Historical Malaysian Stock Market Crashes

There's this old little book by Neoh Soon Kean called Stock Market Investment in Malaysia and Singapore. It's published under Berita Publishing Sdn Bhd.

Here are some collection of comments from the book which I find to be very interesting.

from pg 14...

It is always difficult to determine exactly when a bull run starts, certainly much more difficult than pin-pointing the time a crash starts. Typically, a bull run always starts gently. The prices tend to bump along the bottom for a while before starting up and even after it has started, there may be a few false starts when the rate of rise would falter. With that caveat in mind, it is my opinion that the bull run started in Jan 1971 and the big marker break (that is the start of the crash) occured on 13 Feb 1973, an up-cycle period of about two years.....

The amazing fact is that in 1971 and 1972 could be regarded as bad years economically for Malaysia while 1973 and 1974 were, in fact very good years for both Msia and Singapore. Yet the latter two years coincided with the sharpest fall in the history of Msian/S'porean stock market. STi fell by 41% in 1973 and 42% in 1974.

Until after June 1973, the Malaysian stock market and the Singapore stock market were joint. The whole market was therefore affected by the economic well being of Malaysia. In the early 1970's Msia/S'pore was still very much an export-oriented region. The prosperity of many quoted co's in the stock market was much dependent on the export of primary commodities.

What were some of the factors which caused the big boom?

(1) Early profit was made

after May 13th incident of 1969, investors' confidence sank to an extremely low ebb. there was a very considerable amount of panic selling and the Straits Time Industrial Index dropped to a low of 130 in late 1970 from 170 in April 1969. Many shares were being sold at an extremely low level. The few investors who had the courage to buy then were to make hefty gains later on.

... even after another more than 40% rise in the overall price level by 31 Dec 1971, many of the stocks, were still very reasonable, especially the second tier stocks.

The early profits attracted a lot of investors into the market and again, the prices rose and by June 1972, ST had increased by another 20%. However from this point onwards, the people entering the markets were no longer governed by economic considerations.

The prices were to be increased by yet another 81% in the next six months (WAAAHHH), after which the end of the boom was in sight. By that time, the market had caught the speculative fever and price rises were no longer rational. The market was to rise another 41% in the final six weeks before collapsing. It is notable that the increase every six months got steeper and steeper. In the final three months or so, the increase of the index exceeded that of the previous 2 years! This rate of increase obviously cannot be sustained and the speculative mania ran out of steam and had nowhere to go but down.

... When a market is rising, everyone who goes in makes some profit and he is therefor encouraged to make further purchases. However, the continuous price increase cannot go on forever. At some point of time, the amount of money tied up is so high (at the highs, one lot of OCBC costs 50,000, a sum which was more than the selling price of two terrace houses at that point of time) (Fiyoh!!!! Now that's what u call BULL, eh?) that the buyer who buys in anticipation of a further rise will be forced to sell soon if the market is not going up. Once the market sees that a shares has stopped rising, the opposite goes into effect. The intending buyer will delay buying hoping that the price will fall further. This causes the weak intending seller to lower his price yet again. A spiral of forced selling at low prices is thus started and it tends to continue at ever increasing speed until eventually much, if not all, of the earlier rise is completely increased.

(2) Many were First Time Investors

For much of the 1960s, investment in the local share market was very much limited to the institutions, large corporation and a few well-off private individuals. The middle class was of a small number and wielded little economic power. However, with the Independence in M'sia and Singapore, the social spending of the governments were vastly increased and slowly a large body of middle class consisting of civil servants, doctors, teachers and other professionals were established.

Like the US of the 1920's investment opportunities in the late 1960's were the limited. Three months of fixed deposit was then paying 5% (Wahh... 5% now banyak lo). Naturally the stock market market attracted some of the money in circulation. As explained before, those who made profit early, attracted many others into the fold. The commentators of the time also pointed out an additional fact which caused a large number of first timers into the market. In late 1972, all teachers in msia received a considerable amount of back pay. The sudden receipt of an unexpected sum of money and the booming stock market at that time was all that needed to push many teachers into the market. Indeed in 1972, teachers' common room conversation was largely limited to the stock market. (LOL!!!! Wahh... so much happening inside ze teacher's in common room!!!... hohoho... playing shares when they are free??? )

These first timers had little idea of the economic principles upon which stock purchases should be made. Instead they relied on market talks, brokers' advice and self-proclaimed experts. (hehe... they become Sayur lor or some prefers to call it as Hong Kong Kai Lan) As a well-known Wall Street saying goes: 'Genius is a rising market'. the rapidly increasing prices gave all involved a vision of boundless prosperity and wealth ( hmmm... Grandiosity lo ). By the end of 1972, price rose to a level which could not be justified by any known economic standard.

... the price increase obtained were totally out of bounds of rationality. A PER of three digits is absurd by any standard but to the newcomers, PER was a meaningless measure. All they believed was that: 'If the prices had doubled in the past 6 months, they must be capable of doubling yet again in the next six months'. (ho ho ho... they believed that the stocks could really fly up, up and awayyyyyyyy hor!!... and today's high is tomorrow's low eh?)

