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Capital Dynamics Sdn Bhd is the first independent investment adviser in Malaysia. It has been described as "one of the country's most iconoclastic and critical research outfits".

In February 2004, Capital Dynamics Sdn Bhd launched icapital education.

Since our inception in 1988, we have remained totally independent and have been providing objective advice on Stockmarkets and Economies through iCapital.

The iCapital newsletter is its flagship product. It has been around since 1989.

In 2002, icapital.biz, the online version of iCapital was launched.


Home > Articles > Profits that Beat Bangsar Properties

Profits that Beat Bangsar Properties


In our interaction with fellow Malaysians over the past 14 years, we have only come across a single person that has spoken favourably of our unit trusts. The rest have all regretted investing in the unit trusts. Based on the feedback, none of them have been able to achieve decent returns despite investing for 5 or even 8 years. The single person who was positive unfortunately turned out to be a unit trust agent. Is there any hope left for our fellow Malaysian investors ?

First, many Malaysians get attracted to the KLSE because they think that making money from the KLSE is easy - just buy shares based on rumours, tips, insider news, etc that are passed to them from various sources. This very popular method works very well for a certain period, in particular during bull markets, like 1993.

Then, when the stock market falls, they get stuck with their shares and pray that the prices would recover. They are forced to become long-term investors. They think they have learned their first lessons. They promised themselves that they would be smarter the next time. Still remembering their earlier profits, they hunger for a repeat of this quick success. They would now look for more reliable rumours, hotter tips and better insider news. Unfortunately, they have invested more money but the only results are more losses, even though they console themselves that they are only paper losses. After this, many would feel they have been cheated and swear not to touch the stock market again or many would turn to unit trusts.

The above experiences that we are telling are very common experiences. It is very tragic because very often, hard earned money is involved. Investing in the stock market does not have to lead to such financial disasters. Investing successfully can actually be simple. It only involves a few concepts and only a few steps. But it can be difficult to understand or difficult to practise them. This is why we are using a simple case study to explain the factors involved.

One of the very easy sections in icapital.biz is Section C or The Capital Dynamics Portfolio. It was started in Sep 1991 with RM55,000. After 11 years, it currently has a market value of around RM330,000 or 6 times larger than its original sum. From 1991 to Jun 2002, the compound annual return for The Capital Dynamics Portfolio is 17.97%, compared with 2.38% for the KLSE Composite Index and 1.98% for the EMAS Index. There are a few simple but very good reasons why we are highlighting Section C of i Capital today. Some may see it as purely marketing our service but we think many would be very interested to find out about such an investment success and how we achieved this success even if it inadvertently involves some self-marketing. There are many valuable lessons to learn from Section C. Remember, our record is not 6 or 12 months. It is over 11 years, covering bulls and bears, boom and recession.

Reason One - Investment Style

The first thing to observe about Section C is that it is based on a bottom-up investment approach. In fundamental analysis, there are two major methods of analysis. [1]. One is known as bottom-up. [2]. The second is known as market-timing or top-down approach.

What is a top-down approach ?

The top-down approach is a very popular investment method and the most well known, even though many investors do not know that they are actually using this investing style. What you read in the newspapers or what you get in stockbroker's analysis is mostly based on a market-timing/top-down approach. It is very popular with the large institutions or stock broking companies that can afford the research support infrastructure. The approach implies that the investor must be serious enough to make the effort in understanding the arguments involved. It is definitely not a lazy man's approach.

It starts with global macro-economic analysis, especially those of the big 3, ie USA, Japan, Europe. China is fast emerging as an economic force - it pays to monitor its economic performance also. It involves forecasting the overall economy, inflation and interest rates; then, selecting the industries that have better prospects. After choosing the favourable industry, the analysts or investors would pick the stock or stocks with favourable prospects. Very briefly, this is what a market-timing/top down investment approach would involve.

What is market timing ?

A good example of market timing is Section A in the i Capital. It is similar to the top-down approach and tries to time or predict market bottoms and market tops. Timing the market implies 2 decisions. One, WHAT to buy or sell. Two, WHEN to buy or sell.

First, one conducts the top-down analysis as explained above, providing an input base on fundamental analysis and the basis for selecting the securities. Then one would conduct the necessary chart and technical analysis for deciding when to buy or sell. Timing is almost completely technical in nature because fundamentals rarely change on a day-to-day basis.

