Investing in the Philippine Stock Market – Tip#1: Have your reserve cash
So let’s have a short discussion on that now.
What is reserve cash?
Very simple – it’s cash that you reserve for surprises in the stock market.
What kind of surprise? A surprise just like what the Philippine Stock Market had last May 16th.
Majority of the stocks are down.
And worse, even giant good companies did slide its way down big time, ranging from 5% to 10%.
If you’re in the Philippine stock market for some time, you know that it’s quite seldom that good companies go down by that much.
If you’re in the Philippine stock market for some time, you know that it’s quite seldom that good companies go down by that much.
Now you use this reserve cash for opportunities like that.
Yes I call them opportunities, rather than a curse.
(I realize that successful people always see opportunities everywhere, but that’s a different topic)
In other words, you have this as your free cash, ready to be tapped under extreme conditions.
You have a separate wallet for your regular investments, and a different purse for your reserve cash.
And when the stock market gives its surprises, you open this purse to buy at low prices.
Specifically, you use this reserve like when giant fantastic companies have dropped big time in one day.
WHY RISK DOING THIS
There are basically two ideas on which this strategy rests:
- If good companies dropped big time in just one single trading day, then it’s highly probable that it will bounce the next trading day.
- The higher the drop, the higher the bounce.
Now we use that reserve cash to leverage on that expected bounce.
So what you do is to buy at the red day’s closing phase (or the next day opening phase), and you sell it once it bounces enough at the next few trading days.
You see, this is actually more as a trading strategy, since this has a shorter time frame, and caters more to those folks who can afford to monitor more closely the stock market.
It’s important that you sell the next trading day (or the next few trading days after that) to get your profits out of the table. Doing so also gives you back your reserve cash you can then use for other future market surprises. If you see that the uptrend is still intact, you can keep it there a little bit longer. The important thing is to have your reserve cash back again, with some profits made in the side.
Take note that I used highly probable for the bounce scenario above, which means stocks prices may still keep going down even more. But from experience, with such a big drop, it’s usually the bounce that’s more often the case for these giant fantastic companies.
Why do we risk doing that?
Because we believe that there’s nothing wrong with these companies.
We recognize it’s only some bad external news that had driven people crazy that pulled the prices down.
But they remain fundamentally sound. And because everyone still knows this fact, others start buying again and these companies start to bounce.
You can see below the green pasture bounce I’m talking about, as the Philippine Stock Market closed today from a recent nightmare it had. ( I also shared again this nightmare picture where it bounced from)
In the above scenario, you can see big revenge attained by several companies dragged down like
URC: 3.11% from -6.29%
MEG: 5.26% from -8.21%
MPI: 5.45% from -8.11%
AGI: 4.34% from -2.60%
and others.
As a last note, take serious time to realize that you use this free cash under extreme conditions – like an unacceptable big-time drop that dragged giant sound companies.
Forgetting this rule can hurt you in the end.
There you have it.
Have fun investing! (and be ready for trading!)
PS: Hang around for more tips on investing!
