Surviving stock market risk/reward

John Mangun

Outside The Box

IHAve always assumed that the only place to find “life” is on planet earth. I believe this because from the simplest single cell bacterium to the epitome of complex life forms (humans) staying alive is a lot of work. survival is a constant, never-ending battle and eventually everything loses the war against becoming individually extinct. Why bother?

But from that Gram-negative, facultative anaerobic, rod-shaped, coliform Escherichia coli bacterium running around in your lower intestine, all the way up the food chain to you and me, every living thing wakes up with the same thought. “What the hell. I’ll give this life-thing one more day to see how it works out.”

The ultimate battle that we wage every living moment is figuring out how to handle risk and reward. Reward is something that we want. Risk is the price we might have to pay to get the reward. We learn from a very early age about the risk/reward equation. Is the risk worth the reward? More importantly, is the probability of gaining a reward greater than the potential of suffering the risk?

Therefore, our quest is to find the optimal risk-reward balance, a delicate act of weighing these two critical components. We must somehow measure the odds of “winning” against losing and then, is the reward beneficial enough to offset the pain of losing?

The ultimate battle that we wage every living moment is figuring out how to handle risk and reward. Reward is something that we want. Risk is the price we might have to pay to get the reward. We learn from a very early age about the risk/reward equation. Is the risk worth the reward? More importantly, is the probability of gaining a reward greater than the potential of suffering the risk?

Running across a busy street, dodging cars, is probably not worth it if you are just going to lunch. Running across a busy street, dodging cars, might be worth it when being chased by a horde of brain-eating zombies.

The key to handling risk/reward is finding a quantitative measure of the relationship between the two factors, the Risk-Reward Ratio. Simple example. The odds of winning the PCSO jackpot Mega Lotto 6/45 are approximately 1 in 8,145,060. The cost for a ticket is P20. In other words, if you win a jackpot paying

P8,145,060, your Return on Investment (Reward) is P407,253 for each

P1 put at Risk.

Does buying a 6/45 lotto ticket with that eight million jackpot make sense on the Risk/Reward equation?

No because your odds of winning are much worse than the possible reward if you do win.

However, for stock market investing, considering the dynamics of external uncertainties and inherent volatility, it is not as simple as calculating odds as for the lotto because there are not any hard odds to calculate. Reward probability then becomes straightforward as “How much can I make and how much could I lose?”

For me then, the best thing is to assume that at best case, the “odds” are fifty-fifty that the price will go up or down. How do we calculate a sensible Risk/Reward equation?

The stock price tends to go higher from a support level and to go lower from a resistance level. A price that breaks below support will probably go lower. The strategy then would be to buy at support level with the profit potential at a higher, preferably much higher, resistance price.

Assume the price is P5 and that is a strong support level from which the price has usually gone up. The historic resistance has been at P6 so if the price moves from support (P5) to resistance, the profit potential is 20 percent. But at what price do I cut loss if it breaks below P5?

Theoretically—and I don’t follow theories unless they start with “Newton,” “Einstein,” or “Planck”— you should hold until the next lower support level or at a set percentage loss. That is a great way to lose a lot of money. The number one “theory” is “Sell until you can sleep.” The moment and at a price I begin to feel uncomfortable and uneasy thinking the increase from support is not going to happen, I sell. I never regret cutting a loss. I always regret watching a losing position get larger.

Survival, not profit, is always the number one priority.

E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.

100 Percent Support For The 500 Reservoirs Program

Thomas M. Orbos

Street Talk

WAter, as we know it, is life—for us to drink, to grow the food we eat, and the source of electricity we need. And water is a resource that we need to protect. despite the heavy downpour resulting in massive flooding that we experienced last week, most parts of the country remain to be without water. And not just drinking water but even the power outages we have experienced is affected by the amount of water supply our country has. that is why the announcement of President Marcos to build water impounding areas and reservoirs is an innovative and bold idea that may not have been appreciated immediately by those presently affected by the floods, but definitely a solution for long term flood mitigation as well as for water resource management of our country.

The globe, as we now realize, is facing a severe shortage of clean water. Climate change, the loss of watersheds and forests as well as an increasing global population will stress out this valuable resource all the more. It is not far-fetched that future wars will be fought in the same manner that oil and gas are now the subject of regional conflicts. It therefore comes as no surprise that govern- ments of both developed and developing nations are stocking on their supply through water impounding infrastructures. Just in our region alone, Vietnam has accumulated an annual 473m/capita of water storage, Malaysia—722m/capita, Thailand has 1,1145m/capita. And the Philippines? We, on the other hand have an estimated water stored for each Filipino at 68m/capita!

We are facing a national water crisis that will only worsen. The rains that flood us and cause much damage can be the valuable resource that will make a difference for future generations. Our scarce water resource needs to be managed well and protected. The 500 Reservoirs Program of Marcos should be supported and embraced 100 percent!

The pronouncement of Marcos stems from a cabinet presentation, made by the Department of the Environment and Natural Resources and under the leadership of Secretary Maria Antonia Y. Loyzaga, which calls for a national plan for water impounding in select areas nationwide. Veering away from just the traditional dredging and dike infrastructure solutions to flood mitigation, water storage facilities, aside from being an additional flood control measure, will also provide reliable potable water supply, sustained irrigation for agri and aquaculture, as well as enhanced year long supply for hydropower generation. In a World Bank study made in 2022, Philippine Country Climate Change and Development Report, “increasing water storage capacity of vulnerable areas is a complementary strategy for flood mitigation and a key adaptation measure for the Philippines.”

Discussing this with DENR Undersecretary CP David, the plan calls for the building of at least 500 reservoirs strategically located throughout the archipelago. This can be realized through the refurbishment and repurposing of old dikes and the construction of low height dams, which will in turn become local storage and water retarding facilities. And where would the money to build these come from? The government spends close to P300 billion annually on flood control, usually in the form of rivers and coastal dikes that outline our silted riverbanks. The problem with this is that it not only cost much, dikes also directs and drains out the water resource we direly need out to the ocean. So, rather than just mega dikes, the program would redirect the flow of excess water during the rainy season to these reservoirs. And the cost? David estimates this to be not more than 10 percent of the flood control budget of the national government. The government need not even spend on the construction and maintenance of some of these water