RAPID

A curious LT chart. 

1997-1999:  Down impulse wave #1 -85% in less than 2 years

2000-2001+: Down impulse wave #2 -79% in less than 1.5 years.

So far is normal.

2001+ to 2009:  Up impulse wave #1 +410% over 8 years

2011 to 2015:  Up impulse wave #2 +355% in less than 4 years

2020 to 2023:  Up impuse wave #3 +481% in 2.5 years

So far is not unusual.

2024 January:  Massive 95% crash in just 1 month!

This is not normal market move.

What happened?

This massive move wipes out 2 massive impulse waves up and brings price back to where it was in 2000 (before Tech crash), 2007 (before Global Financial Crisis).

The first question is ...

Question - Will this company even survive?

It's obvious - lay people like you and me will never know the answer.

Question - What kind of business is this?

Precision tooling apparently. 

Colourful annual report.

But if you read through the Management Discussion & Analysis, you'll realize the profile is outdated.  It's more into property investment and related business more than precision tooling.

Looking at its balance sheet and notes, they have a sizeable loan and borrowings to back up a very sizeable property investments.  See pages 137-145 where the Company listed 99 properties to back their claims that the investment properties are worth RM268 million.  Their cash is not exactly large in comparison.  I haven't looked closer outside the annual report, my wild guess is they might be facing potential liquidity crunch and trying to raise cash by selling some properties.  Everyone knows that forced sale under panic situations never fetches the values shown in the books.

At the same time, this situation can turn profitable if it turns out that the fear is unfounded.

Reported NTA RM1.62.  At its peak, it was nearly RM29.50 just recently.

Rational possible outcome?

Honestly, I don't think anyone knows the answer on future possible outcome.   Everyone will have strong opinions - either  (1) yes, (2) no, or (3) don't know.  My personal take is likely the future outcome will be binary i.e.

Outcome #1. It goes to zero. (because the underlying business, books, numbers turns out to be "inaccurate" / "fake")

Outcome #2. The fear is unfounded, it eventually recovers (due to the underlying business reasons).  If so, a new impulse wave commences lasting years, not too dissimilar to #1 (+410% over 8 years), #2 (+355% in less than 4 years) and/or #3 (+481% in 2.5 years).

Rational trading strategy?

The most rational strategy is probably to avoid this.

However, if you must really scratch your itch (because the itch is too itchy), then, Warren Buffett likes to say this:  

Investment is most intelligent when it is most business like

What's the most business like strategy for this?

I think the most doable strategy for me personally, is to pretend as if I am going to Genting and gamble.   Buy 1 chip only, bet in a 50/50 situation where the payoff is larger than 2:1.

In short, it basically means this:

1. Adopt a 1, 2, 5 year timeframe.
2. Accept this timeframe is gambling and not investment.  Accept you could lose it all.
3. Fixed in advance how much to gamble.  Say 0.5% capital (a small portion of your market profits).  Accept you could lose all of this.
4. Buy only once near the bottom (the exact price near the NTA of RM1.62 probably doesn't matter).  
5. After buying, lock this in a drawer immediately. 
6. Tell yourself the market for this stock has been immediately suspended, with no further quotation available over the next 2-5 years.
7. Don't look at Mr Market quotation any more - it will only bring you emotional roller coaster.
8. In 1, 2 or 5 years time, look again at the stock.   Use Market quotation to your advantage i.e. sell only when it makes sense by then.

Likely your outcome will be a binary one as mentioned above.

What about Luck?  

If you absolutely must scratch the itch, then you'll definitely need the luck!

LCTITAN

Turnaround play

Documenting for future reference.  Paper gains at the moment, but this stock still can lose if make mistakes.

Not Buffet investing nor dividend investing strategy.   

- Last bought 1.11. 
- Average price 1.36. 
- 2.68% capital still exposed.

Turnaround, cyclical plays means don't bother to look at historical fundamentals. 
- They are lagging.
- We are guided purely by price charts.

LT chart

- Downtrend unmistakeable since 2018.
- Trying to print a double bottom, with potential breakout, but hard to know.  Half the time, instead of breakout, we see sideways consolidation.

