Investing In the Stock Market

Introduction

Your investment journey begins the moment you open a Central Depository System (CDS) account - either as a Direct or Nominee account.

• This journey often feels mysterious because, beyond the basic concept of "buying low and selling high", beginners often lack a grounded strategy.

Success in the investing world requires more than just capital; it demands a keen understanding of global economic shifts and a disciplined mindset.

A Disciplined "Value" Approach

The challenge arises when deciding which specific stocks to buy. Out of the hundreds of listings on Bursa Malaysia, only a handful consistently provide a dividend yield of 4-5%, which is the benchmark required to outperform traditional savings like the EPF (Employees Provident Fund).

Risk Management and Sustainability

It is widely recommended to secure a solid savings foundation first and invest only "surplus" capital.

• While the global economy has generally improved over the last decade, many companies have collapsed into bankruptcy.
• Therefore, when selecting an investment, you must evaluate the sustainability of the business model.

Beginners are often lured by massive Dividend Yields of 10-15%. However, math can be deceptive. Since Dividend Yield = Dividend Per Share / Share Price, a yield can look "high" for two very different reasons:

• The Good: The company increased its profit and paid out more cash.
• The Bad: The company is in trouble, and its share price has crashed 50% while the "trailing" dividend data hasn't been updated yet.
• Solution: Check the Payout Ratio. If a company is paying out more than 100% of its earnings as dividends, it is "bleeding" cash to keep shareholders happy. This is unsustainable, and a massive dividend cut is likely coming soon.

A popular strategy is to invest in "daily essentials" - companies integrated into our lives, such as major banks, technology companies and healthcare providers.

• In Malaysia, banking stocks are often viewed as safe long-term investments because they frequently offer reliable 4–5% yields.
• Conversely, investors should avoid companies with questionable profitability, especially those whose business models are built on short-term "hype" or passing fads - such as trendy F&B concepts (e.g., TeaTime) or speculative collectibles (e.g., Labubu).
• Furthermore, current listing requirements - particularly on the ACE Market - have become increasingly accessible, allowing many companies to go public without a proven track record of profit. This lack of a "profit test" means retail investors often bear the brunt of the risk, as founders use Initial Public Offerings (IPOs) to exit or raise capital, effectively transferring immense financial uncertainty from the original owners to the public.

Understanding Different Profiles

REITs (Real Estate Investment Trusts)

• These are attractive for their high yields, as they are required to distribute at least 90% of their taxable income to shareholders.
• However, they typically offer limited capital appreciation and are highly sensitive to interest rate hikes and rental vacancy risks.

Growth Stocks

• These companies often pay low or no dividends because they prioritize reinvesting profits into research, development and market expansion.
• Investors pursue a "buy-and-hold" strategy, betting on significant share price appreciation over time rather than immediate cash flow.

Recovery Plays

• Some companies struggle due to macroeconomic headwinds or internal crises.
• For example, Capital A (formerly AirAsia) endured years of hardship due to COVID-19 travel restrictions, while Pharmaniaga is currently navigating a recovery phase following a massive impairment on its vaccine stockpile. As of 2025, both companies remain classified under Practice Note 17 (PN17) status - a designation for 'financially distressed' listed issuers - and consequently do not offer any dividend yields.
• Without a concrete turnaround plan to exit PN17, "hope" is not a strategy; the risk and volatility remain exceptionally high.

Value Traps

• Investors must be wary of companies that appear "cheap" based on low P/E or high trailing yields but are fundamentally "barely surviving" with negative cash flow.
• A company may look like a bargain because it is in a dying industry (like traditional print media or certain legacy manufacturing). No matter how low the P/E drops, the "value" is never realized because the earnings never stop falling.
• A Payout Ratio exceeding 100% suggests the company is borrowing money or depleting cash reserves to maintain dividends.
• These companies face a high risk of being delisted, which could render your shares untradeable and worthless.

The Psychology of Entry

Trading is often more of a psychological battle than a financial calculation.

• In practice, it is nearly impossible to predict the absolute "floor" (bottom; support) or "ceiling" (top; resistance) of a stock.
• Investors frequently face a dilemma: waiting for a low entry price that may never be hit, or buying immediately only to feel regret if the price drops further.
• Notably, the morning session often sees high volatility driven by emotional reactions to overnight news, whereas the afternoon session - particularly toward the market close - tends to stabilize as institutional volume takes over.

An intelligent investor avoids "chasing the herd".

• Buying at a 52-week high is inherently risky because the current price likely fully reflects (or "prices in") all future growth potential, leaving no margin of safety. If the "bubble" bursts, the price can fall rapidly.
• Those who profit from such peaks are typically momentum traders looking for a "quick flip". This is a drastically different profile from a long-term value investor seeking sustainable annual dividends.

Following the golden rule - "Be fearful when others are greedy, and greedy when others are fearful" - requires immense patience.

