Sunday, 22 July 2018


We have some bad news to share : the reality of the trading business is not as fun as you might think. Sure, sometimes it can be exhilarating when you're early in a winning trade - it's like riding a bullet train - but other times it can be much less so - it's like being run over by a bullet train.

We once committed a major sum of money (for us) to a high conviction trade only for it to blow up spectacularly. Wait, need to clarify that - we have often committed major sums of money to a high conviction trade only for them to blow up spectacularly. This post is on just one of those trades.

"He was a good 'swing' trader". Source

This is not a post about dealing with bereavement and mourning, though at some points it will seem like it. We will share our experiences on how to deal with the triple threat of devastating consequences from a severe setback in trading - losing money, losing confidence, and admitting to a flawed investment idea.

Take our word for it - without going through a period of learning and self-improvement, we would not have been able to bounce back and achieve spectacular gains like this one.

MITRAJAYA - Promising Company, Flawed Stock  

This was the trade's final P&L! We were ashamed, chastened and held off writing about this for a while (Editor's note : It's always so much easier to talk about the winners).

We've had plenty of losing trades before, but none were as swift and as devastating for us. In effect, we literally paid for a very expensive tuition lesson - and there was an amazing number of lessons from this one. We'll share as many as we can in this post.

Just some context for the trade itself.

1) MITRA-WE was a freshly issued warrant.

2) Mitrajaya is a construction/property sort-of conglomerate with significant overseas assets. It is asset heavy but somewhat light on the order book side. Its story is not as attractive as other construction companies that are highly leveraged but possessed some glamourous contracts.

3) We went into this trade in the weeks leading to the 14th General Election.

4) Guess how well that turned out for construction stocks in general?

5) We pegged Mitrajaya as a low-volatility stock that would not be as impacted from a potential post-GE14 shock. Its net asset value is at a good premium to the current share price.

6) Our preliminary fundamental analysis indicates that Mitrajaya was an undervalued but unloved stock. Any sector-related setback is an opportunity to buy. Hence, the warrant provides a great entry opportunity due to its cheapness (?).


We'd love to talk about how we stand by our analysis and convictions. But the latest figures showed that our projections were way off (we entered this trade before the release of the most recent earnings disclosure). As it turns out, Mitrajaya has a host of issues to deal with right now - cash flow constraints, dwindling cash reserves, and a borrowings-dependent operation (which impedes its capacity to expand/undertake new contracts).

From an equityholders' standpoint, things do not look encouraging. The dilution in earnings per share due to a higher share base is not being viewed favorably by the market. The low amount of utilisable cash also paints a clearer picture than the company's sky high net asset value (RM1.12) relative to its share price (53 sen as of July 20).

Despite the long term positives - low exposure to pre-GE14 major infra projects (now considered a major risk), diversified revenue sources, overseas projects with future potential, some good landbank - at present we have come to the conclusion that the stock is actually fairly valued at its current levels. In five years things could be completely different, but that is besides the point. Which brings us to our next point...

 MJ - Moonwalking to Excellence


Almost by definition, company issued warrants do not only represent a cheaper proxy, but also a short term viewpoint. It's not to say that having a short term viewpoint is wrong, but in the context of the company and its supposed positives, we were misguided to buy MITRA-WE in the first place.

Simply put - we favour Mitrajaya's long term prospects, but there wasn't much going on in the near term (we define this as three to six months). We were in love with the notion of the stock being so undervalued and how ignorant everyone else was; of course it turned out to be the complete opposite.

There was a fairly obvious clue that we completely missed to justify our point that there is little near term excitement. And this clue came out of the company's own intentions:

The rights issue - which gave birth to MITRA-WE - was wholly done to pay current debt. There was nothing set aside for projects, or anything forward looking (commonly known as working capital). While management is doing the right thing to pay off borrowings, there was little for investors to look forward to in the near term.

This ultimately means that investing in MITRA-WE is already a flawed premise for an investor with a short-to-medium term viewpoint (we define medium term as six to twelve months). We did not realize this at the time.