An exception perhaps in using fundamentals for market timing is that many would add in the overall stock market valuation ratios that are published in icapital.biz. This market PE does not tell exactly when the market will turn up or down. Given the underlying economic and corporate fundamentals, the ratio is saying that the overall market is cheap or expensive.

These ratios can be useful for timing the KLSE at the major tops or bottoms. For example, the KLSE has in the past reached its peak or was close to it when the market PE-ratio reaches the mid 30s. In our 16/12/93 issue, it was around 32-33 times (KLSE CI was at 1,112). On 6/1/94, the market PE ratio was more than 36 times. The Index was at 1,248. The KLSE peaked at 1,314 on 5/1/94.

A major bullish reversal usually leads to longer-term investing for maximum profits. A shorter-term reversal usually leads to a trading position where the broad and major fundamental trends are taken as given. Charts and technical indicators are given strong emphasis. It is necessary to first determine what the underlying major trend is. Market-timing is a method that is hard to be right consistently. Yet it is very popular with all types of investors - institutions, individuals, beginners, veterans, etc.

What bottom-up is

In contrast, a bottom-up investing style ignores macro-economic forecasting. It does not try to pick the most favourable sector, like palm oil or banking or technology. It does not predict the timing of a recession or recovery. It does not time the stock market by predicting when a bull or a bear market would start. It ignores all these.

What a bottom-up investor does is to analyse the company. The investor or analyst would look at the business of the company, its track record, the quality of its management and the long-term prospects of the company. After evaluating all these factors, the bottom-up investor would calculate the intrinsic value of the company, which is a long-term value. The investor or analyst would then compare the intrinsic value of the company with the share price. If the share price is below its value, then, the investor would buy. If the share price is higher than the value, then, the investor would sell. There is no market timing involved. This is briefly what bottom-up investing is.

In timing the stock market or analysing from a top-down approach, the investor or analyst has to make a lot of forecasts. The accuracy of the forecasts therefore becomes very important. To make accurate forecasts, correct assumptions have to be made. For a bottom-up investing style, the most important exercise is to calculate the intrinsic value of a company. The long-term value of a company is not a precise or static figure. One very successful bottom-up method is known as value investing. This is the investment approach that was pioneered by Benjamin Graham and the best example of a successful value investor is Warren Buffett.

The Capital Dynamics Portfolio or Section C of I Capital uses a bottom-up, value investing approach. This is one major reason why its performance is so much better than the KLSE.

Reason 2 - The Easiest Way To make money

An investor may not have the skills to be a bottom-up investor. Or he may not have the time or research facilities to do top-down analysis. This is where Section C of icapital.biz comes in.

For a subscriber to invest successfully, all he or she has to do is to follow exactly what The Capital Dynamics Portfolio does. Many of our subscribers do this. What we buy, they buy. What we sell, they sell. If we have 70% of our funds in cash, they follow. You just have to subscribe to icapital.biz and be patient. It is as simple as this. Compared with unit trusts, investing through Section C is so much easier, so much cheaper and so much more profitable.

We have shown you what your profits would be over the last 11 years. A six-fold increase over 11 years would even beat buying prime properties in Bangsar, Kuala Lumpur. This now brings us to the third important reason why we are explaining Section C in detail.

Reason 3 - Compound Return

Compound return is the magic of investing.

Take a look at figure 1. It looks at what the value of The Capital Dynamics Portfolio would be 11 years from now, using our annual performance of 17.97% that was achieved over the last 11 years. Another 11 years from now, its value would be close to RM2.000 mln. So, over a period of 22 years, RM55,000 would grow to nearly RM2.00 mln. While this achievement is very impressive, many investors are not interested when they realize that the annual return is only 17.97%. They want more.

Figure 1 : Cumulative Return Section C of i Capital

Take a look at figure 2. It shows the results based on different compound rates of return. Look at the results based on a compound return of 99%. The results are astounding. After 15 years, RM50,000 becomes RM1.519 billion ! This can be changed to 15 months, 15 weeks or just 15 times within a night. At a compound return of 99%, an investment of RM10,000 becomes RM1.236 million just after 7 times. One can even become a millionaire with just RM10,000 in one night. Just find a casino.

Figure 2 : Compound Return for 15 Years

It is the magic of compound return that seduces many people into speculation, short-term trading or quick gains or buying share based on borrowings. They laughed at the 18% type of returns; they say that it takes too long and are too slow. What many people do not realize is that there is also compound loss.

A 20% loss each year for 10 years would cause RM100,000 to shrink to RM10,740. If the loss is 60% per annum, the sum shrinks to only RM10 !!


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