It has not been a good couple of weeks…the work stress has definitely eaten up 90% of my brain cells. I found myself schlepping around the KLCC carpark at least twice in as many weeks looking for my “lost” elantra. Two days ago my dopod crashed with all my important info in it…(not such a bad thing actually…I now have an excuse not to be constantly contactable J ). They told me it would take two weeks to fix! Two weeks! A business phone! (Do not buy a dopod!!) Today I found myself at a Shell station wondering what my pin was for my Shell card…6562? 6752? 6578? I gave up after numerous permutations starting with 6! Thankfully the car got me home in one piece…but will have to figure out how to get the card working tomorrow…or fork out the dosh. And you thought you had it bad didn’t you??!!

 

Well, the good news is that it’s been so hectic that I found myself wanting to get back to my blog again … after what has been a rather long hiatus. This is my de-stresser. Admittedly, it’s not a real good time to be talking about investments. This past week has been a roller coaster ride for the stock markets all over. Haven’t really had the time to investigate what all the fuss is about…other than the US mortgage market is having a meltdown and some problem or other with the subprime rates that would lead to a decline in leveraged buyouts and merger activity bla bla bla…anyway read somewhere that the worldwide market status is now“more than jitters”. So although not quite a crash, the impact of the US mortgage problems is spreading around now. Still elsewhere, another report said that the US economy is still fundamentally strong and the Fed’s corrective action seems to be getting nods from some analysts. So how that all fits together…next week will probably give us a better idea. But for now I think I’ll just sit tight and wait…and try to calm my Lil Mom’s nerves and daily laments of “why didn’t I sell this and that when the market was close to 1,400 points two weeks ago?? In case, you didn’t get the chance to catch it, the KLCI closed at 1,287 points today.

So back to my last post about what you shouldn’t pick up from your Ma and Pa when it comes to investing.888888888888888888888888888888888888 (ok now my keyboard’s acting wonk too…ignore!).

  1. Strive to be the best, and don’t settle for average. According to the Bogleheads, you should actually practice the opposite in investing. This goes back to the risk-return story. Remember they go together – investments that have a higher possible return also carry greater risk. Just look at all the small cap (< RM1.25 billion market capitalization) counters on the KLCI or the Small Cap funds. With the recent stock market high, many of these counters and funds were showing spectacular returns of 50% or 100% + returns over the short space of less than one year. Small cap funds actually topped the equity funds performance charts. But when the market was in the doldrums, many small cap funds showed poor (below average) returns. Small cap counters were thinly trade and highly illiquid. In contrast, moderate and less risky funds like the CMS Premier fund  and Public Ittikal provided consistently good returns and outperformed most of the small cap funds over a 3-5 year span. The moral of the story? Slow and steady wins the race. The act of picking likely “winners” in investing is akin to a day at the race tracks – you are taking a gamble with your hard-earned money. Not that I have anything against small cap funds. They can help to turbo-charge your portfolio returns given the right asset allocation mix. I think 5%-10% of a thirty- or forty-something’s portfolio invested in small caps should be pretty manageable.
  2. Listen to your gut….and just go for it. Or how about this one: If there’s a crisis, you need to quickly fix it. Well this is another big no-no in investing. Investor psychology teaches us that the two things that contribute most to the downfall of most impulse investors are greed and fear. They get greedy when the stocks or funds perform too well…losing sight of their objectives…and forget to rebalance their portfolios. A typical scenario would be someone who keeps buying more and more of the same stock as its price increases, without understanding the fundamentals such as expected future earnings of the company, competitive environment etc. This can be seen in a bull market where the herd mentality takes over…and we rush in blindly in the hope of making a quick profit. An example of the fear factor is when we panic when markets get volatile (as has been happening) and start selling off our stocks or funds. In the end, losing out when the market eventually recovers. Buy high sell low…NOT!!
  3. History repeats itself. Future performance is determined by past performance. This investment “strategy” stems from the belief that fund managers are like gods who can miraculously and repeatedly out-perform the market year in and year out. Well the Bogleheads would beg to differ, actually. In the US, evidence collected over an 18 year period shows that the average equity fund manager had significantly underperformed the S&P index. Not everyone is a Peter Lynch in other words. This is consistent with the efficient market theory which says that all available information that could affect a stock’s performance, whether positively or negatively, is already reflected in the stock’s price so trying to predict where the price is going will be pretty much a futile activity. However, this may not be true for the Malaysia market – which some say is not completely efficient. The superior returns of some of our top performing mutual funds would certainly support this argument.
  4. You get what you pay for – so pay for good investment advice and tips from your stock-broker, or rely on a financial expert to manage your investment for you. Well, no not necessarily. There are costs involved…which means that at the end of the day, net of costs, you are probably better of just buying a low-cost index-fund or an exchange-traded fund (ETF) according to the Bogleheads. Well, we don’t really have that many ETF’s here in Malaysia. If you’re talking about stock ETF’s, then there’s only the recently launched fbm30etf (see previous post on fbm30etf).  In a Malaysian context I would have to qualify the Bogleheads’ advice as we have actually seen some fund managers signicificantly out-perform the KLCI. This “issue” had been niggling at the back of my mind since I took up investment “studies” and learnt about theories such as efficient market and how difficult (if not impossible) it is to beat the market…many statistical studies have been done to show that many have tried to out-perform the market in the US, and the great majority have failed. It’s a “random walk” as futile as trying to predict the weather in Melbourne! But in fact, I  noticed some great returns from the top mutual funds in Malaysia which cast doubt on whether beating the Malaysian market is as difficult/impossible as compared to the US. An excellent article in July 07’s Personal Money titled “Can fund managers beat the index” quotes Kenneth Koh, head researcher for Lipper Asia Ltd as saying:

“In an inefficient market, a skilful fund manager with a supportive investment process can add value. There are top-performing equity funds that have consistently produced returns that have far exceeded the benchmark index”

The same article goes to highlight a Morningstar Asia report, which showed that over the 3 year period ended 31 December 2006, 24.2% of funds in the equity category outperformed the KLCI. Over 5 years, the percentage had increased to 43.9% and for 10 years it was a whopping 64.7%. So far so good I thought. Certainly seems to suggest it is worthwhile to pick a good fund, pay your 5%-6% sales charge and 1%-2% annual management fee and let things roll!

 

Unfortunately the upfront sales charge had not been factored into the Morningstar report, so it is still not clear how differently the conclusion would have been had costs been taken into account.

 

And this is not quite the end of the story. A separate survey done by Watson Wyatt on institutional and retail funds in Malaysia also seems to support passive investing over active investing. Looking at the average performance of all actively-managed funds in totality over a span of 3-5 years, the KLCI benchmark emerged with far superior returns.

So the evidence here seems to be inconclusive. Hopefully someone will do a more comprehensive analysis, factoring in costs, in the near future so that we can put this question to bed once and for all. For now, the conclusion I will form is that there are some really great funds out there and there are also some really crappy funds. So DO do your research and pick carefully.

 

So while in the real world, some of the above conventional wisdom may be the essential ingredients for you to succeed in life, in investments you may have to unlearn and do quite the opposite. Whatever the case, keep up with improving your investing IQ and I’m sure you’ll do just fine J

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