ST chart

- I think it's critical to beat RM1.61 - RM1.65 resistance over the coming week(s).
- If failed to beat RM1.61/65 and falls, it can potentially fall further, due to confirmed printing of bearish RSI divergence.
- Because of this risk, I will queue to take partial profits near there.  I have take some, and will take profit up to 40% of the position.  If it does breakout and sustain the breakout, I still have majority position to ride up.  If not, it lowers my average cost, with Margin of Safety.
- Hard to say what are the odds - my gut says 50% chance of breakout, 50% chance of failure - I literally have no edge here.
- If it falls, half the time it can fall back to perhaps 1.26-1.30, or lower, or higher.

Don't chase

PS.  First double bottom Mar 2020 Covid low.  Big zig zag up lasting over 1 year, with at least 5 opportunities to sell on strength and buy back over that 1 year period.
We've just seen the second double bottom in 2023 with a different character (it's normal).  My personal expectation is majority of the time, what we see in 2020-21 big zig zag up won't be repeated.  If it's a true double bottom, we'll see a different move up.  More likely, one that creeps up slowly and climb that wall of worry, that will encourage most buyers to let go their positions so that when it makes a genuine move up over a longer period, most long holders will let go of their positions.  (just a personal guess - interesting to see how this pans out the next 12 months).
PS2.  When charts print somehing different from expectations, like reading tea leafs, prognosis changes again.  I may keep quiet after that.  Don't follow, don't chase.

PS3.  Whilst this point onwards, I'll be guided by charts, I won't ignore fundamentals either.  My initial entry was guided by fundamental considerations.  The next quarterly report will also be studied.  Only today, I am not looking at fundamentals.  Got to know when to look, and when not to look at fundamentals vs charts.

BAT

One of Charlie Munger's famous quote is 

"All I want to know is where I am going to die, so that I'll never go there".

He didn't mean this literally (he recently passed away).  It's actually the same point as Warren Buffet's investing rule no 1 and 2.  What both means is that they want to know where are the investing mistakes that loses monies, so that they follow Rule No 1:  Never lose money.

Unfortunately, BAT is an example of a business that has lost earnings since 2015 peak.  Price crashed and dropped subsequently.  My contention is that it's not yet over.  Some long term price charts first.

LT Price Chart

3 clear phases since 2000:
1. 2000-2015:  Bull run phase running 15 years at least.
2. 2015-2020:  BAT crash phase lasting 5 years.
3. 2020-2023:  Gradual decline phase lasting 3+ years.

Note the greatest fear with highest volume happened around 2020, and there's a small opportunity to buy when everyone else is running at capitulation stage - however, this is not investing strategy, and capitulation play is a completely different trading strategy.  (A side note is in comparison to 2020 high volume, today's volume is tiny in comparison and is no longer a rewarding capitulation play).

Business Quality - last 10 Years

It's clear from above, that the highest EPS and DPS per share from BAT happened in FYE2015.
- This corresponded to BAT peak price around RM70.
- Since then, BAT EPS has declined from 319 sen down to 73 sen or roughly 4.5 times.
- BAT DPS follows EPS decline, as the company endeavours to pay out nearly all of its earnings.

Price generally follows earnings and dividend contraction, except, here, it has fallen more rapidly, because of P/E multiple contraction, from 20-25 down to 10-15.  My contention is that this P/E of 15 is still quite generous and can shrink further.

BAT's business model

This relates to the question - what caused BAT's earnings crash since 2015?

Sometimes you may hear illicit cigarettes being used as a reason.  This is actually not a new factor - e.g. Read 2015 BAT annual report, and so, is only partially true.  Partially because whilst it has gone worse by anecdotal accounts, illicit also means that the government data collection process is more vague, less disciplined, and more prone to hearsays.  Just because more and more people start calling a dog's tail to be a leg, it doesn't mean the dog now has 5 legs.  The dog still has 4 legs.

"The operating environment in 2015 was far tougher in terms of business challenges in comparison to previous years. The escalating illegal cigarette trade was the main challenge faced by the legal tobacco industry. One in three cigarettes in Malaysia is illegal which puts the illegal cigarette trade incidence at a high 36.9 percent , a 3.2 percentage point increase from 2014." 

