Awakening of the Marginal Investor or Speculator

The Stater Investor Triangle

As of our April 5, 2023, update, we have changed our name from Marginal Investor to our current name, The Starter Investor. Please refer to our About Us page for further information.

TO SELL AT A MODEST PROFIT was an opportunity so tempting I took advantage of it without hesitation. I am referring to my decision last week of selling all of what my so-called stock portfolio consists - the 20 shares of Ayala Corporation at 220 pesos per share. I bought these shares in two board lots of 10 shares each:

• 10 shares on January 29, 2009 at 207 pesos per share; and
• 10 shares on February 23, 2009 at 198 pesos per share.

My total acquisition cost for these 20 shares is 4,050 pesos. This trading cycle gave me a net earnings of 350 pesos or close to 9% capital gains in three months.


Precisely, this is one situation the book The Intelligent Investor warns about when one is seriously involved in investing. Specifically, Chapter One of the book was entitled What the Intelligent Investor Can Accomplish. This chapter was organized as follows:

• Introductory paragraphs

• Investment Before World War I and Today

• Results to Be Expected by the Defensive Investor

• Tax-Exempt Bonds: State and Municipal

• Results to Be Expected by the Aggressive Investor

• "Yes" and "No" Table for the Investor

• The Investor as Security Owner

Of course, some portions of this chapter may no longer be relevant today. But that is offset by the larger portion describing the valuable insights and suggestions that any beginning investor should know. The introductory paragraphs presented several concepts that are fundamental to understanding this whole idea of investing.

Investing Defined

"An investment operation is one which, upon thorough analysis, promises safety of principal, and a satisfactory return. Operations not meeting these requirements are speculative."

The Investor

Our typical investor contemplated by the book is one who:

• emphasizes the safety of the principal.

• buys securities outright.

• holds these securities for a considerable period.

• more interested in annual income than in quick price changes.

The word intelligent was given the meaning endowed with the capacity for knowledge and understanding. Interestingly, however, the intelligent investor is more about character than of the brain.

The two categories of investors are the defensive or conservative investor, and the aggressive or enterprising investor.

Defensive investor

For the defensive investor, intelligent action is largely the exercise of firmness in the application of relatively simple principles of sound procedures. 

Aggressive investor

In contrast, the first rule of intelligent action for the aggressive investor is never to embark on a security purchase which he does not fully comprehend and which he cannot justify by reference to the results of his personal study or experience.

Investing in Common Stock

The emerging trend at the time the book was written, was the inclusion of common stock as an integral and important part of a sound investment program. Among the advantages cited, related to tax considerations, is that common stock can be selected more on the basis of capital gains expectation rather than current income. There must be some caution, however, because paying attention to the appreciation of the principal may lead the investor into speculative attitudes and operations resulting in financial loss.

Another advantage of common stock is based on long-term experience. A diversified holding of representative common stocks was found to be more profitable than a bond portfolio. Provided, the shares were purchased at reasonable market levels, that is, levels that are reasonable with respect to well-defined standards derived from past experience.

Results to Be Expected by the Defensive and Aggressive Investors

Defensive return on investment

The defensive investor may expect a 4% return for his money. True, this is not a brilliant achievement. Nevertheless, it is attainable with minimum intelligent effort. 

Aggressive return on investment

The aggressive investor, should he or she listen to the warnings and positive suggestions presented, may expect to double the average annual return of the defensive investor.

Furthermore, The Intelligent Investor offers this encouragement: The genuine investor in common stocks does not need great equipment of brains, and knowledge, but he or she does need some unusual qualities of character.

Marginal Investor Notes

Let us go back to the main purpose of this website described in our page About Us. We said that it is about how one may start his or her stock trading and investing activities in the Philippines from scratch. In addition, we also said that we shall limit our investment to common stock and with only one issue: Ayala Corporation.

Considering the suggestions of The Intelligent Investor and the practical situation of our beginning marginal investor, it led me to the observation that there can only be a meaningful talk about investing when one's fund is in excess of 50,000 pesos.

