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[continuation from Relaxed Stock Market Investing (part 1) ]

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**#4. STRIVE TO BEAT INFLATION, NOT THE MARKET**

Maybe it would be more appropriate to say it this way: “*strive to beat inflation, or a long-term safe financial investment like a 10-year Government Bond, whichever is higher.*”

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Forget about earning +30% or more on your money in a year! Also, free your mind from the pressure of wanting to match (or even beat) what your friend earned or has been earning from his/her investment in the stock market.

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The idea of “**saving**” is all about setting aside something *today* for you to be able to buy things in the *future*.

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And since it is a known fact that prices do increase as time passes (which, by the way, is what *inflation* is all about), we have to couple the idea of “**saving**” with the idea of “**investing**“, which is:

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putting your savings to work so that, in the future, you can still fill your grocery basket with the same goods you are buying today even if their prices have already increased through the years!

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In summary, when we invest, our real goal is *preserving the value of our money.*

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Anything in excess is a **bonus.**

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*Now, how much profit should we try to get from our stock market investments?*

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Consider this:

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In the Philippines, for the last 10 years:

- annual inflation has averaged between 5% to 6%

® - while 10-year Government Bond can give you around 6.5%

® - if you want to take it further, a 25-year Government Bond can give you 8.5%

- Average inflation is 5% to 6% — so our
*minimum requirement is 6%*

® - But a safe investment (meaning, there is a remote chance that our investment will be gone or will significantly lose value) like the long-term Government Bond can give us 6.5% to 8.5% without doing anything (including not losing sleep when stock markets crumble and not digging into company reports, economic news, price charts) — it is just fair to
*raise our minimum requirement to at least 8.5%*

® - But we know that “putting our money in the future of an operating company” involves some degree of
**risk**, it is just reasonable to ask something “extra” in return.

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Since we become part owner of a company, if the company loses, we lose too; if the company wins, we win too.®

Worse, the company is traded in a stock market, so its value is also under scrutiny by all other stock market investors.®

With that, to justify our efforts to study the economy/markets/companies, and to compensate us for the risk we will be assuming when we invest in a stock,*let us say we require an*?**additional**5% profit

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After that little exercise, we can now reach the conclusion that, for you to buy a stock, it should give you **AT LEAST 13.5%** (= 8.5% + 5%) for the period within which you have committed to invest in a stock.

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If you are more comfortable with a whole number, maybe you can set your minimum return (or profit) requirement at **15%**.

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If you can get at least

15% net profit(after paying all taxes and other costs) from your stock market investments, then by all means you can say “it is worth it!”

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### #5. BE PATIENT. PROFITS CAN WAIT.

When we said that we will only invest in a stock if it can give us at least **15%** net profit, *we should be clear about the period over which we expect to earn that profit*.

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And, when we say “we want at least 15% net profit”, we mean Internal Rate of Return (IRR) of at least 15%.

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**What?!?!!!!!**

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Ok. For example, if we deposit **Php100** today at 15% interest, we can withdraw **Php115** after a year (Php100 x 1.15).

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If we deposit again that **Php115** at 15% interest, after another year, we can withdraw **Php132.25** (Php115 x 1.15).

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We can also say that, if we deposit Php100 today, and we can withdraw Php132.25 two (2) years from now, we can say that our **Internal Rate of Return or IRR is 15%**

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I think it is more commonly known as the Compounded Annual Growth Rate (CAGR).

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To get it a little closer to the stock market, if we can find a stock that is **worth** **Php132.25 per share**, to achieve our objective of earning *at least* **15% **net profit, the following conditions should be met:

- We can buy it
*today*at no more than Php100 per share

® - We have a reasonable basis that the stock price will reach
*at least*Php132.25 within the next (*at most)***2 years**

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In our previous post [Relaxed Stock Market Investing (part 1)], we said that we should only buy undervalued stocks.

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Now, using the table below, we can decide the period over which we can wait to realize our expected net profit. Alternatively, we can see if our investment period is consistent with our return expectations.

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So how do we use Table 1?

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Do you see the intersection of *15% net IRR* and *5 years*? It is **102%**. It means, if you can find a stock that is worth Php100 per share but current market price is only Php50 per share, you can buy it today, sit it out up to 5 years and still earn** 15%** net IRR. If it reaches Php100 per share earlier than 5 years, then it’s a bonus!

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Or, do you see the intersection of *15% net IRR* and *2 years*? It is **33%**. It means, if you know a stock that is worth Php100 and the current market price is only Php75, and you think that it will take at most 2 years before other people realize that it is undervalued, buy it today, wait for its price to reach Php100 within (at most) 2 years , and get your *at least* **15%** net profit.

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If you are more of a “discount-oriented” type of a person, you can use this table:

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Do you see the intersection of *15% Net IRR* and *5 years*? It is **51%***. *It means, if you can find a stock that is selling today for Php50 but it is worth Php100 (50% off!!), you can buy it today, *ignore the twists and turns of the market price within that (at most) 5 years*, wait for the stock price to reach the stock’s value (i.e. Php100 per share), and earn *at least* **15%** net profit.

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Sounds familiar? It should. It is the same as looking for the intersection of *15% Net IRR* and *5 years* from Table 1, which is **102%. ***A 100% upside is equal to a 50% discount.*

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**In Summary, for a Relaxed Investing experience, one should:**

- Invest in a company/business (not just the stock)®

® - Be clear with the reasons why he/she is investing in that company.

® - Buy ONLY
**undervalued**stocks.

® - Stop trying to beat the market or to surpass a “record” by other institutions or other people, stop targeting over-optimistic profits, and instead set an acceptable and reasonable profit expectation.

® - Be patient.

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Happy investing!

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>> back to **Investor Education – Home**

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