Sunday, February 25, 2007

Stock market the 8th wonder by Teo Yin Zhi

MYSTIFYING indeed is the power of the stock market. In the 1993 Bull Run, our very own Bursa Malaysia (or Kuala Lumpur Stock Exchange, as it was then known) demonstrated perplexing supremacy in propelling ordinary Joneses into instant millionaires.

On the contrary, it also turned imprudent billionaires to paupers during the Asian financial crisis. The crucial question is: How could we triumph in this precarious yet potentially rewarding stock market?

The power of knowledge

My stock portfolio value has increased at a compounded annual growth rate (CAGR) of 22.7% for the past five years by investing in Bursa Malaysia. The experience has taught me that investment knowledge is the focal factor in determining one’s ultimate triumph or downfall in stock investing.

The market is now dominated by institutional play. Hence, only prices of fundamentally sound companies with bright prospects would be northward-bound. – APpic
This is followed by adequate capital and patience, as time is needed for the market to ratchet up undervalued stocks’ prices. Relative to knowledge, capital and patience, luck plays a minimal role in long-term investing success.

In this complicated contemporary investment climate intertwined with issues such as high crude oil price and terrorism, selection of stocks is of paramount importance.

The heyday of across-the-board stock prices increase in 1993 is over. The market is currently dominated by institutional play. Hence, only prices of fundamentally-sound companies with bright prospects would be northward-bound.

Speculative interests may send prices of stocks rocketing but irrational exuberance is short-lived. If investors fail to disengage themselves from the whirlwind of rumours, they will end up being victims of the inherently deceptive market by buying high and selling low.

Insatiable appetite for investment knowledge is essential as it helps in unearthing undervalued gems in Bursa Malaysia i.e. stocks trading at low price-earnings ratio (PER), high dividend yield and significant discount to net tangible assets (NTA).

This is where investment knowledge comes in handy in warding off unnecessary alarm caused by intermittent stock prices fluctuations.

Opportunities are everywhere

Crises offer excellent bargain-hunting opportunities for intelligent and courageous investors who adopt logical contrarian approach.

Such opportunities arose during the Iraq war, followed by the severe acute respiratory syndrome (SARS) outbreak where panic selling caused the Kuala Lumpur Composite Index to drop to 619.22 points on March 11, 2003.

During those periods, I scanned vigorously for companies trading at undervalued prices with perpetual business demand, insulated by geopolitical and pandemic catastrophes.

I found a few companies that fitted the criteria perfectly and bought their shares. My patience paid off when institutional players started supporting theses hidden gems, steering their prices to a new high.

Do some homework

In assessing a company’s intrinsic value, investors must read thoroughly its financial statements. Due to supply and demand mechanism, market prices will at times fail to reflect the stocks’ exact worthiness.

Some investors select companies for their low PERs, attractive dividend yields or growth prospects. Buying a stock simply because it is an investment fad may be an investor's lethal blow. It is very important not to overlook the quality of the management team.

In addition, investors have to respond quickly to adverse fundamental changes in companies and sell the stocks albeit at a loss. Or else, the losses could be heftier as time passes.

Borrow to invest?

Ever thought of borrowing to invest in the stock market? Many would shudder in fear. We borrow to purchase properties and cars. Why not borrow for stock investments?

Borrowing to invest is viable for stocks with consistently high dividend yields exceeding interest rate for margin account. However, these stocks should only be bought during the ebb of market sentiment and only if they are truly undervalued.

It is paramount for such companies to have commendable forward earnings to support dividend-paying capability. If prices reach unwarranted lofty levels or a global recession is imminent, it would be wise to cash out to settle your debts.

In conclusion, Bursa Malaysia is likened to a gold mine for intelligent investors. I urge the investing public to be disciplined and avoid speculating on news in the grapevine, otherwise Bursa could be a financial graveyard for them.

There is no easy money. With sufficient investment knowledge, adequate capital and a sprinkle of luck, you are en route to reaping bountiful harvest from the eighth wonder of the world.

Before I end, here are some words of wisdom from me on investing in the stock market:

Bursa Malaysia an investment haven,

Unknown territory for those who haven’t,

Rays of wealth for value investors,

Spectre of loss for speculators,

Aren’t stock markets the eighth wonder?

Many references for you to read,

Arm yourself with knowledge, it’s a need.

Learning through mistakes, it’s not a shame,

Above average profits, that’s what we aim.

Your investment effort will soon bear fruits,

So would those with value investing roots.

Isn’t everyone seeking for a wealth outlet?

Ample opportunities in Malaysia’s stock market!

·Disclaimer: The views and opinions expressed in this article are strictly those of the author.

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