• You must wait for "bad news" or temporary earnings dips to "shake out" weak-handed retail investors. A common entry point is the ex-dividend date, when the share price typically drops to reflect the dividend payout.
• Aim to enter near the 52-week low. If the price falls further, use "dollar-cost averaging" to lower your entry price, provided the company's fundamentals remain intact.
• Remember: buying at a lower price doesn't just increase your potential for capital appreciation when the market recovers; it also locks in a significantly higher effective dividend yield.

Diversification

When it comes to investing, it is vital not to concentrate your capital into a single "sure win" stock. Even the most robust companies can fall victim to unforeseen "Black Swan" events, such as legal scandals, sudden regulatory shifts or management crises.

• A resilient portfolio should ideally hold 5 to 8 stocks across diverse sectors (e.g., Banking, REITs, Consumer Staples, and Technology). This structure ensures that a downturn in one specific industry does not sink your entire ship.
• A common pitfall for beginners is buying shares in three different banks and assuming they are diversified. Because these stocks are highly correlated, a change in interest rates or banking regulations will likely cause all three to move in the same direction. Similarly, holding Axiata alongside CelcomDigi - the latter being a merged entity - is essentially doubling down on the same telecommunications "basket," increasing your exposure to the same sector-specific risks.

Transaction Costs for Small Investors

Small investors must be mindful of "friction costs" that eat into profits:

• Stamp Duty: RM1.00 for every RM1000 (rounded up) of transaction value (capped at RM1000).
• Brokerage Fees: Usually a minimum of RM8-RM12 (though some digital brokers offer RM3-RM5).
• Clearing Fee: 0.03% of the transaction value.

If you invest only RM100, these fixed minimum fees could represent a 5-10% "loss" the moment you buy.

• To remain efficient, it is better to trade in blocks of RM1000 to RM2000, making the transaction costs negligible relative to your capital.
• Furthermore, purchasing multiple small lots of the same stock within a single trading day is often more cost-effective than spreading those purchases over several days. This is because most brokers practice contract consolidation, where multiple orders for the same counter are bundled into one contract note, incurring the minimum fee only once rather than charging it for every separate day of trading.

Mastering the Exit

Many investors focus entirely on the "entry", but wealth is only realized at the "exit". An intelligent investor sells based on logic, not emotion. Consider these three primary triggers:

• The Valuation Ceiling: If you purchased a stock at a P/E of 10x and it has surged to 25x (well above its historical average), the stock may be overvalued. At this point, the "margin of safety" has vanished. Rather than trying to gamble on the absolute peak, a disciplined investor realizes gains when the price significantly exceeds the company's intrinsic value. You can then reallocate that capital into undervalued opportunities rather than waiting for a potential crash.
• Fundamental Deterioration: You must sell if the original thesis for your investment no longer exists. For instance, if a company's profit margins are permanently eroded by a new competitor or disruptive technology, the business model may be broken. Holding on to a "dying" stock is equivalent to sinking with the ship. History shows that many companies slide into bankruptcy because they lack a sustainable foundation; do not let "hope" replace a cold analysis of the balance sheet.
• The Opportunity Cost: Investing is the art of capital allocation. If you discover a new opportunity with a 7% yield and superior growth potential, it may be wise to sell a stagnating 4% yield stock to "recycle" your capital into the better vehicle. The goal of investing is to maximize the productive use of your money; staying loyal to a low-performing asset prevents you from capturing higher market returns.

Essential Metrics for Stock Market Monitoring

To effectively monitor stocks, investors utilize various platforms. For the Malaysian market (Bursa Malaysia), the most common tools are KLSE Screener and Bursa Anywhere.

While analyzing historical price charts (identifying peaks and troughs) is vital, you must also evaluate the following financial metrics to make informed decisions.

Market Valuation and Size

These metrics help you understand the scale of a company and how the market prices its earnings.

• Market Cap (Market Capitalization) - The total market value of a company’s outstanding shares. It is calculated as Current Price * Total Shares.
• P/E Ratio (Price-to-Earnings Ratio) - Indicates how much investors are willing to pay for every RM1 of profit. A typical average is 15-25x. A high P/E suggests expectations for high future growth, while a low P/E may indicate the stock is undervalued or facing challenges.

Profitability and Returns

These figures tell you how much money the company is actually making for its shareholders.

• EPS (Earning Per Share) - The portion of a company's profit allocated to each individual share. A rising EPS generally signals a more profitable and healthy company.
• DY (Dividend Yield %) - The annual dividend payment expressed as a percentage of the current share price. This represents your "cash-on-cash" return from dividends alone.
• DPS (Dividend Per Share) - The actual amount of cash a company pays you for every single share you own over a specific period (usually a year).

Trading Activity & Volatility

Use these to gauge market interest and price stability.

• Vol (Volume) - The total number of shares traded during the current day. High volume indicates high liquidity and strong interest from traders.
• 52-Week Range (52W High/Low) - The highest and lowest prices the stock has reached over the past year. This is essential for your "Low Floor" strategy, as it shows if the current price is near its historical support level.

Price Mechanics (The Order Book)

These metrics represent the immediate "tug-of-war" between buyers and sellers.

