Manila, Philippines

TEL Me Where It Hurts – When Buy and Hold Hurts Your Investments

Share the #GYMBFF:

PLDT (PSE: TEL) is among the favorites of investment funds and brokerages due to its high dividend yield of almost 6% annually, very steady growth, and very profitable. Historically, it’s like getting the best of price appreciation and dividend yields.

For some, it is also an ideal buy and hold blue chip stock, for the long haul, something you can buy, don’t worry about and forget for the next 10 years. Just let it surprise you how much it has grown. Well it used to. Recently, it pulled up a different kind of market surprise. So surprising that those who invested in 2006 will be astounded and depressed as to where it is now (good thing there were regular dividends along the way as compensation).

You’ve probably heard by now the painful reporting of PLDT management (PSE: TEL) on why they posted lower income once again (lost customers, capital expenditures, wrote-off obsolete infrastructure, lower valuation of Rocket internet investment) and why they are also lowering their growth and income projections for the next 3 years — to invest heavily in new infrastructure in an attempt to turn the company around and become more at pace with the Pinoy’s use of internet and mobile data compared to traditional calling and texting.
To say that TEL’s stock price plummeted from 2250/sh to 1833/sh (as shown below, then some more the day after) is an understatement. And given their challenging 3 year outlook, analysts predict the share price will likely linger in these levels for a long time.

The drop was so steep that it went back to 2006 levels, the years when the company was making a comparable P28B annually, which is the income guidance for 2016. Strange eh? 10 years back in time. Below is the chart of TEL from 2000 to 2016.
What happened to TEL shows how Buy and Hold (Forever) can hurt Juan’s investments. Those who bought TEL in 2006, hoping to gain much from it, will be depressed to see that after 10 years, there wasn’t any capital appreciation. Wasted time. Wasted paper gains all those years. I hope not a lot of people did that. Though again, a small compensation is the dividends so in that sense, it is still a lot better off than time deposits (even if invested capital did not appreciate).
If Juan was able to sell TEL during it’s peak of 3400 in 2014, then that’s around double your money in 10 years (plus dividends on the side). But after the peak, TEL has been having a hard time delivering income growth, and admitted that with its pursuit of ever higher earnings, it sacrificed money which could have been reinvested and spent instead on infrastructure. TEL is headed towards that direction now, which means less income to be released as dividends, and more income to be retained and reinvested for growth.
Buy and hold is an often suggested strategy for new investors. But it carries a lot of footnotes, so Juan shouldn’t do it blindly. How do avoid being hurt by this TEL scenario? Below are some tricks:
Buy and hold doesn’t mean one stock only. If Juan was able to diversify, then the growth of other shares who did not fall to 10-year lows will cushion this fall in TEL. Likewise, if Juan invested in index tracking funds, then the index is definitely better now than in 2006. Another option is not to go 100% in stocks or stocks funds. There are balanced or bond funds that Juan should also consider. The trick is not to put all your eggs in one basket.
Time Horizon
The longer time horizon, the better. If Juan is retiring in 10 years time, the he should slowly veer away from risky investments as his retirement approaches. Likewise, if Juan is preparing for his retirement only 10 years in advance, then that is actually a short time to be fully invested in stocks, much more to be fully invested in TEL only. Juan should prepare for his retirement as soon as he gets his first paycheck from his first job. If not, as far away as possible from targeted retirement age, as early as possible in Juan’s financially productive years. In case of TEL, at 10-year horizon, not much changed, but at a 16-year horizon, there is still some gains. Always link this time horizon to your investment OHA (Objective-Horizon-Appetite).
More Frequent Buy and Sell
All stocks do not move in a straight line, there are ups and downs, but quality companies will always go up in general and given time. The peaks and troughs actually give us windows of opportunity to buy some and sell some. Here’s where fundamental analysis and technical analysis come in, the former in choosing quality and undervalued companies, the latter to signal whether it’s time to buy and sell. TEL’s Jan2014 to Sep2014 run was a good opportunity to have bought and sold. Juan does not need to detect the exact highs and lows, but being able to buy after lows and sell before highs can still provide sizable gains.
Buy and Monitor, Don’t Forget; Buy and Hold But Not for Too Long
Juan need not monitor his investments daily, but ideally on a regular basis, depending on the available time he has. Checking on your investments quarterly or annually will give you a good grasp of how they are performing, and whether the gains you have so far are worth cashing-in already. If Juan bought an investment 10 years ago and it’s only now that he’s checking on it, then he better be ready for both good and bad surprises.
Fund Manager
If Juan does not have the time (or interest) to learn trading on his own or the time to monitor his investments regularly, then having fund managers can do the trick. Investing in UITF or Mutual funds or VUL insurance allows Juan to invest in stocks managed by fund managers, and these fund managers can definitely buy on highs and sell on lows for you, and react faster in case they foresee that investments are going south.
Who knows, 10 years from now, where TEL will be? Or any other stock for that matter? For optimists like me, this can in fact be an opportunity to own TEL at 2006 prices, an opportunity that’s not always available, especially to those who got left behind by the 2006 run. And a lower than 6% dividend yield will still beat most dividend paying companies out there.
I wouldn’t go all in either, since I prefer to diversify, and wait further before investing to see how TEL’s going turn around it’s income growth.
Follow us on Facebook, Instagram and Twitter. Don’t forget to subscribe to our email base. Join us in Truly Rich Club.
Photos: Charts from COL Financial, PLDT logo from PLDT website
Share the #GYMBFF:

 Filipino Personal Finance Investments For Filipinos PH Stock Market PSE: TEL

2 Responses

  1. Geri says:

    Agree with you Ray. Though lately TEL has been making a recovery. But still diversification is indeed crucial.

  2. Ray says:

    Nice. “Buy and Hold” is a double edged sword. Things like this do happen, and hopefully the investor was wise enough to be well diversified instead of just “betting” it all on one stock like TEL.

What's on your mind?

This site uses Akismet to reduce spam. Learn how your comment data is processed.