The second factor is cigarette alternatives (such as e-cigarette, vaping, etc.).   Google the history of e-cigarettes and we know it was already around in early 2010s, when BAT price keeps rising.  It appears BAT has under-estimated this threat, because as late as 2020 (e.g. look at 2019 BAT annual report), it still keep blaming illicit cigarettes.  Look at the cover of the annual report and the Chairman messages:

Of course the rest since 2020 is history.  

Whatever the cause (blame never helps), BAT was slow to respond to the growing threat of alternatives.  

Using Vaping as example, Malaysia vape users rose to 1.4 million in 2022, out of 23 million adult population in Malaysia - if true this is roughly 6%.  Total cigarette users % adults in Malaysia is around 23% in 2015, estimated by the government.  

If true, this suggests 5 million adult Malaysians smokes.    

Doesn't take a genius to figure out that there is still considerable substitutions to be had in the coming 10 years.  From a total population perspective, perhaps 3.5-4 million Malaysian cigarette smokers could potentially still switch.  Half of them are expected to be BAT customers (since it has 51% market share).  So, there are still millions who could still switch to vape in the coming 5 to 10 years.

Relative revenue/profitability between traditional cigarettes vs Vuse

Vuse is BAT's top vaping product on sale, and they are clearly late in introducing this product to Malaysian market.  

It appears one could buy a pack of Vuse GO 3000 (good for 3000 puffs) online for approximately RM26.

Compare to a pack of Dunhill going for apparently RM17.40-17.70.  Depending on the smoker, a single pack may be good for 200-300 puffs, say 250 puffs.

What does this mean to BAT revenue per smoker who switched from Dunhill to Vuse GO 3000?

To get 3,000 puffs from normal cigarettes, the typical smoker will need 12 packs.  Estimated Revenue = 12 x 17.40 = RM209.

The same company offers 3000 puffs for RM26 via Vuse GO 3000.

The potential for revenue contraction (from RM209 down to RM26) is nearly 88% per smoker.  Let's say at least 80% revenue contraction every time a smoker switched.

Current BAT market share

In BAT's latest 2022 Annual Report, they claimed that they still have 51.6% market share, presumably vast majority are cigarettes.

This is disturbing to BAT's future revenue prospects over the next 10 years.

Considering it holds half of 5 million smokers, say 2.5 million smokers, and its share of Vuse GO smokers is unlikely to be larger than 25,000 to date, due to slow start i.e. unlikely to be 1%.

And even if it's successful to recapture previous smokers and turn them to Vuse GO, it is likely to lose the majority of its revenues.

Therefore, it is unlikely that we've seen the bottom on BAT declining EPS even today.  If you consider how many years it would take to switch a generation of population to change behaviours, this is a long term pattern and it's quite unlikely that we've seen stabilization / bottoming.   

If so, over the next 5-10 years, it is quite likely that we will continue to see BAT EPS continue its decline notwitstanding quarterly spikes (which can be engineered by clever management). 

Side observation - brilliant management vs bad economics

When reading BAT's annual reports since 2015, it is interesting to note how many times BAT has changed its CEO - I counted at least 4.  Over this period, all 4 are expats.  What does this mean in the context of Buffet's quote:  "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Simply put, giving these expats the benefit of the doubt that they are brilliant management, the fact is that eventually, these CEO has to leave BAT Malaysia without turning around its EPS, because when they go against bad economics, it is the reputation of BAT's bad economics that remained intact.   Simply put, EPS continued to decline, management continue to change.   We should not underestimate how poor BAT's economics are.

A second potential reason why frequent management change is bad for business.   The replacing CEO knows that he/she may only have a short time - say 1 or 2 years to turnaround the business.  Therefore, if a business decision needs 3 or more years to show fruition, it is quite unlikely for this CEO to consider implementing, because he'll be gone by then, and any benefit only to be gained by his replacement.  This is another constraint to overcome, one caused by bad economics.

Conclusion

One of Buffet and Graham's famous quotes are:  "In the short run, the market is a voting machine, but in the long run, it is a weighing machine.".  What this means is in the long run, the stock price tend to follow earnings and in the case of BAT, as its price falls and as its future prospects fall, its P/E multiple also falls together with its EPS, causing a faster than proportionate fall in its Price.

Today, it is still being priced on a 10-15 P/E multiple.  

