Wednesday, January 20, 2010

The 6 Biggest Investing Mistakes

Burton G. Malkiel, Princeton economics professor and author of 'A Random Walk Down Wall Street,' and Charles D. Ellis, author of 'Winning the Loser's Game,' have teamed up to write 'The Elements of Investing.'

We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. He is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.

In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was an old fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.

In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.

1. Overconfidence
At our two favorite universities, Yale and Princeton, psychologists are fond of giving students questionnaires asking how they compare with their classmates. For example, students are asked: "Are you a more skillful driver than your average classmate?" Invariably, the overwhelming majority answer that they are above-average drivers. Even when asked about their athletic ability, where one would think it more difficult to delude oneself, students generally say they're above average. They see themselves as above-average dancers, conservationists, friends, and so on.

And so it is with investing. In recent years, a group of behavioral psychologists and financial economists have created the important new field of behavioral finance. Their research shows that we are not always rational. We tend to be overconfident. If we do make a successful investment, we confuse luck with skill. It was easy in early 2000 to delude yourself that you were an investment genius when your Internet stock doubled and then doubled again.

To deal with the pernicious effects of overconfidence, think about amateur tennis. The player who steadily returns the ball, with no fancy shots, is usually the player who wins. And the prudent buy-and-hold investor who holds a diversified portfolio through thick and thin is the investor most likely to achieve his long-term goals.

2. Following the Herd
People feel safety in numbers. Investors tend to get more and more optimistic, and unknowingly take greater and greater risks, during bull markets and periods of euphoria. That is why speculative bubbles feed on themselves.

But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful. Throughout history, some of the worst investment mistakes have been made by people who have been swept up in a speculative bubble. Whether with tulip bulbs in Holland during the 1630s, real estate in Japan during the 1980s, or Internet stocks in the United States during the late 1990s, following the herd - believing that "this time it's different" - has led people to make some of the worst investment mistakes.

Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market's bottom when pessimism is rampant.

More money went into equity mutual funds during the fourth quarter of 1999 and the first quarter of 2000 - the top of the market - than ever before. Most of that money went to high-tech and Internet investments, the ones that turned out to be the most overpriced and then declined the most during the subsequent bear market. And more money went out of the market during the third quarter of 2002 than ever before, as mutual funds were redeemed or liquidated - just at the market trough. Later, during the punishing bear market of 2007-09, new record withdrawals were made by investors who threw in the towel at record lows just before the first, and often best, part of a market recovery.

It's not today's price or even next year's price that matters; it's the price you'll get when you sell. For most investors, that's in retirement - and even at age 60, chances are you will live another 25 years and your spouse may live several years more. So don't let the crowd trick you into either exuberance or distress. Remember the ancient counsel, "This too shall pass."

3. Timing the Market
Does the timing penalty - the cost of second-guessing the market - make a big difference? You bet it does. The stock market as a whole has delivered an average rate of return of 9.6% over long periods of time.

But that return measures only what a buy-and-hold investor would earn by putting money in at the start of the period and keeping his money invested through thick and thin. The average investor's actual returns are at least two percentage points lower because the money tends to come in at or near the top and out at or near the bottom.

In addition to the timing penalty, there is also a selection penalty. When money poured into equity mutual funds in late 1999 and early 2000, most of it went to the riskier funds - those invested in high tech and Internet stocks. The staid "value" funds, which held stocks selling at low multiples of earnings and with high dividend yields, experienced large withdrawals. During the bear market that followed, these same value funds held up very well while the "growth" funds suffered large price declines. So the gap between overall market returns and an investor's actual returns is even larger than those two percentage points.

4. Assuming More Control Than You Have
Psychologists have identified a tendency in people to think they have control over events even when they have none. That can lead investors to overvalue a losing stock in their portfolio. It also can lead them to imagine trends when none exist or believe they can spot a pattern in a stock chart and thus predict the future. In fact, the changes in stock prices are very close to a "random walk": There is no dependable way to predict the future movements of a stock's price from its past wanderings.

The same holds true for supposed seasonal patterns, even if they appear to have worked for decades. Once everyone knows there is a Santa Claus rally in the stock market between Christmas and New Year's Day, the "pattern" will evaporate. Investors will buy one day before Christmas and sell one day before the end of the year to profit from the supposed regularity. But then investors will have to jump the gun even earlier, buying two days before Christmas and selling two days before the end of the year. Soon all the buying will be done well before Christmas and the selling will take place right around Christmas. Any apparent stock market pattern that can be discovered will not last as long as there are people around who will try to exploit it.

5. Paying Too Much in Fees
There is one piece of investment advice that, if you follow it, can dependably increase your returns: Minimize your investment costs. We have spent two lifetimes thinking about which mutual fund managers will have the best performance year in and year out. Here's what we now know: It was and is hopeless.

