Why Buy Stocks?

I was doing my regular reading on Fool.com and came across this : http://www.fool.com/investing/beginning/2011/01/31/back-to-the-basics-why-buy-stocks.aspx

The part I want to highlight is this since a lot of people are thinking of investing in gold/property and other investments (palm oil investment schemes come to mind) is this:

" Returns. Over the long term, stocks have delivered impressive returns. According to the 2002 edition of Jeremy Siegel's book Stocks for the Long Run, stocks returned 6.8% per year above inflation between 1871 and 2001. That compares with a loss of 0.1% per year for gold and an average gain of 2.8% per year for bonds. Cash, of course, almost always has a negative return as it earns nothing and simply absorbs the impact of inflation. But over the past 10 years, the stock market has actually fallen more than 6% as measured by the S&P 500, which is a good reminder that the returns from stocks may not always be consistent. However, the stock market's history gives us good reason to think that over longer stretches investors can do very well."

So, if this doesn't convince you, I don't know what will! Also, being Malaysian, we are in an emerging market - there will be lots of money will be flowing in the middle of the year. The only worries about investing in Malaysia for me are these:

1) The Credibility of the Financial Reports- This is a problem in general, it also happens in the US as was the case in Enron. But this problem is more prevalent in Asian countries as our financial reporting standards is not up to par and that old joke comes to mind where an accountant is looking for the job is asked - How much is 1+1? And the accountant replies : Anything you want!

2) Market Manipulation - Compared to the SGX and US markets, we trade in rather low volumes which mean stocks can be more volatile and move quickly. Anecdotal advice of syndicates in Malaysia is plenty and you do worry at times!

Best to stick to bigger, blue chip stocks which would be harder to manipulate and would have better accounting standards.

My suggestion is to look abroad to other markets as well. But start small. Start with a tracker fund which will track , an ETF which can do the same or a mutual fund - All these options takes away the stress of actually picking stocks. ETFs have much lower management fees than mutual funds and are easily trade able.

But you still need to research on how close to they track and in the case of mutual funds, whether the manager is any good. There is matter of timing the market and holding it for the long term.

Pick up some books, learn and read to make your money work harder for you! You don't have to be day trader and/or do momentum investing. The biggest downfall of stocks is one's emotions. I have said it many times but it is worth remember what Warren Buffet says - "I will tell you how to be rich : When others are greedy, be fearful, when others are fearful, be greedy!"

So be patient. Now, being the CNY and being the holidays - the KLSE is really quiet and stocks are down so now, would be an ideal time to pick up some stocks actually!

If you're interesting in looking at the US market, check out www.fool.com and they services give you the option of a one month trial period. They also occasionally will offer free reports on certain picks.

Full Disclosure: I have said this before but yes, I am a subscriber of the Fool's Stock Advisor Service.

How to Make Money Or How to End up Swimming with the Fishes

How to make quick money?

Be a tax fraud rat...er, I mean Tax Informer!

You will earn 50% of the tax gained from the tax recovered from the offender and... it's tax free! (but read on to hear the dangers!)

Okay, so we had a tax consultant give us an in-house talk about Taxes- Auditing & Investigations: How to be Prepared. It was very interesting, thorough and enlightening yet entertaining talk!

So, let me share a few things I learnt with everyone here.

1) Getting on their radar - The speaker has 43 years of experience in Tax - 35 years of those in the Inland Revenue Board (IRB). The usual people on the IRB's radars are non-fixed income individuals and businesses. Why not employees? Well, they are the easiest to check based on the

Apparently the IRB's computers does a comparison across the sector to see anyone who sticks out and also if the numbers look too consistent or fishy, then, that will give rise to an audit/investigation.

2) Are you a Mutual fund/Life Insurance dealer? Well, these are normal culprits of tax evasion and they are the bigger showoffs! Taking pictures of themselves on fancy holidays and equally fancy cars are dead giveaways! IRB will always check your expenses against your declared income and you will need to be able to justify the reason.

3) Myth - Counting plates? The Speaker said it's abit of a myth how IRB actually sits a hawker stalls and count plates. They do observe suspects and what they see has to match what is actually reported. For example, a store that empties it tills 3 times day, does it have 3 bank-ins in its bank accounts a day as well?

4)Going back to be an IRB informer, yes the reward are great and the speaker told us stories of friends and lovers betraying each other so be warned! This is another reason why you should not go around making enemies or better still, document and file your taxes properly to give them ammo to pin you down.

If you do become an IRB informer, be warned by how the speaker related that during one of his past investigation of a suspected tax offender, the suspect was willing to contest the investigation but.. even offerred RM50k to reveal the informer! And if the informer was revealed, one can only imagine what would happen to the informer or his family! So, it's a risky life indeed!

And remember... once a rat.. always a a rat!

Once a rat.. always a rat!

Any lessons to take away for you and me? Always have all your documentation kept properly! If you do come under suspicion, it will be for you to justify why you under declared or how that extra 100k is in your bank account. Stay calm, get your tax advisor and accountant and keep cool and don't let IRB frighten you if you have nothign to hide. The speaker said they usually can be very reasonable and would usually give you the benefit of the doubt.