If BAT revenues continues to shrink over the next 5 years, then, it is possible that one day we'll see P/E contraction in addition to EPS contraction i.e. the current price between RM9-9.50 may not be the bottom yet.

For investors, this is a sunset industry and best avoided for now.  Compare to MAYBANK benchmark, the difference is huge.

Remember Buffet's Rule No 1 and 2.  To avoid making long term investment mistakes, remember Munger's opening statement above, with Dividend Guy paraphrase - "all I want to know is where and how I will lose monies, so that I avoid going there"

Instead, look for businesses with above average / superior economics for longer term investments.  We don't lose monies when we don't invest in bad economics stocks.

Berkshire Hathaway Acquisition Criteria

Reference:  Berkshire Hathaway 2017 AR page 23.

Why is this important?

I think we can learn a lot from Warren Buffet, the world's greatest investor of all time.
To me, Buffet's investment strategy centres on:

1. Carefully selecting businesses with superior long term economic characteristics, and 

2. Comes with honest and trustworthy management who will take care of shareholders, and

3. Looks to buy at a fair / attractive price, and

4. Once he finds such a business, he will then try to own that business in its entirity (because good businesses are very hard to find), and

5. With its economic moat, and presumably growing earnings and cash to shareholders, then, look to hold this business forever (.. yes forever ...) whilst the superior business model remains intact.

Does this strategy makes sense to you?  

To me, yes.  When we find the rare, long term winners that will keep growing its earnings and shares its bigger and bigger profits with shareholders over time, it doesn't make sense to sell the stock for a one-time profit, and lose all the future income.  Buffet has many times stated that he's not into short term gains, unless there is an extraordinary euphoria that completely overvalue the business so much that it is no longer rational to own such a business. 

How to find such a company?

I believe there are more than just 1 interpretation of a Superior Quality Company.
It is interesting to start from what Buffet actually writes about this topic.
Looking at the 6 criteria above, I think we can summarize as follows:

1. Consistent earnings power over say past 10 years (he's not interested in future projections which anyone can claim - he's after demonstrated past earnings).  

2. Good returns on equity over say past 10 years (there's a few ways to define this, perhaps the simplest may be EPS / NAPS).

3. Business deploy little / no debt (there's some logic to this, a business that is highly leveraged might not be sustainable in the future when it encounters difficulty and risks bankruptcy/insolvency for example.  Many ways to measure this, perhaps the simplest may be Net borrowings / NTA.  But I expect this to vary by industry type - e.g. banks business model are highly leveraged).

4. Business model that's easy to understand (to me, this relates to understanding 1, 2 and 3 above in terms of its sustainability and predictability over the next 10, 20 years - do we really understand how the business retains its superior business model in the future).

What does these 4 criteria means?  To me, I think it can be boiled down into 2 essence:

1. We must really know, truly understand, beyond doubt, how the superior company makes increasing profits in the future.   Out of 100 companies, pick the best 1 or the Top 3, believing that the rest are rubbish, average, not sustainable, not worth owning, etc.  The better you are at discerning, the better the quality discovered (probably).   Have objective principles to discern and differentiate.

2. We must be convinced beyond doubt, that this company is trustworthy and will share its rising profits with shareholders, and not keep it to themselves. 

Any short cuts?

There are, but they have opportunity costs/not full-proof.  Simple rules means some gems will fall through the crack.

E.g. one of these criteria could be as follows:

1. Rising EPS over past 10 years.
2. Rising DPS broadly in line with rising EPS over past 10 years.

Why DPS over 10 years? 

There's pros and cons.  The pros is that it is harder to do accounting manipulation of long term DPS - the signs are easier to detect.   Whereas stocks that doesn't pay dividends - it is much easier to do accounting manipulation even over 10 years to show rising EPS.  You got to know where to look and sometimes, it takes too much work.

Another pro is to eliminate/differentiate from stocks that pays high DPS for short term, or 1 year or one time.  These cyclical or one-timers don't  fit Buffett's strategy to own the business forever.  Cyclical stocks are better off bought during cycle lows and sold during cycle highs, rinse and repeat.

DPS is also demonstration and proof - especially over past 10 years - that this company truly shares its profits with shareholders.  It shows, the Board and management thinks about the shareholders every quarter, every 6 months, every year.