Oh, did we mention that we initiated this trade in the weeks leading up to the general election?


You were probably aware about how the GE14 shock impacted stocks in the construction sector. For fund managers and company CEOs holding big stakes, the first few weeks post-GE were about as fun as pulling teeth. (Editor's note : our GE14 forecast also had a lot to do with the subsequent mess and clean-ups that we had to undertake, including this very trade).

As for us, the small fry traders, we considered Mitrajaya a relatively market neutral pick in the sector. We knew that the stock has languished at multi-year lows. We foresaw a low correlation between how the likes of GKENT and GAMUDA will fare compared to this company. By that it simply means that the stock will not fall as much in a sector shock situation. We did come up with a post-GE14 impact forecast to measure how badly the sector would be impacted.

Mitra's stock price, early 2017 until July 20, 2018.

 We can claim a Pyrrhic victory in this (Editor's note : the worst kind of victory, really). It did turn out that MITRA was not as seriously impacted as the first-tier construction stocks. We can even prove this  with data.

But the sobering reality is this: even a monkey can conclude that MITRA won't fall as hard as GKENT in a sector shock situation. We also humbly admit that the monkey would not have lost RM20K as fast as we did from trading. 

The major in-hindsight-it-was-so-obvious mistake we learned was this : none of this means we can make money from this trade. It doesn't support our trading thesis, and ours was pretty half-assed. 

We had little justification for having an exposure in the construction industry before GE14, given the risks. We also conveniently forgot that if a sector's heading downhill, MITRA will go with it. There won't be any flows to MITRA's stock just because other construction stocks are falling. There's just no desire to buy construction stocks, period.

Which brings us to our next, fatal move...


When investors became frightened by these kinds of market shocks, there's little incentive to buy at the lows. There's a higher inclination to stay on the sidelines and adopt a wait-and-see approach. This means that there is far fewer trading interest in construction  stocks compared to post-GE14 (the scary decline in GKENT made sure of that). Stocks fell hard because the liquidity is only one way - sell orders - when there is actually any liquidity to speak of.

We have noted numerous times that when the stock (mother share) falls steeply, the proxy (call warrant, or company warrant) falls even harder. This is simply a byproduct of leverage and liquidity; it creates buying opportunities for us like in the recent TOPGLOV trade, but if we had held a position before these kinds of declines, we would have been toast.

In MITRA-WE, we were completely toast, and then some. The liquidity situation, and our dithering, simply compounded the losses. This is what a completely illiquid warrant price chart looks like.


Between May 8 and 30 June, MITRA fell by around 20% due to the mix of bad sector sentiment and lousy liquidity. MITRA-WE, however, fell by a staggering 50%. 


You may ask; how did we end up buying at the high and selling at low like that? Weren't there opportunities to sell on the way down? 

We compounded our mistakes (and losses) by accumulating a large position early on; we bought in during the first few days of MITRA-WE's listing. We then became trapped; relative to the day-to-day trading volumes, there was little opportunity to dispose a meaningful amount. The buy-sell volume queue was erratic, also due to lack of trading interest (for example, on a typical day it might look like this - buy at 14 sen, sell at 16.5 sen)

We were also admittedly in self-denial mode and were unwilling to unload at a steep loss - a sure sign that our ego got in the way of sensible, risk-controlled trading. We failed to control the losses because we failed to set the parameters for this trade.


To avoid this liquidity trap as well as to control losses, we should have set clear parameters. These are simply deadlines for the trade to show that it's heading in the right direction - profitability is the clearest indicator, of course.

We had set a clear time-based threshold - dispose by end May, when MITRA's quarterly results are out - but we failed to institute a rigid price-based threshold. It's just drawing a line in the sand - if we lose money by this much, we have to dispose the entire position, at all costs.

We picked 17 sen as an exit point. But, as is often the case with illiquid trades, MITRA-WE shot right past that barrier. In one trading day, the warrant fell to 13.5 sen before we could react in any way.

