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I believe that most people in Malaysia are still not invested in the stock market. At most they are indirect investors through unit trusts and investment-linked insurance products.

For some reason, stocks are seen as risky and for most people rightly so. Compare it with the KL property market in the past few years and you see little reason to be in the stock market.

So how is it that the fund managers can always flip out their charts to show how shares outperform all other asset classes?

There is an interesting article in Yahoo Finance today. It is written in the American context, extracts of an interview with Roger Ibbotson. I had to look up Wikipedia and found out that Ibbotson is a Yale finance professor who is an expert in capital markets. Although Warren Buffett never really thought highly of academics, there are some good observations in the article.

The thing that caught my attention was the comparison between Stocks and Bonds. The extra risk you take when investing in stocks is still the same as before, but what is unusual about the last 30 years in the US is that the bond market often outperformed the stock market over long periods. According to Ibbotson, we won’t see this again.

Why not?

In 1980s the US saw double-digit yields, and when those yields dropped, the prices of bonds went up making it a great period for bond investors. But today yields are 3% to 4%. So we’re starting out with a low yield that is more likely to rise than fall, which means you won’t get any capital gains from owning bonds. Many investors in the US are no doubt disheartened with stocks, causing a flight to safety which will not favour them in the long run.

Ibbotson is putting his money where his mouth is. He manages funds which invest in less liquid stocks, those that trade less frequently:

“But research shows that the stocks that are more liquid historically have lower returns, while those that are less liquid have higher returns. We’re buying companies that have strong fundamentals but are relatively less liquid, companies that there’s less interest in, the ones not talked about in your magazine. Effectively, you get an out-of-favor stock, and if it ever comes into favor, you get a big kick-up in the returns.”

Most fund managers would shy away from this approach but it is the wise contrarian who often has the last laugh.

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