What are the limitations of such an approach?

Many.  For example:

- You will miss the few superior stocks that hasn't paid dividends yet.   (i.e. Opportunity loss.). 
- Some companies with high borrowings may show rising EPS and rising DPS but will eventually go bust due to excessive leverage and borrowings.  So, there's no substitute for really understanding the business model, including its long term sustainability.
- Other opportunity losses may be missing rising stars with less than 10 year history (i.e. Opportunity loss).
- You still have to look at its payout ratio and long term sustainability of these dividends paid out.
- Past statistics alone has limitations - e.g. it doesn't look forward, hence, still important to also look forward to understand its future threats/potential weaknesses (assuming management are competent to identify opportunities and capitalizing on their strengths). 
- etc.

There are no one perfect simple approach / guarantees in the stock market.

Bottom line?

Don't forget Buffet's requirements to select superior, quality companies for the long term. 
The idea is simple and rational, but requires some honest effort.
He and others like him has used this approach successfully for many, many decades.

CARLSBG

Added 18.94 recently.  Represent 2.4% of my stock portfolio.  Notes for future reference.

I won't bother to describe its business profile - everyone knows CARLSBG, it really doesn't need much introduction. 

Long term Chart

24 year chart.  3 phases are obvious, and should be noted:

1. 2000-2011:  Sideways range.

2. 2011-2020:  Long term price increase.

3. 2020-today:  Long term consolidation / downtrend.

In short, temporary support at RM18.90, but more than 50% chance that the patient long term investor can collect more at lower prices over the next 1-3 years.  

Not a bad Quality Stock

EPS over past 10 years grow from 60 sen to a peak of 103 sen, which is pretty decent really.  6% per annum CAGR is decent.  However, there is a divergence between the Price vs its EPS growth since 2020.  Note the big dip in EPS in 2020, to fall down to 53 sen.  So, it's business quality is okay, maybe decent, but not superior.  Still it is clearly above average relative to the average Malaysian companies.

Its DPS experience is more volatile.  Peak DPS in 2018/2019 paying 100 sen i.e. paid more than it earns. Nevertheless, depending on your start date, DPS is generally on a recovery phase after crashing down from 100 sen in 2019 down to 40 sen in 2020.  It's not a great characteristic, but it still pays dividends regularly every year. and its payout ratio is more disciplined from 2020 onwards.  This is its new phase which ties up with Price chart above where it appears to be doing a long term consolidation / downtrend.   

The dividend payout ratio since 2020 is more disciplined, with payouts ranging from 75% to 85% which I like.  I get a bit nervous when it pays out higher than 100% (because it needs more work to dig in to know how it can sustain), but it looks like financially, after COVID, it has become more cautious.  So, this part I like.

A sample of Dividend Yield over the past 10 years is shown above - ranges from 1.8% (2020 - extreme, unlikely to repeat in next 5 years I think) to a high of 5.9% (2015, also a bit on the high side).  At 18.94, if DPS is say 85 sen, then DY = 0.85 / 18.94 ~ 4.5% i.e. this looks a bit high probably due to the price being a little bit lower.

But in Technical Analysis, there's a saying that what looks like a low price, can get lower.

Hence, I'm not in a rush.

The Long Term Play Strategy

To get rich slow, aim for a longer term play.  Time is the friend of a Quality stock and enemy of the Mediocre stock.

My objective is modest, to try to earn say 9% per annum returns over next 5 years with this stock conservatively.  I don't believe in shooting for the moon - that's for my speculative trading portfolio where I have made triple digit % gains in some of them.   This is about growing your wealth slowly and safely with extremely high probability.

This means:

1. Over the next 1-3 years, take my time to buy more at lower prices - my guess is that the bias over next 1-3 years is to perhaps try to touch RM17.  We can never accurately predict prices, but I already have something at 2.4% of my portfolio, so, I scratched my itch and now, it's slowly and patiently seeing if market gives me the opportunity or not.   There is some fear, but the fear is not exactly heightened.

2. If my DY on cost is 4.5%, it means I'm looking for price gains of roughly 4.5% per annum.   Over 5 years this equals 1.045 ^ 5 = 1.25.   What this means is that:

- If my average entry price = 20, then, I need to wait till it gets to 25 in 5 years to exit and secure my 4.5% per annum price gains.