This was when rules-based trading turns to hope-based trading. We thought : surely the market would regain some sense and buy into the warrant? Can't they tell how underpriced it is right now? Perhaps just another day and the warrant will go back to 17 sen, where we had planned to sell?

The lesson is - you can set the rules but if you don't follow them, you'll pay the price very, very quickly.


This is where it gets self help-ish. We don't claim to have all the answers, but here's what we did. And perhaps it can apply to you once you endure through a severe loss, or a prolonged losing streak in trading. (Editor's note : we'll probably write another post just for this)

1) Don't Internalise - Yes, that sum of money is significant. RM20,000 worth a few months' salary (for most of us) and could have been used for down payments for many things. But in this instance, thinking of money in literal terms is not helpful. Trading losses are inevitable in trading. They can come in waves; some may be far more severe than others. Don't treat any trade - profitable of otherwise - as a significant milestone. A huge loss is not a roadblock; it's the foundation for crafting better trades next time.

2) Its OK to Feel Stupid, But Not For Too Long - Believe us, the process of disposing this trade at its lowest sucks. It was emotionally and physically painful. But there is little point in wallowing in self pity. The trade may have been flawed, but the most important lessons  are learnt from the dumbest trades.

3) Stay Forward-Looking - As in any bereavement process, it is normal to feel devastated. But with any disposal - no matter the cost - there is now cash freed up to invest in better ideas and far more promising opportunities. Regain the focus at your own terms; never go right back into trading when you're getting over a loss, especially when you feel like you have to trade now to recover all these losses.

4) Stay Away, Then Start Slow - MITRA-WE was our biggest single trading loss this year. By many measures, it was also shockingly swift, and it swallowed a large portion of our earlier profits. In other words, it destroyed our winning streak and completely shut down our trading. We made a conscious decision to stay away from trading anything for a few weeks before returning. The market will always be there, and so are new opportunities.

5) Analyse, Improve, Apply - As you can see from this post, we took the time to retrace our steps and draw a list of exactly where and when we made these crucial mistakes. We diligently took notes and marked every step of the decision making process which could have been improved. We intended to apply these lessons in our subsequent trades. We've already paid for the tuition; now we're making the most of it.

6) Get a Sense of Context - Understand that big losses are a natural process in trading. For us, we're at a stage where we can plausibly derive a RM20K gain from a single trade. You have to be able to handle big losses if you want to get big gains. At the end of the day, this was just one of many trades, and losses, that we will make in our careers.


Remember that this was barely two months ago - it was just one screw-up in a series of screw-ups that we committed. But since then we have been flying on all cylinders. We roughly estimate that our fund has made more than RM70,000 in gross profits (see our July posts) since the MITRA-WE disaster. There are still some losses here and there, but we are well ahead of where the broader market is right now.

When you're busy handling new trades and identifying opportunities, such setbacks are merely footnotes in your trading career. Accept it and move on.

We'd really like to say we owe all our recent gains it all to this trade, but to be honest it was our rage that drove us. We were totally pissed, and we used it as motivation to recover. (Editor's note : We still are)

Monday, 16 July 2018


We'll kick off this post with some mind-boggling statistics from last week (for us, anyway). What basically happened was we executed several profitable trades which went a long way towards boosting our capital position - already, almost half of our current capital pool is made up of this year's profits.

Ranked in no particular order of absurdity:

1) We made exactly RM50,351.44 in four trades (excluding commissions) over three days - July 9, 11, and 13.

2) The first trade - TOPGLOV-C34 on July 9 - delivered a 38% return on invested capital. That's RM11,300 in profits in twenty minutes.

Green = buy order. Red = sell.

3) The second trade - TOPGLOV-C33 on July 9 - delivered a 22% return on invested capital. That's RM8,050 in profits. In eleven minutes.

Ignore the middle part - we mistakenly tried to sell a nonexistent position in C34 (which were already sold) when it should've been C33.

