BY NEOH SOON KEAN
PREAMBLE
About a year ago, I wrote my first series of articles on investment for this publication. In the second article of the series, I stressed the importance of holding investments for the long term and relying on the power of compounding to build up a big nest egg (ipohecho.com.my/2024/05/22/not-too-good-to-be-true-part-ii-the-importance-of-dividend/). In that article I stressed that for the average person, investing in the Government Linked Investment Schemes (i.e., EPF/ASW/ASN. Let us call them by the acronym: GLIS). I showed that over the long term, investing in GLIS can produce very decent returns. However, as an introductory article, I did not go further in our discussion regarding some of the disadvantages of investing in GLIS. Because GLIS have certain disadvantages, the bigger investors have to consider other types of investments. In the current series of articles, I shall start by explaining the disadvantages of GLIS and how investing in shares can overcome these advantages.
I am conscious of the fact that stock market investment has earned itself a terrible reputation in Malaysia. Most people seem to regard KLSE as a gambling den where one is almost guaranteed to lose money. This is certainly the experience of many investors. LOL, when my wife retired many years ago; she told her friends that she was going to spend her time investing in shares. She received stern warnings from most of her friends and even her accountant. I am happy to say that she has done very well with her investment. I dare say she is even better than I in some ways as an investor.
Dynaquest (our own investment company) is now nearly 45 years old and apart from some income from investment advisory services; its wealth is totally derived from investment. It has been able to obtain double digit return from its investment over this long period from a very small start. I agree that stock market investment can be risky as humorously put in the famous quote from Mark Twain: “July is a most dangerous month for stock market investment, as are August, September, October, November, December, January, February, March, April, May and June.”
In future articles; I shall discuss why stock market investment is not as risky as it is commonly believed and how one can mitigate the risk of stock market investment. For the moment let us look at the advantages stock market investment has over GLIS.
DISADVANTAGES OF GOVERNMENT LINKED INVESTMENT SCHEMES (GLIS)
Lack Of Flexibility & May Be Illiquid
Unlike share investment, one cannot move one’s money in and out of GLIS at will. In the case of ASN/ASW, one can only purchase additional units when they are available. The available amount is restricted and one has to be diligent in looking out for them. This is especially true for non-Bumiputra investors. In the case of EPF, while one can almost put in any amount at will; it is difficult to withdraw if there is a sudden need for funds beyond what is permissible under EPF’s regulations. For a major part of the money one has already invested in EPF, one can only start using it when one has reached retirement age.
Share investments are quite different. One can move money into and out of publicly traded shares at will – i.e., it is highly liquid. Although there are some shares which are illiquid (i.e., difficult to buy and sell); if one restricts oneself to large high-quality companies, their shares are usually quite liquid. One can put in extra funds if one is blessed with sudden inflow of cash and one can take out the cash if one has an unexpected need.
In addition to the above two advantages stock market investment has over the GLIS; shares have additional benefits which cannot be duplicated by GLIS. Let us now look at how stock market investment can provide additional benefits.
Protection Against Inflation
Unfortunately, in the modern world, inflation is a sad constant fact of life. The money in your pocket or bank account is constantly shrinking in value. The RM1.00 that you own now is worth a lot less than the RM1.00 in your Father’s or Grandfather’s pocket. Although one say that the central banks of the world have largely learnt from the periods of super-high inflation such as the Seventies or Eighties when annual inflation shot up to double digits; it has not been possible to remove inflation totally. The classic example often quoted to illustrate danger of inflation is the cost of a can of sardine. Fifty years ago, a can of sardine cost 30 sen, it is now about RM5.00, an increase equivalent to 5.5%+ pa.
Let us consider a few more recent examples to compare the price level in the year 2000 and the current time. In 2000, a terrace house in Penang’s Green Lane area may cost about RM400,000. Now, I have been told that a similar house may cost you RM1,200,000. This is a tripling in house price in 25 years. In annualised term, this is equivalent to an increase of about 4.5% pa.
Overseas education has suffered much worse rate of inflation. In 2000, an MBA from Harvard Business School would have cost about USD140,000. For 2025, the cost has ballooned to USD250,000. This is equivalent to an increase of about 8.5% pa. To be fair, I must admit that not everything we buy has suffered from inflation. The price of a Proton Saga has been remarkably stable over the last 25 years wherein its price has stayed close to RM40,000 for the base model.
Based on the official inflation index, the average rate of inflation in the country over the last 25 years is about 2%-3% pa. Not so high but still significant. This is equivalent to a halving of purchasing power every 24 years (based on 3% pa inflation). This means that on average the inflation adjusted return you may get from an investment in GLIS is only about half as high as the nominal return.
How can investment in shares protect you against the ravages of inflation? The basic principle is that if the profit of a public listed company (PLC) rises, it would be able to pay higher dividend. Thus, the shareholders will be able to get a stream of growing dividends. The eventual return would be higher than the initial dividend yield. We shall next look at the reasons why a PLC can produce a continual growing stream of dividends.
Why The Return From Public Listed Companies Can Grow?
INFLATION This is because the sales of a PLC is based on the current ringgit and its profit is a normally a consistent percentage of its sales. Thus, its profit would continually increase to match the price of its product or service. Assuming a PLC sells the same number of “widgets” in 2025 as in 2000 but its price has doubled because of inflation, its profit would also double if its margin stays the same. It would thus be able to pay out more dividend from its profit.
ECONOMIC GROWTH In the last 25 years, the per capita income (the average income per person) of the country has grown from RM13,411 to RM56,851. That is equivalent a growth rate of about 6% pa. Higher income means a person would have higher purchasing power. If the product or service provided by a listed companies can grow at the same rate as the per capita income, its profit would increase greatly and hence its ability to pay out more dividend. (Think: how much was your telephone bill before the advent of smart phone compared with now).
POPULATION GROWTH The population of Malaysia has grown from 23,275,000 to 34,500,000 in the last 25 years. This is equivalent to a growth of just under 2% pa. If a listed company can sell the same amount of its product or service to each person, it would be able to reap a substantial increase in its sales over this 25 years. Again, other things remain equal, its profit would increase and also its ability to pay dividend.
In the next article, I shall try to explain why if stock market investment is such a good deal; KLSE has earned itself such a bad reputation such that most average investor would avoid it like the snake.