- If my average entry = 19, then, target is 23.7.

- If my average entry = 18, then, target is 22.4

3. These target prices are quite realistic, with extremely high odds of happening in next 5 years conservatively speaking.   All it requires is time and CARLSBG business model does not deteriorate (where no clear signs this is even at risk yet).  The lower one's average entry price, the larger the Margin of Safety.

The Risks

There are no guarantees in the stock market - price can crash.

There is no rule that says that the bottom is RM17 - price can crash.

There's no rule that says that after breaking below RM18.90, it will go lower - it might to shake out holders and then goes back up to shake those traders who cut loss.  Market knows where the stop losses are.  Hence, I don't bother to trade and cut loss - I have no cut loss price.

There is no guarantee that it will take 1-3 years to find bottom - it could find bottom sooner than 1 year, or longer than 3 years.

There is no guarantee that after finding bottom, it will work its way up to RM25 - it might surpass this and makes new high beyond RM40.  It might not even get back to RM25.  

In short, nobody in this world knows anything about the future of this business and this stock price, even though there are many who claims to know.  I don't know anything.

Mitigations

It's all about Margin of Safety.

1. Keep this below 4% of one's portfolio, because it's not that great a stock.  It's decent quality, but not the best quality.  If things go very seriously wrong (e.g. more than your expectations above), 4% won't hurt you.  Do enough right things, your portfolio should continue to make new all time highs as this won't be a big drag when you're wrong.

2. Don't need to chase for stocks like this, where charts are like this pattern.  You have a plan, stick to the plan, even if it's very boring plan.  Boring plans are good.

3. Your entry price (a low one) is your margin of safety.

4. Avoid making decisions that will lose you monies.  Decisions like Averaging down automatically - there is a fine balance between averaging down when price moves are expected, vs blind averaging down when its business and price action is out of whack.  The odds for the latter are low for this kind of quality stock, but not impossible.  So, take your time to assess when price crashes.  No rush.

5. If you are wrong, do nothing.  Time will make this an increasingly smaller part of your portfolio, as your correct actions elsewhere will make your winners bigger and bigger to bring your portfolio to new all time highs.

In summary

Love boring strategies.

Love boring stocks.

Live your life.

Minimally monitor prices after market closes.

Life is more than just stock price tickers going up and down.

MAYBANK

 Long term Price Chart

MAYBANK price movements is more stable than KLCI.

4 dip/crash periods since 2000:
1. Tech crash (2000-2001) from peak of 8.67 down to 4.41.
2. GFC crash (2007-2008, Mar 2009 bottom) from peak of 9.91 to 3.54.
3. 2013-2016 dip from peak of 10.8 to 7.5.
4. 2018 peak to Covid bottom, from peak of 11.08 to 7.

Current price of RM9 is in the middle of the last price range (RM7 to RM11).

LT Per Share Statistics

For FYE2023, I think MAYBANK can make 10 year high to edge past 76 sen per share.

It's not a bad quality stock - EPS and DPS CAGR is not negative, but its NAPS grows by 3%+ per annum.

LT Dividend Payout Ratio

Dividend payout ratio ranges from 70% to 90% averaging say 80%+.  The retained earnings helps grow the NAPS.  There are some gaps/leakages, as NOSH grows.

LT Dividend Yield

LT Dividend Yield ranges from say 5.5% to 7.5%, or 6% to 7% most of the years.

Key Takeaways

This is a real business for the long term - we can validate this from our everyday experience.
The stock price is relative subdued, relative to KLCI index - it's a major constituent.
Past 24 years, there are 4 periods when Mr Market was clearly fearful - from Tech Crash 2000s, GFC crash 2008, 2013-16 dip and Covid bottom - all fearful times.   

A plan to accumulate during these fearful times will prove rewarding, to enhance LT Price gains.
- Relying on Dividend Yield alone to earn say 6.5% per annum is not bad - it does appear to edge EPF a little bit.
- However, if you can supplement to own this stock when Mr Market is feeling fearful, you can enhance Total Returns to around 9% per annum, or even higher depending on how good is your market timing.

This becomes common sense, once you understand its long term price and company history.