4) Our third trade - PASDEC-WA on July 11 - delivered a 43% return on invested capital. That's RM19,501 in profits.. in just under three hours. Actually, excluding the two-hour midday market break, it would be just under an hour. Or more than RM325 in profits per minute.


4) Our fourth trade came from GKENT-CG which we disposed on July 13. The position was held overnight. This was our favorite one - we recorded the following return on invested capital within 24 hours for a total gain of RM11,500.

The main theme of this week's post is to show you the good and ugly sides of trading. This isn't an easy business, and it's especially easy to lose perspective. Behind these large profits are stories of massive doubt and uncertainty. Nothing here is a piece of cake.

To illustrate our point, let's have a closer look at the first trade. Did you notice this the first time?
Look closer.

We're sure you're generally aware of the events at TOP GLOVE right now. Similar to the KRETAM trade, we were fully anticipating a limit down situation and a subsequent recovery (stocks of large, reputable, profitable, dividend-paying companies are more susceptible to a successful rebound than... well, KRETAM). The limit down angle makes this a very high volatility trade.

Note that our first position buildup was 170,000 warrants at 13 sen by 9:05AM. But in just under two minutes, that position lost a staggering 42% in value - that's another absurd number for you. In other words, we briefly endured a RM9,350 paper loss within two minutes of entering this trade (yes, we were down by 42% on this trade).

How would you have handled this situation? Would you freeze and panic? Dump everything? Cry? (in the past, we personally have done all three and more)

 This is also known as the 'I bought Bitcoin in January' face.

What we did was simple : we maintained our composure and stuck to our trading plan. This is the most important key in high volatility situations like this. Freezing means you're caught unprepared - always have a plan, even when you're practically losing half your capital.

We can give you tips on maintaining composure, but in practice you will find it to be useless. It's not something we can teach - it simply comes with endless hours of practice and enduring large, real, horrible losses (we have been to hell and back many times, figuratively speaking). We suppose it might help greatly if you have a stable personal and professional life, as well as a strong bladder.

(Editor's note : most people usually have just one of these three - I personally prefer the last one over all else)

The following is our thought process for this trade and why it turned out to be successful. We're also going to demonstrate that these trades were completely thematically different. But these decisions, as always, are based on past observance of similar circumstances - we collect research and we trade on them under the premise that history never repeats itself, but it does rhyme sometimes.

The Trading Scenario for TOPGLOV-C34

Our viewpoint was fairly straightforward. TOP GLOVE's mother share hits limit down, thus the selldown will destroy the value of its call warrants - we anticipated this and have selected our preferred call warrants to trade. The loss of liquidity in the call warrants means that the selling will be even more desperate than in the mother share. For context, C34 closed at 22.5 sen the previous Friday.

On Monday (July 9) it fell all the way to 13 sen and we bought into it at that price. But we were in too soon - C34 quickly fell further to 7.5 sen. At this moment, the mother share was slightly off its limit down threshold of RM8.47 and was trading at around RM8.70.

We did not panic because the angle remains the same - the previously anticipated desperate selling caused the call warrant to plummet further (at its lowest point C34 was down by 72% from its previous close). We calculated the risks and decided it was one worth taking, hence we bought an additional 100,000 warrants at 7.5 sen. It turned out to be near the intraday low.

The beauty (and curse) of high-volatility trading is you're going to be proved right or wrong really quickly. By 9:20AM C34 gained more than 100% - absurd number alert! - as the artificial mispricing was quickly rectified. We felt that we showed some restraint by selling at between 14.5 to 16 sen as soon as the warrant's price rallied. C34 actually closed at 21 sen that day (!)

Another very important factor for us was that we demonstrated further restraint by not building up the position at that 7.5 sen level. We could've easily bought a million warrants if we had wanted to but we didn't and couldn't - such an act would have been a foolish gamble, and it was never part of our trading plan for C34.

To be clear, our decision was not a case of 'averaging down' - we thought carefully and thoroughly about an acceptable trade size and our expectations of the warrant's movement. We were emphatically NOT trying to trade our way out of a loss. Even with a huge paper loss our expectation did not change one bit. We are familiar enough with short term volatility to not be frightened by temporary setbacks.

