggs in one basket, to blaming the foreign funds for their hot money exodus, to â€œI told you so!â€ Most answers contained that confident message of â€œIâ€™m in this for the long term so I shouldnâ€™t worry!â€ Thatâ€™s their official line; however, you canâ€™t help but sense that fear of uncertainty, especially from the newbie investors. Some opted to write to me privately to share their real sentiments, â€œI just placed P100,000 a few days ago and I see it dissolving each day as the market goes down. Should I sell now?â€

The truth is, no matter how long youâ€™ve been investing in the stock market, sharp downturns like these can still turn your stomach around. It has been exhibited in various Behavioral Economics experiments that humans are super averse to losses. The Prospect Theory of Daniel Kahneman, who won the Nobel Prize in Economics together with Amos Tversky, states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics (i.e. based on rule of thumb which is usually not optimal). And the thing is, the human emotion on loss is greater than the emotion on gain. I think this is the most simple explanation why a lot of people will just keep their money in savings account and time deposits despite the fact that inflation is higher than these depositsâ€™ returns and despite the body of evidence that in the long run stocks provide the highest return among all asset classes.

Iâ€™m not going to explain why the market has been acting as such lately. A lot of people have tried to do that and I donâ€™t envy their position, as they always have to come up with a reason why the market went up or down and where the market is headed. But what I wish to share with you are some parallelisms between stock investing and parenting. Hopefully, these would make more sense to you.

1. Long-term nature. When you decide to be a parent you sign up for a long-term engagement. In the same way when you decide to invest in the stock market you have to have a long-term investment horizon. Sometimes I wonder why some self-appointed stock market gurus say, â€œIâ€™m here for the long term, about two years!â€ Say what? Well, if youâ€™re lucky to ride a bull market that may be ok but long-term should really be long-term, 10 years or more. Now the problem is when we say 10 years, a lot of people will back out already and I guess thatâ€™s why these gurus shorten their definition of long-term, to entice more followers. Try being a short-term parent and letâ€™s see what happens to your child.

2. The jittery newbie investor is like the first time parent. When one becomes a parent for the first time everything has to be sterilized to the max, each tiny mosquito bite is a big deal, lactating moms are worried about their milk supply that they immediately switch to formula to make sure their infants are not starved. In the same way, newbie investors get worried about each price fluctuation movement of their stocks, â€œI should have bought at this price, or sold at this price, etc.â€ And understandably, theyâ€™re the ones who expressed the greatest worry in the recent downturn. I once read in a parenting book, â€œWhen a baby teether is dropped on the floor (teether is an object for a baby to bite on to ease the gums during teething stage), the first time mom would sterilize it, second-time mom would rinse it with water, and a third time mom would blow off the dust!â€

3. Manic depressive market and the dangerous world. Lolo Benjamin Graham (the mentor of Uncle Warren Buffett) described the stock market as manic depressive because of how it over reacts to both good news and bad news. In other words, OA all the time. But should that scare you to the point of not investing in the stock market anymore despite its historical record of providing the highest long-term returns among asset classes? Itâ€™s the same as deciding not to have children anymore because itâ€™s a dangerous world out there, even if you believe that being a parent could be the most rewarding endeavor in life.

4. Devote time. Raising children needs time. Iâ€™ve always believed that quality time is quantity time. In the same way, you need to devote time to study what youâ€™re getting into before you jump in. Time in the market is more important than timing the market.

5. Simplify. These days thereâ€™s a tendency for parents to overschedule their childrenâ€™s calendars. Simplify, thereâ€™s no need for them to be involved in all sorts of activities at the same time. Itâ€™s the same with your portfolio; keep it simple â€“ go for the blue chips. Hereâ€™s a guide question, â€œGiven all the economic and political upheavals weâ€™ve been through, which listed companies continue to be stable and profitable?â€ List down your answers and have these stocks in your portfolio

6. No need to be a Supermom/dad. Relative to number 4, there is also no need to be a do-it-all and have-it-all Supermom/dad. If youâ€™re a busy parent you can ask for the help of your mom (if she likes) or hire a yaya. In the same way, if you donâ€™t think you can actively invest on your own, hire your fund yayas, I mean fund managers. Most of the time, youâ€™re better off invested in pooled, managed, or index funds rather than doing yours haphazardly. Thereâ€™s always a lot of newbie casualties who enter the market for the first time during a bull run. As they say, â€œEveryoneâ€™s a genius in a bull run!â€ making a lot of newbies prematurely and unnecessarily over-confident. The sad thing is if they get burned during the correction, they will forever avoid the stock market. Word of caution also to those buying funds: In the same way that you should not over-delegate to your yaya, you should also monitor your fund managerâ€™s performance.

7. Give your good child a break. Imagine your son or daughter always bringing home honors and awards. Sometimes all these achievements raise everyoneâ€™s expectations that the next time he/she loses in a competition or doesnâ€™t make it to the honors list, itâ€™s as if itâ€™s a mortal sin. In the same way, letâ€™s give the PSEi a break. It has gone up so high and has been recognized globally as one of the best performing markets in the world. I am not so happy when I read articles that try to justify the downturn by saying that our economyâ€™s improvements are not real and are not trickling down to the masses. The reason why itâ€™s called trickle down is that itâ€™s a slow movement.

8. Donâ€™t give up on your child/our economy. Good parents do not give up on their child. This is our country and we should see to it that we invest in its growth and improvement.

9. Cost averaging in parenting. Itâ€™s not in the big bets on the hot tips that you will make money in the stock market. Itâ€™s in cost averaging or the regular investing of a certain amount in your chosen blue chip stocks over a long period of time that you will earn your best returns. In parenting, itâ€™s not the grand and expensive vacations, big celebrations or expensive toys that you will raise your children well. Although you will see them excited with these big ticket items, itâ€™s really in the everyday dinner conversation, praying together at night, sharing and laughing at each otherâ€™s jokes, praising good and reprimanding bad behavior, doing ordinary and sometimes mundane things for your children like tutoring, seeing to it that they brush their teeth properly, take a bath everyday, eat the right food, etc. that you will raise your children well and reap the rewards of parenting. Those little acts of love deposited in the childrenâ€™s and parentsâ€™ love tanks are the ones that will enable your family to weather the conflicts and crises that you will encounter.

10. Zoom out. I wish to borrow my son Enriqueâ€™s way of explaining stock investment in the long run. When you watch the day-to-day price movements of your stocks, you will feel jittery about the fluctuations. In downturns you will feel the pain so much that youâ€™d want out. But if you zoom out, these dips in the market will later on appear as just small blips and youâ€™ll realize you were better off invested the whole time. In parenting, you may fret like crazy if your honor student child brings home a failed quiz. I know some who rushed to enroll their sons in tutoring centers because of a failed quiz! But the thing is, if youâ€™re confident that your child is disciplined enough to devote time to his studies, and determined to fulfill his life ambition, these failed quizzes will just be blips in his lifelong journey to success.

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