How to make money from investing in the Malaysian stock market?

How does this perception arise? The truth is, some Malaysian investors, like investors in many countries, generally love to speculate. If I may refresh your memory, during the peak of the internet stock boom in the year 2000, there were thousands of full time day-traders in the US trading (or perhaps more correctly-speculating) in NASDAQ stocks. Not surprisingly, many of these day-traders eventually end up in tears with empty bank accounts. Does this make the US stock market a lesser place for investing? Certainly not!

Speculation. It is simply human nature that investors love stocks that promise huge investment returns, and hopefully it comes through in the shortest possible time. This natural bias perhaps has influenced the mindset of some Malaysian investors (and non- investors alike) to form the perception that the Malaysian stock market is speculative, risky and for speculators only.

Some speculation by a minority group of people certainly does not mean that one cannot make money investing in Malaysian stocks. By investing, we mean investors should base their decision to buy or sell shares on the fundamentals and valuation of these shares.

A great example is Warren Buffet, the second richest man (and the greatest investor!) in the world with an estimated US$ 36 billion in personal wealth that was accumulated from “value” investing based principally on his great ability to assess the fundamentals and valuation of stocks.

Equity investment historically and globally has been the best asset class for investing, the same applies to investing in Malaysia; ask around, you will find many investors who made excellent investment returns over the past five to ten years, investing in stocks such as IOI Corporation, Public Bank, Digi, Maybank, UMW, etc. An RM1,000 investment in IOI Corporation in 1990 is now worth approximately RM25,024, this is an investment return in excess of 22% per annum!

You may argue that perhaps one can only make money from these large market capitalization “blue chip” companies, and there are very few of these companies listed on Bursa Malaysia. In fact, the lack of large market capitalization stocks is one of the key complaints of foreign fund managers. These foreign investors, given the enormous size of their funds, generally prefer to invest in companies with big market capitalization that usually trade actively in the stock market.

However, for individual investors who are less constrained by the size of the companies, there are even more choices. In fact, our research tells us that many smaller sized companies have performed much, much better. Those who invested early in smaller companies such as Lion Diversified Industries, Top Glove, Pos Holdings and Kossan Rubber are certainly very happy with the large gains that they have made (3 years cumulative returns ranging from 230 % to 478 %!).

Over the past few months, we have met quite a number of investors who have been successful in multiplying their wealth through investing in Malaysia’s stock market. Here are just 3 things that they have in common. Firstly, these investors have been investing in the stock market for many years; there were some not so good years but over time they have generally done well investing in stocks. Secondly, they tend to invest based on fundamentals and avoid speculation. Thirdly, some of them actually say that it is not hard to find good investable stocks if you are willing to work at it. In fact, you may even find great investable stocks amongst MESDAQ companies.

MESDAQ companies such as Green Packet and Jobstreet, for example, have attracted serious foreign fund managers. Fidelity Investment, one of the largest US-based fund management companies, owns about 4.9% of Green Packet. Armor Capital Management owns about 5.9 % of Jobstreet. Share prices of Green Packet and Jobstreet are up about 600 % and 270 % respectively over the past two years.

There is also a perception is that there are very few successful MESDAQ companies and that most of the MESDAQ companies have not performed well in term of both financial results and share prices. Investors need to understand that MESDAQ was created for smaller companies to raise funds to expand their business and these companies generally do not have long-term business track record in a fast changing technology environment, therefore their business risks are higher. They are mostly in the fast growth stage– either they make it really big or not at all. Investors in these companies should be aware of these higher risks as they look for high return.

In summary, it is important to distinguish between speculating and investing. Quite a number of investors have made good money investing in Malaysian stocks. Many Malaysian stocks have performed extremely well. Which ones are these stocks? What makes these stocks successful? What can we learn from the success of these stocks?

Through the series of articles by CFA Malaysia over the next few weeks, it is hoped that investors like you will find that there are indeed investment opportunities in the Malaysian stock market.