Fortunately the price movement validated our assumptions very quickly - and for further context, that 7.5 sen per warrant position ended up making more than half our eventual profits from this trade.

For us, the most important element of this trade was having that restraint. Not trading can be the hardest part of trading, but it's the most effective risk management tool. We always think of the risk and the worst case scenario as priorities. For example, TOP GLOVE could have stayed at limit down levels instead of rebounding, causing a complete collapse in call warrant prices (we are cavalier traders but we will lose our shirts if our positions fall by 90%).

(Editor's note : I always say that we trade very conservatively but nobody believes us)

The Trading Scenario for C33

By this time (around 9:40AM) TOP GLOVE's share was closing in on RM9; there was a strong rebound from the limit down levels and the call warrants have also recovered. The mother share was exhibiting signs of accumulation activity at the RM8.90 level. If it breaks RM9 and beyond, C33 was likely to follow and blow past the 20 sen mark. We felt comfortable enough to acquire 200,000 warrants at 18 sen.

Why didn't we continue to trade C34? This is because we rarely re-enter a profitable trade (for that specific warrant) because its parameters have totally shifted - remember that the trading angle has been fully realised. C33 was an alternative and was available at a good price point. It also exhibited the kind of liquidity characteristics that we like.

We anticipated the breakout - of course, if it didn't happen, we would have taken the losses at a level we deem to be acceptable. But the breakout happened, and the mother share hit RM9.20 quickly. We sold C33 at 22 sen per warrant for a hefty profit. It actually closed at 23.5 sen that day, or a 135% gain from  its intraday low - sounds absurd, doesn't it? But it happened.

We must stress that this all happened in such a short time span - just around 11 minutes. Thinking on your feet is a necessity as a discretionary trader who's trying to execute a high-volatility play. As always, we followed our own rules instead of having the market dictate them for us. We set the scenario, the expectations, the profit targets, entry points, and exit points.

The Trading Scenario for PASDEC-WA

PASDEC-WA was a new issuance - we initiated a position on its first day of trading. We have observed that less than 30% of the time, a new company warrant issue can receive significant buying interest against all logical reason. This essentially means a complete detachment from the underlying value of the warrant itself.

A recent share takeover offer may have sparked some interest to ramp up the share and warrant price, though we personally believe it was not a serious offer (for example, warrant holders were offered to dispose their warrant at a mere one sen per share - obviously nobody will go for that).

The warrant's terms also had no bearing on its fair value relative to the mother share. It carries an exercise price of RM1, making the warrant essentially worthless as the mother share was only trading near the 50 sen range. (Editor's note : this pricing is normal for warrant issuances. The warrant offers shareholders an opportunity to build a bigger position and express a long term viewpoint. The expectation is that PASDEC's long term trajectory is good enough to attain a share price above RM1).

We suppose you may be wondering - how do we trade beyond reason?

This is not a fundamentals-based trade; it's purely based on price and volume activity. Simply put, what we did was set a target price to confirm a continuation of momentum. This target price is at a premium to what the warrant was trading at during the first few hours. If the warrant easily hits that target price, and if it supported by clear buying demand, we would build a position without hesitation. Or as Soros would put it, the trigger has occurred, so the only thing left to do is to pile in.

The most important factor : our price/volume expectations had to happen within a predetermined time period. This was key to our trading style - price, volume, and time converge to signal a high-return opportunity.

We waited until it was near the midday market close to build the position. It was just about two hours of waiting to see if the warrant will start exhibiting interesting characteristics - we weren't entirely convinced that it would, but we did put in on our watchlist.

The convergence occurred in a way we have seen numerous times before. This rally is happening, and it's not fundamentally justified or easily understandable, but there was real money to be made.

Note that our first position was at 8.5 sen - naturally our first target would be 10 sen, or a potential 17% yield. With a big enough position, we stood to make significant profits if this did happen. The warrant broke past 10 sen as soon as the market resumed at 2:30PM, and we bought some more at that price in anticipation for another wave of buying.