• Bid - The highest price buyers are currently willing to pay to buy the stock immediately.
• Ask (or Offer) - The lowest price sellers are currently willing to accept to sell the stock immediately.
• Spread - The difference between the Bid and the Ask price. A narrow spread (like RM0.01) indicates high liquidity and lower transaction "friction".

Asset Value & Book Metrics

These help you determine if you are buying the company for more or less than its physical worth.

• NTA (Net Tangible Assets) - Often called the "break-up value", this represents what would be left for shareholders if the company sold all physical assets and paid off all debts. To interpret the NTA effectively, you must compare it to the current Share Price,
• Price < NTA (Trading at a Discount): You are essentially buying the company’s physical assets for less than their recorded value. This is a classic signal for value investors, provided the company is fundamentally sound.
• Always check the ROE (Return on Equity, ideally >12%). A high NTA with a very low ROE (<5%) might indicate "dead assets" - property or equipment that isn't generating profit, making it a potential "value trap".
• Price > NTA (Trading at a Premium): This indicates that the market values the company's intangibles - such as brand equity, patents and future growth potential - more than its physical parts.
• PB (Price-to-Book Ratio) - Compares the stock's market price to its book value (net assets).
• P/B < 1.0: The stock is trading at a "discount" to its assets; It could be undervalued or have serious business problems.
• P/B > 1.0: The stock trades at a "premium," meaning investors are paying for the company's brand, intellectual property, or future growth potential.
• D/E Ratio (Debt-to-Equity) - Measures a company’s financial leverage by dividing its total liabilities by its shareholder equity.
• D/E < 1.0: Generally considered safe and "healthy". It means the company has more of its own money than borrowed money.
• D/E > 2.0: A "Red Flag" for beginners. It suggests the company is highly leveraged. While this can boost profits in good times, it makes the company very vulnerable during a recession or interest rate hikes.
• Context: Some sectors (like Utilities or Real Estate) naturally have higher debt. Always compare a company's D/E ratio to its industry peers (e.g., compare a bank to another bank).

The "60-Second" Stock Evaluator

Before buying a stock, run it through this checklist to see if it meets the criteria for a "High-Quality, Low-Floor" investment.

• P/E - 10-20x (<industry average)
• DY (%) >5%, but check if Payout Ratio <90%
• D/E <1 (ideally <0.5)
• Price <NTA, and ROE >15%
• Ideally near 52W Low, but at least consolidating at base
• High volume, tight spread

Visualizing Market Sentiment: Japanese Candlesticks

While fundamental metrics - such as P/E, DY, and NTA - determine if a company is fundamentally sound, Japanese Candlestick charts help identify the optimal entry point. They provide a visual map of the psychological battle between buyers (bulls) and sellers (bears).

Anatomy of a Candlestick

Each "candle" represents price action over a specific timeframe (e.g., 1 day).

• The Real Body: The thick center of the candle showing the range between the Opening and Closing prices.
• Green (Bullish): The price closed higher than it opened.
• Red (Bearish): The price closed lower than it opened.
• Body Length: A tall body indicates high conviction and strong momentum. A very thin body - where the open and close are nearly identical - is a Doji, signaling market indecision.
• The Shadows (Wicks): The thin lines above and below the body. These represent the Highest and Lowest prices reached during the session.

Reversal Patterns for the "Low-Floor" Strategy

For value investors targeting a "52-week low" entry, these two patterns signal that a downward trend may be exhausting:

• The Hammer (Bullish Signal)
• Appearance: A small real body at the top of the candle with a lower shadow at least twice the length of the body.
• Meaning: Significant "panic selling" occurred during the day, but buyers aggressively stepped in to push the price back up before the close. This suggests a "price floor" has been established.
• The Doji (Trend Exhaustion)
• Appearance: A cross-like shape (+) where the opening and closing prices are virtually identical.
• Meaning: Neither buyers nor sellers are in control. Following a long decline, a Doji suggests that selling pressure is exhausted and a trend reversal may be imminent.

Investor’s Tip: The Rule of Three

A single candle is a "hint", not a command. Never execute a trade based on a single candlestick. A Hammer or Doji indicates intent, not a guarantee. For higher accuracy, ensure these three factors align:

• Location: The pattern must occur near a major support level, such as the 52-week low or the Net Tangible Asset (NTA) value.
• Volume: The reversal candle should be accompanied by high trading volume, confirming that institutional buyers are stepping in.
• Confirmation: Wait for the next 1-2 trading days. If the price remains above the Hammer’s "wick" (the absolute low) and begins to trend upward, the floor is likely solid.

Summary

While active stock picking offers the potential for higher returns, it demands a significant commitment to research and risk management.

• Statistically, the vast majority of professional managers struggle to outperform market benchmarks over the long term.
• For those who find technical analysis overwhelming - or simply prefer a more passive approach - investing in Index Funds or ETFs provides a more sustainable, low-cost path to long-term wealth.
• Success is not about beating the market every day; it is about staying in the market every year.