Should we invest outside Malaysia?..........Part I

A reader left a comment asking me whether we should invest outside Malaysia such as Singapore or US markets directly. He thinks the Malaysian stock market is very over-valued and other markets are less expensive. The following views are purely my personal opinions and are for reference only, should never be taken as an investment advice.

1. Unless you have more than 2 - 3 million Ringgit, Malaysia market is big enough for us. 10 stocks should work up to RM 1 - 2 million, if we invest in blue chip companies.

2. The reverse is true, if we have less than RM 1 million, going outside Malaysia means we have less than USD 350 k or S 400 k to invest. If you are investing based on concentrated strategy, you get to invest up to 5 - 10 ideas only. Transaction fees are higher and that will prevent you to churn rapidly.

3. From a hedging point of view, what we are trying to do is to hedge ourselves from political, economic and currency risks. If a country has a history of nationalization or turning a free economy into a socialist economy, then all your assets will be nationalized and you will be down to nothing. This fear is very strong among the rich people in China. This motivates them to move theirs assets out of China. In Malaysian context, the risk of we turn into a communist country is low. This is a black swan event.

However, the chance of Ringgit depreciation is there if our government continues to delay their reform or set Big Hairy Audacious Goals but never achieving it. The persistent fiscal deficits are mind boggling -- for donkey years we have been running deficits. The history of 1998 taught us when people panicked sending the KLCI to 280 points proven to be one of the best opportunities in a life time to make a 4 to 5 fold gains.

4. To invest in the US stock market which is a more efficient market, we are competing with the best of the best in the world. Those guys are equipped with smartest analysts, powerful computer systems and etc, it will very tough to beat them, unless in a situational opportunistic buy. When that happen it is very likely that Malaysian market will also be badly affected and the opportunity to buy is also there. Unless you have a very proven track record in Malaysia, going outside is like learning to fly before you can run.

5. The big blue chips are over-valued and buying and selling among the big guys are driving up the markets are valid reasons. Historically, Malaysian market are selling at a premium compare to other markets. We ought to make sure we make apple-to-apple comparison. If Citigroup has been selling for 1.5X P/BV post-crisis, we cannot consider Citigroup is cheap if it is selling for 1.8X P/BV because our Public Bank is selling for 3X P/BV.

6. Expecting yourself to make a smooth 10-15% annual compound rate is just not possible. Smooth out by rotating in and out is nice on theory but I find it very difficult to implement. Some years you may just be content with 3% but some years you may have 30-40%. Over long term periods, we all should aim for 10 - 15% CAGR. Keeping yourself out of negative years over a period of 20-30 years will put yourself in the upper investment echelon class, in an environment of what Pimco coined as the new normal -- the era of de-leveraging.

It's not that I discourage people to go outside. Let me summarize it to avoid being mis-understood. Investing outside Malaysia directly is okay

- if you are rich(greater than 2-3 million cash, many think 5 million and above).

- special situational investment (if Thai index drop by 80%, buying an ETF from SGX will be a great idea). Another example is Mr. Koon Yew Yin took advantage of fear factor of people selling indiscriminately when Hong Kong was returned to China in 1997.

- if you can understand enough of the macro-economics and can understand enough of the forex direction. If you diversifying your stock picking in emerging economies you got more works, you got to do a bit of a politic analyst's work as well.

In part II, I'll share my views of investing outside Malaysia through mutual funds.