From Risk to Reward: Making the Most of Market Cycles

There is no argument that the stock market is suffering from challenging times.

Although the economy has fully recovered from the covid-19 pandemic, the PSEi has yet to return to its pre-pandemic high of 9,100.

This as uncertainties including the direction of the peso, inflation, and interest rates continue to abound.

However, there are many reasons why we should continue buying stocks.

Markets go through cycles

It is important to remember that the stock market goes through cycles. Sometimes it’s up, sometimes it’s down.

Although the stock market is very weak right now, it won’t stay weak forever. Conditions will eventually improve, and the stock market will go up as a result.

Opportunity to earn significantly from capital appreciation

Warren Buffett said, "Be fearful when others are greedy and greedy only when others are fearful."

This is because the opportunity to earn significantly from capital appreciation only becomes available during difficult times – when share prices are depressed because nobody wants to own stocks.

Luckily, we now have the opportunity to earn significant returns from capital appreciation since stocks are trading at depressed prices. Note that the PSEi index is currently trading at only 10.2X P/E, way below its 10-year historical average P/E multiple of 15.5X. Many stocks are also trading below their book value (or the amount of capital shareholders have put in plus all undistributed profits). This implies that new investors have the opportunity to buy at a price that is even lower than that of its principals.

Most stocks are paying investors to wait

Because we are not suffering from an economic or financial crisis, most companies are very healthy and not overleveraged. Consequently, many listed companies continue to pay cash dividends despite the prevailing difficulties. In fact, many stocks have attractive dividend yields that are higher than bank deposit rates (ex. power companies, telcos, REITs).

Since these companies are providing us with passive income through their cash dividends, it is easier for us to be patient and to stay invested until prices recover.

We realize though that buying stocks today can also be risky. Here are some tips to manage risk:

Focus on stocks trading at attractive valuations.

While most stocks are cheap, there are also expensive stocks. Buy only cheap stocks because expensive stocks don’t have significant upside potential and may even be sold down in case their profits disappoint.

Focus on blue chip stocks.

This is because blue chips are usually the first to recover when the market goes up. Their balance sheets are also largely stronger and healthier compared to non-blue chip companies.

Finally, use only long-term money.

Although we believe that 2025 will be a better year for the Philippine economy and the stock market, numerous risks still prevail, and there is no guarantee that the market will recover. By using money that you don’t need anytime soon, you avoid the risk of being forced to sell at a loss in case the market stays depressed for a long time.