For any amount less than this, it is impractical to create a diversified portfolio of common stocks because of the minimum board lot requirements for purchasing shares of stock in the Philippine Stock Exchange.

In addition, focusing more on capital gains at this level may easily give one more opportunity for earnings than just waiting for the dividends. This is why we sold out my portfolio of 20 shares of Ayala Corporation and gained 9% in the process. All we need to do now is to wait for the next price change until we could buy the same number of shares at our lowest purchase price of 198 pesos or even just about 10% discount on our selling price.

Stated in a different way and sounding more like an oxymoron, we shall grow our starting capital of 5,000 pesos using the speculative methods of stock trading that take advantage of quick price changes until we have the amount of over 50,000 pesos required for our investment goals. Therefore, any lesser amount should better be applied in the only alternative available: stock trading.


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Awakening of the Intelligent Marginal Investor: Introduction

The Starter Investor Reads The Intelligent Investor

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

This article is the first of a series that will show how The Starter Investor understood and applied the principles and techniques described in the book The Intelligent Investor by Benjamin Graham in the context of a beginning investor who is a Filipino, residing in the Philippines and with a shoestring budget to begin with.

The book is not an easy read but given sufficient interest and careful thought, any start-up investor may pick up jewels of insights that may guide one in this game of money and investing. The contents of the book are as follows:

Part One: General Approaches to Investment

• What the Intelligent Investor Can Accomplish

• The Investor and Stock-Market Fluctuations

• The Investor and His Advisers

• General Portfolio Policy: The Defensive Investor

• Portfolio Policy for the Aggressive Investor: Negative Approach

• Portfolio Policy for the Enterprising Investor: The Positive Side

Part Two: Principles of Security Selection

• United States Savings Bonds: A Boon to Investors

• Security Analysis for the Lay Investor: General Approach

• Stock Selection for the Defensive Investor

• Stock Selection for the Enterprising Investor: The Appraisal Method

• Detection of Undervalued Issues by Security Analysis: Three Examples

• The Pattern of Change in Stock Earnings and Stock Process

• Group Studies of Earnings and Price Developments

Part Three: The Investor as Business Owner

• Stockholders and Managements

• A Study of Stockholder-Management Relations in Two Industries

Part Four: Conclusion

• "Margin of Safety" as the Central Concept of Investment

• Appendix: Buying and Selling by "Central Value" Method

Since the book was first published in 1949, the examples may no longer be relevant. Even some suggestions may already be obsolete at this time. Nevertheless, I would never hesitate to recommend the purchase of the book by anyone who is seriously interested in buying common stocks for investment purposes.

Speaking of common stocks, we just got a copy of the Notice of Annual Stockholders Meeting, being an investor of Ayala Corporation to be held at the Grand Ballroom of the Hotel InterContinental Manila, Ayala Center, Makati City, on Friday, April 3, 2009, at 9:00 a.m.

Reading from the accompanying SEC Form 20-IS, we found out that Ayala Corporation as of December 31, 2008, has:

• 496,983,784 number of common shares outstanding.

• 103.7 billion pesos market capitalization based on the closing price of its shares.

• 209 pesos/share closing price.

• 7,916 is the approximate number of registered holders of common shares.

• Henry Sy, Sr. is the top 6 registered holder of common shares with 1,296,636 shares.

Our next post will be related to the topic What the Intelligent Investor Can Accomplish. Check it out.

Finding Funds for Investment: Tips and Strategies

The Starter Investor Guide for Accumulating Investment Funds

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

Finding the money

Finding the money to fund our investing activities is among the most important first steps of our journey to financial freedom.

Budget deficit

Let us imagine someone who has a monthly salary or earnings of between Php10,000.00 to 15,000.00 monthly. And assume that this employee or this self-employed individual has one or more of the following financial commitments:

• salary loan either from the Social Security System (SSS) or the Government Service Insurance System (GSIS);

• personal loans like those offered by Chinatrust, Citifinancial, Banco de Oro, Asialink, or even your local credit cooperative;

• business loan from commercial banks, rural banks, or even the now familiar micro financing institutions;

• obligations arising from cash advances and purchases using credit cards offered by Citibank, Banco de Oro, BPI, AIG, Metrobank, among many others;

• housing loan from PAG-IBIG;

• assortment of borrowings including those from relatives, friends, and others.