That's because past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager. The higher the fees you pay for advice, the lower your return. As our friend Jack Bogle, founder of mutual fund company the Vanguard Group, likes to say, "You get what you don't pay for."

We looked at all equity mutual funds over a 15-year period and measured the rate of return produced for their investors, as well as all the costs charged and the implicit costs of portfolio turnover - the cost of buying and selling portfolio holdings. We then divided the funds into quartiles. The lowest-cost-quartile funds produced the best returns.

If you want to own a mutual fund with top-quartile performance, buy a fund with low costs. If we measure after-tax returns, recognizing that high-turnover funds tend to be tax-inefficient, our conclusion holds with even greater force.

6. Trusting Stockbrokers
The stockbroker's real job is not to make money for you but to make money from you. Brokers tend to be friendly for one major reason: It gets them more business. The typical broker "talks to" about 75 customers who collectively invest about $40 million. (Think for a moment about how many friends you have and how much time it takes you to develop each of those friendships.) Depending on the deal he has with his firm, your broker gets about 40% of the commissions you pay.

So if he wants a $100,000 income, he needs to gross $250,000 in commissions charged to customers. Now do the math. If he needs to make $200,000, he'll need to gross $500,000. That means he needs to take that money from you and each of his other customers. Your money goes from your pocket to his pocket. That's why being "friends" with a stockbroker can be so expensive. A broker has one priority: getting you to take action, any action.

We urge you not to engage in "gin rummy" behavior. Don't jump from stock to stock or from fund to fund as if you were selecting and discarding cards in a game. You'll run up your commission costs - and probably add to your tax bill as well.

Wednesday, January 13, 2010

Promising Outlook For Landed Properties

THE residential property market should see a pick-up this year if buying interest remains sustainable and developers offer more creative and well planned projects.

Take-up rates have gradually picked up since the first quarter of 2009 and by the second quarter, newly launched properties recorded take-up of 31.7% – the highest over the past three years.

The strong take-up is especially evident for landed properties, including super-link terrace houses, semi-detached houses and bungalows, which cater to the upper-middle class.

Prices are also expected to rise in tandem with the economic rebound and landed residences have generally seen price increases of between 10%-15% to RM250 to RM300 per sq ft. While the high-end condominium market is still bleak because of an over supply situation, the outlook for landed residences in premium locations is much brighter.

Developers are more confident of rolling out new projects this year to capitalise on the buoyant sentiment among property buyers.

Mah Sing Group Bhd group chief executive Tan Sri Leong Hoy Kum says with the brighter economic outlook, more Malaysians will be willing to spend on big-ticket items like property.

“We believe this will lead to a strong demand recovery in mid-tier to high-end landed properties,” Leong says, adding that these segments should rake in stronger sales.

He says residential properties that cater to the middle to upper middle market stand to benefit from the rebound in property demand.

GuocoLand Bhd director of marketing and sales KC Chong concurs that landed properties, particularly gated enclaves in good locations, command a strong following.

“They appeal to both owner-occupiers, as well as investors as there is a willing pool of tenants which prefer landed properties complete with security, management and common facilities.”

The “feel good” factor may lead many to upgrade this year, given the (still) relatively favourable financing schemes available, he says.

However, Chong cautions that given the likely increase in launches expected this year, developers will have to work hard to achieve their targets.

SP Setia Bhd president and chief executive officer Tan Sri Liew Kee Sin says developers will have to plan their launches carefully and understand market needs if they expect good take-up rates.

“Many developers today are selling an aspirational lifestyle rather than just a house. Innovative ideas and designs are important factors in selling properties today coupled with a strong brand name,” Liew notes.

ECM Libra analyst Bernard Ching says more positive consumer sentiment and current low mortgage rates will sustain demand for residential properties going forward.

“Based on historical data, we see a strong correlation between consumer sentiment index (CSI) and demand for residential properties. Since hitting a low of 70.5 in the second quarter of 2008, the CSI has rebounded above the 100-point neutral level since the second quarter of last year,” he says.

Ching says the Government’s decision to impose a 5% real property gains tax (RPGT) only on property sales within the first five years of purchase instead of a blanket tax irrespective of date of purchase (as announced under Budget 2010) will boost buying interest.

“This is certainly a positive measure that will provide a much needed relief to the property sector. With the relaxation of the RPGT, we believe buying interest will pick up pace, especially among upgraders who need to sell their existing properties first,” he adds.

He says another catalyst for the property sector will be the impending announcement by the Government to allow Employees Provident Fund contributors to utilise their current and future savings in Account 2 for property purchases.

“This is likely to boost housing affordability, especially among first time home buyers, and benefit the mass residential segment,” he notes.

