By using an index, we can very quickly have an idea of how much the
market has moved within a noted period. For example, if the index
stood at 600 at 31 December 1982 and it is now standing at 800, we can say that the market as a whole has moved up 33 per cent
[ (800-600) divided by 600 ]. Let us now examine the history of market
movements in Malaysia/ Singapore. Figure below at the end of this
chapter shows graphically the movement of the KLSE Industrial Index from 1970 to 1988. Table below shows graphically the annual range of movements of the KLSE Industrial Index for the same period. Table below show the same information on the Straits Times Industrial Index for the years of 1973-1988. Let us look at the past record of stock market movements as shown by these two indices. We shall examine the movements of the Malaysian market in greater detail as the writer is more familiar with this market. Table Below provides further information on the movements of KLSE Industrial Index in numerical form for 1970 to 1988. What can we learn from the history of overall market movements in the Malaysia/Singapore stock market?
We can learn a lot from studying the table and figures as, I strongly believe the past can provide us with a guide to the future.
Year Lowest Highest Change* Overall Trend
1970 88 114 23% Down
**The “Change” figures are calculated as “Change From High”, i.e. the percentage change between the maximum and the minimum prices calculated as a percentage of the maximum.
and after 1981. Prior and up to 1981, the trend is fairly strongly upward while after 1981 and up to the time of writing (end of August 1988), the trend appears to be weakly upward. Allowing for the difficulty of trend drawing to be discussed next, we can say that up to 1981, the Malaysian market was growing at an annual rate of about 12 per cent per year while the Singapore market was growing at about 15 per cent per year (the. straight lines in the middle of the charts). After 1981, the trend appears to be much less, around 4 per cent per annum for the Malaysian market and 6 per cent for the Singapore market. The reason for slowdown in the growth trend appears to be caused by deflation and the negative growth experienced during the first half of the Eighties. There is a possibility that the trend may steepen again in the future but this is difficult to ascertain at this stage. These trend lines may be regarded as equivalent to the intrinsic value of an individual share for they mark the inherent value of themarket as a whole. The market seems to fluctuate around these trend lines. In the future, the upward tendency of the market is most likely to continue although we are not sure what will be the actual growth rate. However, by projecting a trend which is conservatively drawn (say 8 per cent for Malaysia and 10 per cent for Singapore) we can have some idea where the market is heading. If we buy our shares when the market is at a reasonable level (that is when the index is around the trend line or below), we can rely on the long term rising trend to obtain our gain from the market. Unless we buy shares near the top of the peaks, we should be able to profit from buying shares after a few years. It is therefore important to go for the long run.
(5) Prices More Volatile Upward. It appears that prices can move very much further from the trend tine on the up side than on the down side. Except for a short period in 1975, the prices do not move very far: from the trend line on the down side. But it can move a considerable distance on the up side. It would appear also that there are more up years than down years. This means that the prices tend to build up slowly over several years and then fall much faster than they rise. However, big upward movements tend to be followed by sharp downward movements. It is thus a lot safer to buy when the prices are below their intrinsic value than when they are high.
(6) Big Booms Are Irregular. It appears that the big booms take place somewhat irregularly. There have been three in the last 18 years; 1972/1973, 1980/1981 and 1986/1987. Not only are they irregular but they are of short duration, one to two years appears to be the usual length. This means that it is difficult to catch a big boom at its beginning. If one goes in after the market has already moved up a great deal, there is a big risk that the market will crash shortly after.