In addition to the above obligations, we must also include household expenditures like the following:

• living expenses (food, clothing, medicine),

• utilities (water, electricity, telephone),

• education,

• transportation,

• entertainment,

• miscellaneous expenses.

Most likely than not, under this scenario, expenses will be much more than what we have for income. Living within our means will now be a very challenging proposition given the existing commitments and fixed expenses that demands our limited resources. What can we do? Where can we find the money to invest? Is there a way out of debt?

First Law of Gold

We cannot delay investing for our future. There is a huge opportunity cost when we consider the impact of compound interest, whether it applies to our debts, or to our investments. Our desired situation is to diminish in an orderly fashion, the outstanding balances of our debts. At the same time, we also gradually accumulate funds for our planned stock trading activities.

The first place to look for funds, of course, is our paycheck or any regular income that comes our way. These funds should not just pass through our hands straight away to our creditors.

We find an excellent solution from the book The Richest Man In Babylon. Stated as The First Law of Gold, here is our strategy:

"Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family."

Described in the a different way as the First Cure For A Lean Purse, the book further explained the first law in this manner:

"For every ten coins thou places within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul."

Allow this thought to sink into your subconscious mind and meditate on it. Once you started believing in it, express it in action.

Practical application

Let us say we apply the above principle at that point when we have decided to start saving for our nest egg. Some compromises may have to be made here and there. But the important thing is we start the program. Here is what our savings schedule may look like in Philippine peso (Php):

Savings for Year 2007

• October - 160.00
  
• November - 440.00
  
• December - nil
  

Savings for Year 2008

• January - nil
  
• February - 100.00
  
• March - 25.00
  
• April - nil
  
• May - nil
  
• June - 600.00
  
• July - 500.00
  
• August - 100.00
  
• September - nil
  
• October - nil
  
• November - 400.00
  
• December - 120.00
  

Savings for Year 2009

• January - 1,600.00
  
• February - 2,000.00

Our total savings would have been Php6,045.00 after 17 months, or close to Php360.00 monthly savings on average. This amount represents about 2% to 4% of our monthly salary or earnings assumption.

BPI Trading Account service charge

In another post entitled BPI Trade: Best Online Broker for Novice Trader, we mentioned that our BPI Direct Trading Account requires an Average Daily Balance of PhP 5,000.00. In practice, however, we learned that BPI will stop charging the Php100.00 monthly service charge if your account balance is over Php1,000.00.

Thus, using our example above, BPI would have applied the service charges for the first 14 months of our savings program or a total of Php1,400.00. This is equivalent to about one-fourth of our gross funds accumulated.

Flow of money

Presented here is how our money will flow once we started our stock trading activities. To avoid further expense, we will consider someone who has a payroll ATM account with BPI. What we mean is an employee who was given by his or her company a BPI Savings Account wherein an employee's salary is directly credited. This type of account has no stated maintaining balance; and consequently, it does not incur any service charges.

We enroll this BPI Savings account with BPI Express Online to be able to transfer funds over the Internet to our BPI Direct Trading Account.

To withdraw funds from our trading account, we will fill up a web form with BPI Trade, which then will transfer the withdrawn amount into our BPI Saving Account. The funds is now available for withdrawal through ATMs.

Money accumulated

After deducting the BPI Direct service charges, our net saving is about Php4,645.00 or roughly Php275.00 monthly. On the average, we would have saved 2% of our monthly salary or earnings.

Now is the right time to invest

Clearly, it takes tremendous effort, patience, and resolve to start a savings program for investment purposes especially if you are deep in debt or have lots of financial obligations and limited income. But this should not stop us from making our first step however small, towards financial freedom.

In the end, we should rather be more motivated now than ever to accumulate that money we need for investment.