According to DBS Group Research Equity analyst Yee Mei Hui, a strong appetite for upper mid-high end properties has seen recent launches breaching 70% take-up within the first weekend.

“Developers are increasingly confident and have set higher sales targets, bringing forward launches and replenishing their landbank. Demand is expected to pick up further on the back of an improving economic outlook,” she says.

Yee adds that given the threat of rising inflation caused by higher mortgage rates and the impending introduction of the goods and services tax, more Malaysians are also buying property as a hedge against inflation.

Monday, January 11, 2010

KLCI : Great V Shape!

Outlook for 2010 is very promising for the market. Since my last coverage in Jun 2009, our KLCI has been keeping the upward momentum and indeed it show a very good performance! Going forward I still bullish on our local mart to perform a similiar performance this year. My next target would be 1500! Well there will be also high hope that our local mart will be breaking new high! At the mean time we just aim for 1500 level before decide the next step. :-) Hope for the best for all of us here and good luck!

[Previous KLCI Posting]

Thursday, January 07, 2010

Malaysia GDP Growth Likely To Accelerate

A VOLATILE, bumpy ride it was for trade-dependent Malaysia as it received the knock-on effects of the global market.

The contractions have been reduced since last year's second quarter and the third quarter economic activities confirm Malaysia has passed the worst of the downturn that gripped its major trading partners.

Growth has shifted from the strong exports Malaysia to domestic demand, while various fiscal stimulus packages have been rolled out to kick-start the economy to mitigate the gradual recovery of the external markets.

Consumer and business confidence have rebounded in Malaysia as reflected in the third quarter gross domestic product (GDP) numbers.

Research houses have fine-tuned their GDP forecasts for 2009 and 2010 following the upside surprise in the third quarter when the economy posted a smaller decline of 1.2 per cent in the July-September period, compared with a 3.9 per cent decline in the second quarter and -6.2 per cent in the first quarter.

Except for agriculture, all the sectors recorded better performance in the third quarter.

CIMB chief economist Lee Heng Guie is already looking at a 2.0 per cent gain in the fourth quarter of 2009 which would take the growth to a lower contracted growth this year.

According to him, the latest batch of global and domestic indicators supports the view that the economy is firmly in a recovery phase.

The positive macro signposts include the OECD leading index which registered a positive uptrend for the eighth consecutive month, signalling the broadening base of recovery in both the developed and emerging economies.

Also, there has been a positive expansion in domestic industrial output which will continue going into 2010, driven by the turn in inventories, reviving domestic demand and continued recovery of exports.

Lee has revised up the real GDP growth to 2 per cent year-on-year in the fourth quarter from 1.8 per cent and the economy to chart a 3.5 per cent growth next year, underpineed by domestic demand and recovery in exports.

Compared with the rest in the region, Malaysia's recovery is trotting along, commented Manokaran Mottain, senior economist with AmResearch.

Conditions in the country have improved as a result of the government's commitments on structural reforms, loose monetary policy measures, stimulus spending and improving external environment.

As in elsewhere in Asia, Malaysia has also implemented a large fiscal stimulus to help recovery and such benefits will continue to come through for several quarters.

"Given the country's low domestic and foreign government debt levels, fiscal policies may remain loose and supportive until economic recovery is confirmed."

A third stimulus package is probably no longer needed as he had suggested earlier this year with a "prudent fiscal policy back on the radar".

Mottain does not, however, expect Malaysia to outperform Singapore in terms of the manufacturing sector.

"This is because Malaysia does not have the exposure to the bio-medicals sector which has boosted the sector and exports in Singapore," he said, comparing with the Malaysian economy's dependence on the electronics sector where growth has been sluggish in comparison.

Kit Wei Zheng of Citi, estimates growth in 2010 to be led by a modest recovery in manufacturing and exports, whilst consumer spending lends further support.

He says a smaller fiscal deficit implies less fiscal support for the economy than initially expected.

The key issues shaping medium-term outlook, he said, are the transition to a consumption and services driven economy, structural reforms to kick-start private investments, including addressing gaps in human capital, and medium-term fiscal consolidation.

In the 2010 Budget, the government made itself clear regarding future policy directions, when it trimmed its operating expenditure for next year to help cut its fiscal deficit from 7.4 per cent of GDP to 5.6 per cent of GDP in 2010.

"Because of the government's fiscal policy change, we do not think Malaysia's upswing will come under serious threat," remarked Mottain.

The government has also raised its GDP projection to -3 per cent for 2009, from its previous estimate of between -4 per cent to -5 per cent.

GDP growth may accelerate in 2010, hinged on positive factors such as RM1 billion public spending per month until middle of the year; recent reduction in personal income tax rates and improved economy to raise private consumption; recovery in private investment as well as global demand for Malaysian-made goods.