Another follow-up post more on this perhaps when I have the time!

Deustche Bank Report Featured on Edge

It's gonna be a yak..er, Bull market! (work with me on this, will yer?)

So Deustche Bank says it's going to be a BULL MARKET in Malaysia this year. Its pretty optimistic with Malaysia's outlook given the Megaprojects, IPOs (think Petronas Chemicals) and subsidies being cut for financial austerity. Also cites increased consumer confidence and increase in M&A activity as reasons. Read it here: http://www.theedgemalaysia.com/in-the-financial-daily/180631-msia-strategy-charging-forward-bullish.html

Pinpoints financials, O&G, Plantations and Property as sectors they like. Read there for some definite picks they like. I'm no way endorsing what they pick and you know me, I'm not very excited with momentum investing. Long-term winners for me, please!

One portion which caught my eye was this:

"Recently, FTSE upgraded Malaysia from secondary emerging to advanced emerging status, placing the market in the same category as Taiwan. The change will be effective June 2011. Victor Phua, from our derivative strategy team, tells us that the upgrade in status will likely induce an additional US$392 million of equity inflow into Malaysia from passive funds tracking the FTSE World index series (which covers developed and advanced emerging countries). He also believes that the positive investor sentiment generated from being recognised as an advanced emerging market can be a catalyst for the equity market. In the two previous country upgrades (Hungary and Poland), the domestic market outperformed the regional benchmark by as much as 27.1% in the three months going into the effective date in September 2008, and further extended the gains by an average of 13.4% in the month after."

What this means is big caps/Blue chips in Malaysia will gain slightly from passive funds buying them up to reflect their exposure to Malaysia. So, it's quite a certain thing that blue chips will go up as demand goes up when June 2011 comes. The only question now is whether these stocks have priced this in yet?

I can't tell for sure. But if you're holding onto Telco or Financial stocks, you should be rubbing your hands with glee as passive funds usually build their exposure around such stocks.

The Rise of China from a Western Perspective

If there's one great site you must visit it is this : http://www.ted.com/ which is like Youtube except for spreading ideas - be it to do with business, science, global issues, technology, faith or entertainment. Speakers are specially recorded by them and the videos are put on the website to engage people and try to spread ideas.

I first heard it being played on BFM and I checked out the website and it's brilliant!

The videos load easily (yes, on streamyx) and you can even have subtitles with some videos having up to 25 languages!

One of the vidoes I wanted to highlight is this:
www.ted.com/talks/martin_jacques_understanding_the_rise_of_china.html

This was taken sometime in October 2010 so its still quite recent. Watch it till the end not only for the insight into China's rise and how it is different from the West but you'll be surprise what the Chinese invented that is so popular in the west!

Check it out!

No time to invest? Try Joel Greenblatt's Magic Formula Investing!

Really don't have time? Worried you will be swayed by emotions and *gasp* panic sell?

Try's Joel Green Blatt's Magic Formula Investing which is basically a formula which looks for undervalued top-ranked small-mid cap companies to invest in and its mechanical because you punch in your criteria into the free search tool and you buy the stocks that come out and hold for a year before selling, and repeat the whole process.

Check out:

http://www.magicformulainvesting.com/welcome.html - the free screening tool is here.

http://www.magicformulainvesting.com/how_mfi_works.html - How it works.

http://www.fool.com/investing/general/2011/01/21/the-energy-industrys-magic-formula.aspx - Jim Royal on the Fool seems to endorse it alot. Search for his articles to read more.

Returns

I have listened to the Audiobook for this and it does makes sense and has consistent returns of 20% (based on historical analysis if you had punched in the formula and chosen the stocks that come out over the last few decades) and above but recognises that times have changed and the US is in decline so expect less. But thinking about it 15% is not bad returns - Double your money every 5 years?

One of the downsides is because of its lack of fundamental analysis of the companies that pop up - diversification (ie buying 20-30 stocks) is a must! If you have too small a portfolio, a few stocks going bad can really affect your portfolio! The formula does not account for say management, disaster (think Australia's flooding!) or fraud issues that can sink a stock.

Vs. Mutual funds

More troublesome than a mutual fund and requires slightly more time. But take a look/listen to what he has to say and you find he has decades of market data showing consistent returns. History is on his side and it makes perfect sense as it looks for undervalued companies in the market.

One for the Future

I definitely will give this option a go if I wanted to cut down the time I take looking and reading at news and spotting trends. All you need to do is spend time once a year and selling systematically.

Problem with having a diverse portfolio of 20-30 stocks needed means you need quite a lot of capital. Let's say you take medium-sized positions of USD1000 in each (RM3000*30) - Need RM 90k. :s (not including brokerage and other fees) Maybe one for the future.

Note: For us non-resident foreign investors, we do not have a capital gains tax fromselling earlier than one year. (http://www.investopedia.com/ask/answers/06/nonusresidenttax.asp)