NOT Too Good To Be True

“Neoh Soon Kean has a first degree in Economics from University College London, an MBA from Harvard and a PhD in Finance from University Edinburgh. He is now 76 years old and has had a very varied life with his hand in many pies. He had worked as a university lecturer, external trainer for several banks, a consultant to the Securities Commission and in different fields in the private sector. He had served as a director for several public listed companies. He had also held positions in several quasi-governmental bodies, the better known among which were the KLSE and the Malaysian Accounting Standards Board. Among older Malaysian investors, he is probably best known as the investment columnist for the Sunday Mail newspaper and the author of the best-selling book on investment: Stock Market Investment In Malaysia and Singapore. For the last two decades and more he has been mainly working as an investment advisor for various investment funds as well as managing his own family’s investment. For the last 12 years he has also become active in investing in Japanese tourism properties.” 

By Neoh Soon Kean

This is the first in a series of articles where shares his extensive knowledge and experience for Ipoh Echo’s audience.

It has been more than 30 years since I last wrote an article for any newspaper and since the publication of my last book.  I have been driven to write this article by the many stories I have heard and read regarding the many people who have been swindled out of their hard-earned cash by various ‘investment schemes’. The situation has become so bad that both Bank Negara and the Securities Commission have repeatedly warned the public about this type of scams. The Government of Malaysia’s official website (https://www.malaysia.gov.my) has a special page on how to avoid falling into the pitfalls of this type of investment schemes. Various financial institutions, as a service to their customers, also issue similar warnings on their portals (for example, https://www.rhbgroup.com). And yet, until this time, I still come across regular news reports of many people being scammed on a daily basis. For example, on 18th November, it was reported by The Star that in the first nine months of 2023, the Securities Commission received 2,873 investment scam-related complaints compared with 2,461 complaints for the same time last year. To date the National Scam Response Centre (NSRC) has managed to intervene and freeze up to RM60 million of illegally obtained funds.

In another article published by the same newspaper on 21st November, the Federal Commercial Crime Investigation Department (CCID) said that a total of 4,435 cases of investment scams were reported between January and October this year. In other words, there have been 15 new investment scam cases per day in 2023. The amount of money reportedly lost to these nefarious schemes totaled RM360 million.

Why are investment scams so common and numerous? There are both ‘push’ and ‘pull’ factors. Let us consider the push factors first. The proliferation and wide acceptance of social media has allowed many scammers to quickly set up their ‘investment schemes’ and gain access to a very large number of people, a large percentage of whom would have little knowledge or experience of investment. At the same time the scammers can remain quite anonymous behind the schemes. Imagine if the scammers cannot gain access to their victims without the use of social media; they would have to reach out to their victims in person singly. 9And after such schemes fail (as they always do), the victims would at least have some clue as to who are the perpetrators. Behind the smoke screen of the social media, one would have no idea who are the perpetrators.

As for the ‘pull’ factors; the most powerful is the promise of extremely high return – often as high as 10% or 20% PER MONTH. This is an incredible rate of return. I only have to quote a couple of real-life examples to show that this is simply “TOO GOOD TO BE TRUE”. As many of you are aware, Warren Buffet, the founder and main shareholder of US investment company, Berkshire Hathaway, has been universally acknowledged to be the best investor in the world over the past six or seven decades. For 10 years (i.e., 2013 to 2022), Berkshire Hathaway had managed to provide its investors an ANNUAL return of 11.45%. If the best investor in the world could only obtain a return of less than 12% per annum for the last 10 years, how is it possible that the investment scheme that is trying to persuade you to join can obtain a return of, say, 120% per year: that is, 10 times what Warren Buffet has managed to achieve? Or let us look at the performance of S&P 500 stock index which is the best performing index of all the mature markets in the last 10 years. The average annual return an investor could get by buying an S&P index fund, again for the period of 2013 to 2022, was 13.09% (before management fee). One can imagine how attractive the promise of a 10% return per month is to a non-knowledgeable person who can only get, say, 3% per year on his FD.