To trade big lots, you have to maintain composure. It's good to know and understand market psychology, but we feel a lot of traders lack the capacity for self-awareness. Your own psychology matters as much when dealing with these stressful factors all at once - managing a big position, dealing with a potentially gigantic paper loss, real time risk management, and executing buy and sell orders at the optimum price.

We don't become excitable when our trades become profitable - this has led to complacency in the past, resulting in serious losses as we became too greedy to exit. What we did was constantly trying to maintain a clear mind and ensuring that our decision making process was linear - we never change our trading plan midway.

For our hefty position of 500,000 PASDEC-WAs, we looked at this trade in the simplest terms. Any exit price beyond 10 sen is already a bonus for us (we've already locked in that 17% profit). The next phase is to gauge the trading sentiment; how fast the warrant is moving, looking for signs of weakness, and our favorite - looking for signs that latecomers are finally buying the warrant in heavy volume.

Note the underlined - this is how we determine our exit point. We try to dispose our holdings at the height of euphoria/market mania. Being early in such a trade is always important - this trade's profit potential diminishes once the entire market got wind of the warrant's big move. PASDEC-WA gained 100% in a day; that's a BIG move.

We sold our positions between 12.5-13 sen for a nice profit. It also happened to be near the intraday peak of 14 sen. The mother share didn't really move that much; all things considered, we probably would not enter PASDEC-WA again; the play has disappeared for good.

The Trading Scenario for GKENT-CG

And now for something completely different. We have successfully traded down and beaten construction companies before. There are some parallels between GKENT and our previous trade in GBGAQRS, and this was the perfect opportunity to test our theory.

We firmly believe that the market oversells bad news and underestimate the power of good news. This was somewhat evident in GKENT and its brethren in the much maligned LRT3 project.

We first flagged this piece of news on the morning of July 12. This was the day when we bought into GKENT's call warrant.

This was at 9:39AM; at the time, there was some modest movement in GKENT and MRCB's shares (they are the PDPs). At this point we were figuring out a play and have begun observing both stocks. We were more confident that GKENT, as a stock, will move faster than MRCB due to MRCB's unfavourable liquidity characteristics (overly liquid stocks face heavier resistance in any rally).

We also considered a number of MRCB and GKENT call warrants and ultimately settled with the only tradable warrant that GKENT had presently. We figured that the rest of the market would trade GKENT-CG as a proxy given that nothing else was available.

GKENT (and MRCB) only really moved in a big way when the market resumed following the afternoon break. The smart investor would've acquired the shares as soon as the news on LRT3 was out earlier that day. We did not.

But here's what we ended up doing. We made a fairly risky but calculated move to acquire the call warrant when the mother share was already trading at RM1.23, or 22.5 sen above the previous day's close. We were anticipating a limit up scenario to frame our trading angle. Here's what our thinking boiled down to:

a) Backed by historical observations, we foresaw a higher than average likelihood of GKENT hitting limit up (RM1.29) on this day due to the overflow in good sentiment and apparent strong buying interest.

b) If this was to happen, we expect to see volatile but clear buying activity in the RM1.20 to RM1.25 range. This means it was important to build a position in GKENT-CG while this was going on. The time window was expected to be very short - we had to move fast.

c) We ended up with 600,000 warrants at 2.5 sen apiece before GKENT's stock began its move to limit up levels. At this point we anticipated that investors who missed out on the mother share might just put on a speculative trading position in GKENT-CG.

d) GKENT ended the day at RM1.29 while GKENT-CG closed at 3.5 sen. Our position was already up by 40%.

e) We understood, also from historical observation, that a limit up closing will typically bring some strong buying interest as soon as the stock resumes trading the next day. We were looking to sell into strength to get the best price. Anything more than 3.5 sen is considered a bonus, and a hefty one at that.

f) We sold at around 4-4.5 sen on July 13. Almost all our expectations were proven to be correct.


