Bursa: long term returns

I have tried to come with the year-on-year return on shares listed on the Bursa Malaysia. To calculate this number I wanted to use the oldest available index value for the KLCI (Kuala Lumpur Composite Index). I found an interesting article on the Bursa website:

http://www.bursamalaysia.com/website/bm/market_information/downloads/Presentation_FBM-KLCI_060709.pdf

Apparently the index started on 4 April 1986, but it has been calculated back up to 1974.

Assuming a value of 100 on 1-1-1974 and a value of 1430 on 17-9-2011 the total return is 1330%, with a year on year return of 7.3%. This return is not that bad, it must have been clearly higher than the return on a Fixed Deposit, on the other hand the investors had to endure huge swings since the KLCI has been very volatile as the graph shows. I think however that the real return for the average Minority Investor is clearly lower than that.

The factors involved are:

• KLCI returned 7.3% over the long run
• There are however many other companies listed on the Bursa Malaysia, my guess is that returns on them have been much lower, the average quality being clearly less good
• Not included are returns from Dividends, I estimate them to be between 1 and 2 percent per year on average (probably less in the initial years, higher in the more recent years)
• Investors have to actually buy and sell shares, with this they incur costs, turning over ones portfolio every one to two year will incur 1 to 2 percent per year
• Insider trading is a huge problem at the KLCI, 99.9% of the "normal" investors will from time to time lose money because of this. Included are both people who have insight on coming corporate proposals and use it for short term gains or Majority shareholders and/or Directors who have simply much more and timely information about the affairs of the company. It is impossible for me to calculate the effect without any other data, but I guestimate the loss for the normal investors to be at least 1 to 2 percent per year.

My best overall guess of the long term yield including dividends and costs incurred of a portfolio is in the range of 4-5% per year. This is rather disappointing given the GDP growth of Malaysia. Western countries have had less growth in GDP but higher returns on investing in shares. I think that the reason for this is the lower degree of Corporate Governance in Malaysia, which is directly influencing these returns. Related Party acquisitions at (highly) inflated prices and General Offers with delisting threats at (very) low prices are directly lowering returns.

All comments are welcome, especcially references to studies done on this subject.