How then can a scammer promise a 10% per month return; and indeed, does provide such high levels of return, at least initially. The truth is that many of the so-called investment schemes are nothing but PYRAMID GAMES. Pyramid games work by persuading an ever-increasing number of people to park their money with the promoter with the promise of very high return. The money put in by each successive wave of fresh victims will be used to pay the ‘high return’ to the pre-existing ‘investors’. For such a scheme to continue functioning; an ever-greater number of victims must be sucked in and their money used to pay off earlier ‘investors’. Very often, those lucky initial victims who have indeed obtained high returns unknowingly become the best salesmen for the next round of victims by telling their friends and relatives what wonderful returns they have obtained from the scam. Eventually, such a scheme would run out of new ‘investors’ and the money flow dries up. At that stage, the promoter would quietly disappear leaving the ‘investors’ with nowhere to turn and no one to seek recourse. If they are lucky, the authority may discover the scheme early enough and freeze the money collected and the ‘investors’ will get some their ‘investment’ back.

As an investor, I can sympathise with the victims of such pyramid schemes as investment return has become very low in the last decade. Since the Global Financial Crisis of 2009, central banks of the world, led by the Federal Reserve of the US, have driven the global interest rate to a very low level. As a result, bank interest rates have been very low until recently – at the lowest, Malaysian 1-year FD rate was below 2%. At the same time, many stock markets of the world have also performed very poorly for several reasons (the most important of which was of course the Covid Pandemic). For example, on 30/12/2012 the KLSE Composite Index stood at 1692.6 and it stood at 1495.5 on 30/12/2022. Hence, unless you are a very good investor, it would have been very difficult for you to obtain much positive return from KLSE. We can have a good idea of how the average person would not be interested in the return obtainable from bank deposits. I provide the returns from 1-year FD as well as other common investment avenues in the accompanying Table (1).

TABLE 1 – ANNUAL RETURN FROM VARIOUS INVESTMENTS (%)
YEAR	1-YEAR FD	ASW	ASM	EPF
2013	3.15	6.70	6.50	6.35
2014	3.23	6.60	6.60	6.75
2015	3.31	6.40	6.60	6.40
2016	3.18	6.30	6.30	5.70
2017	3.09	6.00	6.00	6.90
2018	3.31	6.00	6.25	6.15
2019	3.17	5.00	5.50	5.45
2020	2.13	4.00	4.25	5.20
2021	1.72	4.00	4.00	6.10
2022	2.65	3.75	4.00	5.35
AVERAGE	2.89	5.48	5.60	6.04

As can be seen from the second column of the table: 1-year FD had provided fairly miserable return over the past 10 years. The average annual return was only 2.9%.  If one were to consider investing money for one’s retirement, such return would be far from attractive.

But investors are not restricted to just putting their money in bank deposits. There are other avenues for investment, even for normal people with little knowledge of finance. Let us look at the third fourth and fifth columns of the Table provided. Although in the three years after 2019, the annual return from both EPF and Amanah Saham type of investments had shrunk compared with the return pre-Pandemic; the average return for the 10 years up to 2022 averaged between 5.5% to 6.0% pa. These returns are more than twice as large as return on bank deposits. And as they are government-run, they are also of low risk. It is possible that for some investors, even the returns one could get from these investments is not good enough. Some of them would rather take a chance on the ‘too good to be true’ investment schemes even though in their heart of hearts, they know these are extremely risky.

DON’T BE TEMPTED. I shall spend the rest of this article explaining how by just putting (and leaving) your money in EPF, one can enjoy very decent return to build a nice nest egg for your retirement. Thus, this article will just consider long-term investment. In future articles, I shall discuss shorter-term investments for building up savings for purposes other than retirement, for example, children’s education.