Unfortunately the numbers don't tell the full story. We also endured significant losses from a few grossly misinformed trades last week, namely in DSONIC-WA (a new issuance that proved too volatile for us to cope with) and TNLOGIS-WC (we had internal rules to not go into these types of speculative trades; we broke them and paid a dear price). In effect, these losses meant we had to pay a steep tax on overall gains to the tune of RM13K.

 Proof that sometimes we're too dumb to take our own advice.

Warrant trading is risky, puzzling, and fascinating at the same time. The rewards are tangible, and studying these instruments is worth the trouble. We mainly worry about the downside and the legitimacy of our trading plan; the profits will take care of themselves eventually.

Note : Do share with us your own trading experiences, crazy profits (or losses), and questions. We'll compile the best ones and share our thoughts here.

Monday, 9 July 2018


In the interest of brevity, everything in today's post will be as short and succinct as we can make it. This trade has nothing to do with fundamental analysis; it's pure sentiment, volatility, and understanding how these two factors affect stock prices.

This is to make a point - you can have all the trading ideas in the world and hours of homework done, but in trading, you must have a clear focus. A real clarity in decision making is needed because time is short.

Our trading style is almost fully dicretionary - this means that sometimes we are guided by pure intuition. Catch a ball 99 times and on the 100th attempt you should be able to show some improvement in the skill of ball catching. Focus not on where it is right now, but on where it's going to be.

The extent of our fundamental research culminated in this finding - Kretam's offices are located on a road with the fantastic name of 'Jalan Buli Sim Sim'

This also applies in trading. Most of the time we mainly rely on two things ; an imperfect set of real-time information and past empirical observations. We have seen this movie before; there's a chance we can tell how it's going to end.

Understanding volatility and investors' mentality was key in this particular trade - we managed to score a gain of 20% in KRETAM by recognising the opportunity and implementing some measure of risk control. We were aware of the conditions that would enable the stock to do what it did. If this movie didn't end the way we thought then perhaps we'd lose about 5% of invested capital - but we won this time, with an out-of-the-ordinary double digit gains.

Oh, and this trade only took about five hours. Or three hours, if you discount the midday market close.

We have written about the different types of quick trades before. So without over-complicating things as we usually do, we'll just show you our thinking process and results.


Kretam Holdings, a second tier plantation company, was going to get smoked. This was because a planned takeover by a suitor was canceled. Relative to its net asset value, we felt KRETAM had no business trading at nearly three times that amount. The takeover offer was the only justification for KRETAM's shares to hover at that 85 sen level, but it seemed a flimsy deal to start with.

The reasons :

1) It seems to be overpriced (an offer of 77 times PE?)

2) The acquisition is not immediately earnings accretive for the acquirer.

3) The mutual shareholder(s) present in both the acquirer and acquiree companies suggests that there is no real urgency to take KRETAM private.

4) Before we even begin questioning the rationale of such a vastly inflated offer price, let it be known that the takeover was scrapped due to 'unacceptable' due diligence results.

5) If you had read (3) and (4) twice perhaps you'd agree with us that something is fishy here.

6) We will keep the gossip to a minimum but... the stock clearly saw clear accumulation activity before the takeover offer was announced (21 Feb, 2018) and an even clearer dumping activity before the cancellation was announced (14 June, 2018). *wink*

Heh heh (the last big red candle on the far right is June 14, 2018)

Remember, we can't stress this enough - you have to devote a massive amount of time just to be fully prepared for a few minutes of decision making. Achieving clarity comes with a cost - time (from homework and continuous market observations), effort (from doing analytical work and from actual trading activity) and money (losses from previous unsuccessful trades, which we're supposed to learn from).

We don't really care about the why, what, how, and huhs? in this case. All that mattered was we were vaguely aware about where this stock is heading on Monday, June 18 following the takeover cancellation announcement the previous Friday.

And this boils down to one expectation : limit down.

Thanks to the wonders of Twitter, we can show you our thinking in real time. But first we'll go back to a key period on June 18 - the first 15 minutes of trading.