(3) Rapidly Rising Foreign markets

(4) Trust in 'Blue Chips'

(hmmm.... is this where the common advise to buy blue chips come from?)

In the Crash of 1973, the top tier company was made much of finance, properties and a few old line companies such as Sime Darby and Haw Par. The enthusiasm for these top tier stocks was such that most others were largely ignored. The PER of the favoured stocks would rise to an astronomical level while for the less favoured, their PER would remain at a reasonable level even at the height of the speculative mania. The over-concentration of interest in a specific class of stocks naturally meant that the price rise would be even more phenomenal. Unfortunately, when the crash came, all stocks, favourites or otherwise, were brought down. Stock market crashes knew no favourites.

The higher the stocks rose, the worse they fell. Many ex-market favourites lost over 90% of their peak price. Local newspapers reported many cases of bankruptcies and several cases of suicides directly attributed to the stock market collapse.

But stop it did as it must in all slumps. The severe losses that took place traumatised the speculators for many years. When the overseas market picked up in 1975, the Msian/Sporean market failed to do so decisively. The prices bumped along the bottom for many years until 1979. At the time, once again the lessons of history appeared to have been forgotten and Msian/Sporeans indulged in yet another speculative orgy......


The Crash of 1981

In magnitude, it is almost as severe as the first Crash.

First, it would appear that there were sound economic reasons behind the rise of share prices this time. M'sian/Sporeans had learnt sufficiently to depend on their own feelings on how the economy was doing rather than rely on foreign indices. (Ahhh... the problem of de-coupling our own market from others... be independant lo) At the time of the beginning of the bull run (approx Jan 1979), both Dow Jones and Financial Time Indices were in the doldrums. The local economic environment at the beginning of 1979 was vastly better than that of 1970.

(the tables in the book.... showed that price of rubber went from 1.99 to 3.25, price of tin went from 18,736 per ton to 35,710 and CPO went from 882 to 1177)

.... commodity prices were approaching or just below their respective all time high. Most of the companies directly or indirectly involved in the commodities business were doing extremely well and were flush with cash.

... per capital GNP had been rising most steadily for five years at an average of about 15 per cent. More than that, the private sector was very liquid with cash. In 1979, the money supply of Msia was standing at a figure that was five times higher than in 1971!

With profit increasing at a rapid rate, a PER of 20 or more seemed fully justifiable. (yeah... look at Cycle... price went from 2.62 to 5.25, and yet the PER only increased from 10 to 13... there is growth!!) As the memory of 1973 faded away and the mood of the country totally changed (market sentiments lo), stocks were once more respectable investments. Thus, more and more Msian/Sporeans invested and saw their investments steadily increased in value...

Secondly, the timing was right this time. In 1978-1980 the economic horizon was bright and it was natural to envisage an extended period of prosperity. Indeed the governments did promise just that. It is natural to bid up the price of stocks at the top of an economic cycle and until mid-1980, the prices of most stocks were very reasonable. Not many people, if any, could have foreseen the recession of 1982 (two years away still)

Thirdly one could detect several signs of market efficiency which was most surprising in view of what happened in 1973. Even at the height of the speculation some shares were being quoted at very reasonable prices. At the maximum level Bata, C&C, SIn Heng CHan and many others could be bought at a PER of less than 20. Given the Msian/Sporean context, the PER reached could be considered rational. Purchases even at those prices would not have been unwise investments if the region's growth rate of the late 1970's were to continue into the 1980's. Furthermore, it is noticeable that many of the plantation and tin mine stocks turned down well in advance of the general market. Many plantation stocks peaked in 1981 and most tin stocks even earlier on. This can be shown by comparing the KLSE Industrial Index with the prices of popular plantation and tin stocks. Considering that the poor corporate reports were not to be published for yet another year, this was a very creditable performance. A considerable number of investors must have taken note of the softening price trends of rubber, cocoa and tin at the point of time and started to liquidate or reduce their holdings.

It must be stressed, however, that despite these pockets of efficiency by late 1980's, the usual symptoms of a speculative mania were making their appearance. Trading on the stock market became more and more widespread among the populace. The mania was slowing taking hold in the minds of the people and soon many of them would throw rationality to the wind.

By early 1981, the mania had once again reached epic proportion. The prices again showed the accelerating rate of increase that is common to all manias.

Once again, a large number of ignorant and inexperienced people were attracted to the stock market. Remisers set up operations in every small town and did roaring business. In a typical small town like Teluk Intan, butchers, rubber merchants and small holders from the surrounding areas would crowd into town in the afternoon to take part in the rush to buy and sell shares. Even the universities were not immune to the temptation of the market. Many lecturers from each of the local universities were heavily involved. Housewives of all ages spent their days at the brokers' offices, no doubt finding it more exciting than a game of mahjong. (LMAO!!!..... hohoho.... mania!! Err.... Lecturers involved again? Soooo does this mean that these buggers are great BULL indicators???..... and kakaka.... if 2nd Auntie is so busy playing mahjong.. then u know stock market ain't too happening hor!!! )

The Conglomerate Game.