I believe that going forward, there are two things which may tilt the return in the investors’ favour. First, I like to think that the decade we have just passed through was fairly unusual. I am hopeful that average annual return from the last three types of investments over the next 10 years should be at least no worse than that of the last 10 years. It may be possible that the return may be similar to that of the 10 years prior to the Covid Pandemic. Based on this assumption, I think future investment return may be quite decent. I shall base my discussion in the rest of this article on an expected annual return of 6.5% for funds which are deposited into your EPF account.

Second, even though the annual return from an investment may not be spectacular, by understanding and practising the principle of COMPOUNDING, the long-term return can indeed be spectacular. Compounding has been called The Eighth Wonder of The World (after the Seven Wonders of The World such as the Pyramids of Giza). Although 6.5% pa return may seem like mere trifle, if one re-invests the return one gets from an investment, the principal sum grows year by year and over a period of time the total amount of investment can become quite substantial. The effect of compounding becomes even more miraculous if you were to put in an additional sum every year.

Let us look at the following two investment scenarios for a contributor to the EPF scheme.

1.                   The contributor starts with a sum of RM10,000 for the first year and his contribution stays at RM10,000 every year until he is ready to withdraw his money. In order to arrive at RM10,000 a year, the monthly contribution would be RM833. This would be split two ways: 11/24 from the contributor and 13/24 from his employer. Based on the statutory rate of contribution, a contributor would need a monthly salary of RM3,471. This may be a little high for some of the readers. For them, I have proposed a second scenario.

2.                   Under this scenario, the contributor starts with RM5,000 which would necessitate a monthly salary of RM1,735. But his contribution is expected to grow by 3% per annum until the end of his career, presuming his salary increases by 3% every year.

I compute how funds in the account of the contributor would build up under each of these scenarios for the periods of 20, 30 and 40 years. The results are shown in the attached Table (2).

TABLE 2 – ENDING VALUE IN EPF ACCOUNT BASED ON DIFFERENT SCENARIOS
LENGTH AS CONTRIBUTOR	SCENARIO (1)		SCENARIO (2)
	FIXED RM10K ANNUAL CONTRIBUTION		RM5K ANNUAL CONTRIBUTION WHICH GROWS AT 3% P.A.
	TOTAL CONTRIBUTION	ENDING VALUE	TOTAL CONTRIBUTION	ENDING VALUE
20 YEARS	RM200,000	RM413,490	RM134,352	RM261,311
30 YEARS	RM300,000	RM919,892	RM237,877	RM637,038
40 YEARS	RM400,000	RM1,870,480	RM377,006	RM1,392,721

In this table, I compare the Value in the EPF account at the end of the contribution period with the total amount of contribution paid in for three different contribution periods for the two scenarios. As can be seen, the longer the period, the greater is the end value compared with the total contribution. In the case of Scenario (1): for an investment period of 30 years, the end value is 3.1 times greater than the total contribution but for 40 years, the ratio is 4.7 times. If indeed you can contribute RM10,000 to your EPF account every year for 40 years, you would have a very nice nest egg to live on after you retire. Under Scenario (2): the return is almost as spectacular. If you contribute for 30 years, your end value would be 2.7 times bigger than your contribution and 3.7 times bigger over 40 years. Even under Scenario (2), with a starting contribution of merely RM5,000 a year (only RM191 a month from the employee), your nest-egg would RM1.4 million after 40 years, provided you can maintain a 3% per year growth in your contribution.

I think the above analysis shows in very clear terms, how important it is to invest some money consistently over a long period of time. The compounding effect (the 8th Wonder of The World, remember) will ensure that you can retire with a very adequate sum of savings.

Incidentally, some readers may object to my recommending that one pays some money into one’s EPF account for the long term: as, for some unknown reasons, many people seem to think that EPF is some sort conspiracy to extract money from the citizens. I have been a member of EPF for more than 40 years and I have been able to withdraw whatever that is due to me at all times with no difficulty. And, as an investment professional, I think EPF has done a very good job in managing the money placed under its trust. One only has to compare the performance of EPF with that of the many mutual funds available in the market to see that EPF’s long-term performance is superior to a majority of the mutual funds in the market.

©NEOH SOON KEAN 2023