Historical KLCI Returns

 

Historically, since 1995, KLCI price index hasn't really done much for Buy and Hold investors.

Note the 3 big crashes/dips:

1. Asian Financial Crisis in 1997-98, where KLCI fell from peak of 1278 down to 261.
2. Global Financial Crisis in 2008, where KLCI fell from peak of 1524 down to 801.
3. Mar 2020 Covid bottom, where KLCI fell from peak of 1896 down to 1207

If you bought at 31/12/94 when KLCI was 971 and held till today (7/1/24 1487.61), your price returns is around 1.5% per annum for a Buy and Hold index investor.

KLCI Price returns fluctuates.  If I have to quote a figure for what kind of long term price returns we can reasonably expect, based on historical returns, I would say between 1% to 3% per annum.

Long term KLCI dividend yield may be around 3% per annum (fluctuates a lot, depends on when you start investing).   

Total KLCI returns over the long term may be around 4% to 6% per annum (fluctuates a lot).

Beats FD long term.

May not always beat EPF long term.

Buffet's bet with Protoge: Low cost Index Fund vs Hedge Fund returns

Reference:  https://www.berkshirehathaway.com/2017ar/2017ar.pdf

See pages 11-13, 24-26.

Background

1. Buffet's views are Active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. 
2. The reason:  massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.
3. He wagered $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. He suggested a ten-year bet and named a low-cost Vanguard S&P fund as his contender.
4. Protoge Partners eventually took up the bet.

Buffett's assertion

Bet results after 9 years

1. Compound annual returns for S&P Index Fund is 7.1%, typical of the stock market, and better than Bursa.

2. Buffett's low cost index fund easily beat all Fund of Funds after 9 years.

3. Only initially, in the first year (2008) that S&P500 under-performed.  This is because the Hedge Funds can hold cash/go short.  Even then, their returns were all still negative.

4. However, over 9 years, the low cost index fund beats even the best Fund of Funds, due to high helper's cost.

S&P500 vs KLCI

The green line is S&P500.  The period is 10 years from 1 Jan 2008 to 1 Jan 2018.  Over the 10 years, S&P gained 97% vs Bursa 23%.

Key Takeaways

To paraphrase Buffet - Excitement and Expenses are the enemy of investors.

Historical EPF and FD Returns

EPF is not a bad retirement fund

1. Past 10 years (2013-2022) EPF returns has ranged 5.20% to 6.90%, averaging 6.04%.
   
2. If you invest your own retirement funds (defined as monies you won't touch until retirement with at least 10 years horizon or longer), the benchmark should be 7% per annum. (1% higher than 6%, as reward for doing it yourself)
   
3. If you can't consistently beat 7%, you are better off doing nothing.  Just deposit in EPF and let EPF earn 6% for you with no work on your part.
   

FD is much less suitable for long term Wealth Accumulation

1. Past FD rates (standard shelf rates, major banks) has clearly never beaten EPF dividend rates yearly nor cumulatively.
   
2. If you have excess retirement funds in FD, consider some voluntary top-up in EPF, unless you consistently beat 7% per annum. 

FD rates barely beat inflation over the long term

1. Chart shows most of the times, inflation ranges from 2%-4% averaging say 3% per annum.  Sometimes, it falls below 2% but reported headline inflation rates above tend to be lower than personal inflation rates actually experienced by many Malaysians.
   

Inflation is the silent tax man

Compare 2 scenarios:

Scenario 1 - FD earns 3% per annum, returns not taxable, but inflation is also 3% per annum.

Scenario 2 - FD earns 3% per annum, returns taxable at 100% tax rate, but inflation is 0% per annum.

Scenario 2 is clearly outrageous - if the government took 100% of your entire FD rates, everybody would be angry since you earn nothing, but if inflation is 0% per annum, any spending requires you to dip into capital.

Scenario 1 with zero tax may look good, but if inflation is 3% per annum, any spending you do will also require you to dip into capital, since interest just catches with inflation.  Your original capital buys exactly the same goods 10 years ago, even with FD returns.

 

In short:  Inflation is the silent tax-man

Moral of the Story:  You need to earn higher than inflation, to grow your retirement savings, and be able to buy more goods and services from your original capital.