.. the value a speculator places on a stock (or a tulip) does not necessary depend on anything which is tangible. Rather, it depends on the image or fantasy the investor may have on a particular stock. A company that is continuously in the public eye ( a result of a continuous stream of announcements of bonus, rights, takeovers and profit forecasts, etc.) is that much more likely to become the object of such fantasy. ( Aha!!... got fancy CREATIVE story to sell??) In the same way, an actress who is always in the news is far more likely to become the object of a man's fantasy. Stocks of such companies are far more 'attractive' (sexy stocks?) and are more likely to be bidded up to a far higher level than the dull 'never-anything-happens' type of stocks.

... Indeed the activities of several companies during 1980 and 1981 fit the description. they are the companies that were busily engaging in takeovers and mergers ( for example, MUIB, Hong Leong Industries and PEGI). With the announcement of each new takeover, their profit forecast would become greater and their prices attain a higher level. It would be indeed be foolish for these companies not to make use of their new found strength in the form of high stock prices to seek new takeovers by an exchange of shares. More takeovers led their prices to go even higher and an upward spiral took shape. What was realised by the public did not necessary mean higher per share earnings. This is because a lot of new shares had to be created to 'pay' for the takeovers. (ze dilutions effect lo!!!... BE WARNED! ) Therefore, the per share price should not necessarily go up between overall and per share share earnings was lost in the general madness to pursue high-flyers. Most of the newly-fledged conglomerates saw their stock price increase to a level that is ridiculous by any measure.

The Property Injection Game

Owing to various government and institutional obstacles, it has become increasingly difficult for a Malaysian company to become publicly listed. (Oh my, how times have changed!) For the five years prior to 1981, only a handful of new companies each year had reached such exalted rank. This naturally resulted in a great deal of impatience among entrepreneurs who were anxious to have access to the public capital market. Over the previous four or five years, this impatience had manifested itself in the form of an increasing number of entrepreneurs buying over control of a listed company and injecting his own properties into the listed company as a way of achieving public listing. Since taking over a successful company is not cheap, these entrepreneurs naturally turned their attention to less successful companies ( yalor - the lousy ones - ones that wud stretch and bend ze rules sikit!! ) , in particular, textile companies which were going thru a poor earning stretch.

... On taking over a moribound or semi-moribound listed company, the entrepreneur would use it to takeover their existing assets by a process which is locally known as 'injection'. Most of these assets being so injected had been real properties (ie pieces of land). To the local share buying public, real estate had a magical ring to it for did we all not know that: "All real real-estate developers are rolling in money?" Given this fantasy image of real-estate development, every time the re-organisation of a moribound listed company into a real properties development company was announced, the public went wild bidding up the price of the previously moribound or semi-moribound company to incredible heights. Not only was there an enormous enthusiasm for companies actually being re-organised this way, the speculation spilled over the companies which might be taken over.

This when Taiping Textile was being reorganised the stocks of South Pacific textile, Imatex and Textile Corporation all went up in sympathy even though there were NO concrete news. As mentioned earlier, since the 'Property injectors', were only interested in moribound or semi-moribound companies, we have the most curious phenomenon whereby stocks of companies which would normally be considered as not particularly good, were bidded to an unjustifiable level even for a good company.
(The Goreng of the Chekai and Lousy stocks????)

The End is Near

Thus, if one were to refer to a list of most active stocks for the two years before the Crash of 1981, one would see that much of the activities centred around either conglomerates or re-organised companies or companies rumoured to be facing re-organisation. The day of reckoning arrived when the prices were bidded up to a ridiculously high level and when weak holders become anxious. Like in all slumps, once nervousness started to appear, confidence rapidly ebbed since it was not based on anything tangible in the first place. The market peaked on 26 june 1981, and lost rapidly almost HALF of its value within the next four months. there were a few anaemic attempts atrallying which all failed to go very high. This went on for about eight mnoths. In late July 1982, stock prices began to drop again, slowly at first and then sharply to result in a market loss of another 100 points.

( .... hmmm.... the dangers of using of year high and year low as an indicator to buy stocks lor ... cause .... if one used such indicator as a guide.... surely KENA big, big time lo .... so think it is wise to use a contrarian approach to buy a stock based on low prices?)

There is an ironical twist in the end of the story if the Crash of 1981. The market went down rapidly from a high of 823 on the KLSE to reach a low of 364 after fourteen months. This means a decline of about 58% in just over an year, a very rapid fall by any standard. One would expect it to continue falling further and stay down for a while to catch its breath as in most speculative collapses. This however, did not take place as the local speculators did not seem to have suffered enough and the market started moving up again toward the end of 1982 and was to reach a very high level of 680 by Feb 1984. Most local speculators were ecstatic over the unexpected rise and most local stock market commentators were expecting renewed climb to new heights for 1984. Once again, the unexpected happened and 1984 turned out to be another bad year for local speculators.

( Ahemmm.... never seem to learn their lessons, eh?? )

to be continued.... The Crash of 87!