Why Invest?

My first post onwards shall be dedicated towards a better understanding of the share market in Malaysia. 

Contrary to popular beliefs in Malaysia, share trading is more than a mere gambling scene. When you own a share, you own a part of a business. Hence, that business should pay you dividends which is the profits derived from its legal activities and/or reinvest those profits to further improve its operations to add value to your shares. In other words, if a successful and growing food company reinvest its profits to open more stalls that are bound to do well, then your shares "should" do better in the long run.

Why "Should"? Because there are many more factors that drive the prices of shares up & down such as good management, sustainable profits, trend, controlling stake-effects etc. which will be discussed in posts to come. 

So why invest say RM10000 in shares if you can keep it safely in a bank? The theory is simple. Inflation stagnates/depreciates the value of your RM10000 over time. For e.g. take a simple average inflation rate of 1.9% and interest rate of 3% in 2013. The 3% minus the inflation of 1.9% would have left you with a 1.1% real interest value. Hence, your RM10300 (with added 3% annual interest rate) was only worth RM10110 (after deducting inflation). This calculation is just for illustration purposes. But of course, for EPF account holders, you would have enjoyed a 6.35-1.9=4.45% increase in real value of your savings in 2013.

In contrast, when you invest in a business, your money "should" now ride on the performance of that business. The main goal in investing in a business should be to garner a reasonable return. E.g. there were much news of Titijaya Bhd recently having an increase of profits in the midst of subsiding negative sentiments surrounding the housing industry which drove its price up by 30% if you were to have bought it at rm1.47. If one were to have observed its 2014 to be completed projects and it's possible profits when the price was as above, one could have reasonably estimated a 9% return within a year(higher than EPF interest). This could have been deduced amongst others by a simple comparison of increase in profit ratio to share price of other companies.

One may say there is always the possibility of a global share market decline and other factors that may interrupt the above reasonings. Hence, I would summarize the risk factor in investing as such; improve within your area of expertise and know the risks involved. If you already have a fixed deposit account which you are confident with, find out more about cert of deposit ladder, if you are confident "trading" in 1 particular share, continue doing so while paying attention to new developments and so on.

However so, I believe capital/share market is a great market for any investor looking for annual returns from 10% to infinity. The risk is limited in my opinion only to how long you can hold your shares and making sound judgments prior purchasing them. If you are a trader, have a set of principle and abide by them. If you are an investor, remain one and never become a trader. In my opinion, this is the difference:

Trader: someone who takes a profit between buying and selling for a short term benefit

Investor: someone who takes a profit in view of sustainable long term benefits and accounts for risks/downside

If you are currently an active investor and should all else fail in your portfolio management, you can always opt for a Vanguard or any other type of Exchange Traded Fund (ETF) that holds the aggregate major shares of any particular country/industry etc e.g. Vanguard 500 that tracks the major shares in the S&P 500 of US. The reason is that such an index should probably give on average a minimum of 10% return annually if economic downturns & costs are not factored in (not to mention the exchange rate benefits).

Last but not least, know of the term "compounding effect". It is rumored that Albert Einstein once said that the power of compounding is the most powerful force in the universe. In brief, reinvesting your dividends/interest earned continuously increases the rate of growth of your initial capital. 

Brief e.g. of Compounding Effect

Year 1 RM10000 + 6% = RM10600

Year 2 RM10600 + 6% = RM11236

(Notice the interest earned an additional RM36 in Year 2)

Compounding effect works much better in share investment as assuming you reinvest your dividends to purchase more shares, you now have cost free shares with real monetary value that will continue to appreciate in value assuming favorable conditions.

In conclusion, there are many elements to capital markets that benefits thousands. Knowing a realistic investment opportunity and acting upon it will benefit you time after time to come.

The above is a prelude to share investment in Malaysia. Please comment should you have any valid opinion that may benefit yourself/others. Until next time, happy investing. 

First published on 22/03/2014.