The stock opened just below 50 sen and quickly dropped to its daily limit down threshold of 39.5 sen. There were about 87,000 lots for sale by desperate sellers. Like many retail traders perhaps most of these traders were only in this stock in the hopes of the deal being consummated. (note : 87,000 lots means 8.7 million shares. That's a significant amount of stock being dumped)

This was the only observation that mattered for us at the beginning - we saw that this 87,000 lots were cleared in record time. KRETAM had no trouble rebounding, and there were serious forces doing the buying.

This is a movie we've seen before - so we're already anticipating the story line, plot twist, and resolution. So we put on a trade.

Our approach was eye-wateringly straightforward; buy a bit, survive the downside volatility, wait for our expectations to be met, and then accumulate a far larger position. Then we will ride the profits to a pre-determined exit price, or any point where we see an immediate need to realize profits. We wrote about all this recently here.

So this was how it went down. At 9AM, the stock went limit down, but it rebounded quickly. We got in at 9:38AM and again three minutes later. Within an hour and a half it broke 46 sen and didn't look back (for a while).

Intraday price movement in KRETAM, June 18, 2018.

Note that we weren't immediately certain which path this stock would take, even as late as 11AM on this day. The volatility meant high volumes bought and sold; the stock briefly hit 46 sen before exhibiting a bout of weakness for the next hour at 44 - 44.5 sen. There was a real, plausible risk that the stock could go back to its limit down price and destroy our position. So we had to observe the movement closely.

Actually, things moved so fast that we couldn't wait for our expectations to be met, hence the position was fully assumed at 9:41AM. We had the capacity to double our shareholding but that would have been far too risky for a stock this volatile. The stock moved too fast for us to add to the position in a sensible way - between 11AM and 12:30PM, KRETAM rose by a staggering 17%.

So, by 11:51AM our ROI was this much in just over two hours.

Now comes the next vital part in our trade. Specifically, we had made three assumptions as a result of historical observations of similar stocks.

1) This rebound will not last. In fact, in over 70% of similar cases over the past three years, the stock loses steam after an immediate post-limit-down rebound on the first day. (note: our sample size is small so make what you will out of that)

2) The gains were a by-product of an artificial mispricing - in this instance, it was the desperation of panic sellers in the morning. On a longer timeline, the stock will cease to have a reason for staying up/holding to its gains. The momentum shifts downward as heavy volume selling will displace enthusiastic buyers for the battered stock.

And from the perspective of our trading execution, these were the most important ones:

1) Any price point representing a gain of 15% or more is a bonus. If this was achieved in one day, it was due to exceptional circumstances but this is also indicative of volatility - what goes up fast can come down just as fast. Volatility works both ways.

2) The stock was heading into the midday close at an intraday high after hitting limit down earlier - we know that this practically means the peak of investors' enthusiasm. The rest of day would involve more selling than buying - hence the stock price will normalize (retreat from the high).

Note the time stamp. We said this before the market resumed trading.

We were fortunate to have disposed of the position at the day's peak of 55 sen for a 20% gain.

To put into context, a 20% gain is massive - imagine depositing RM1,000 into a savings account at an imaginary bank that rewards you with 20% interest in three hours.

This is why we have repeatedly emphasized that percentage gains should be the true measure of ROI as opposed to absolute value. Obviously the latter is important, but the double digit percentage gain means that the invested capital was fully optimized.

(Editor's note : to counter our tendency of exaggerating our trading prowess, I'd like to note that the gains were cut down by a couple thousand ringgit due to our stupidity. On June 19 we attempted to build another position to derive more profits from KRETAM and on this we completely failed. Notice the part highlighted in red : we ignored this finding because we thought we were so smart. We clearly weren't.)

Monday, 2 July 2018


One of our patron saints of investment is George Soros (we like Buffett too, but we're trying to distinguish ourselves from the so-called value investors and mutual fund managers who are currently being condemned to oblivion).

Soros has been called many things; bottom-feeder, destroyer of banks, predator, and moron, among others. But he had innovative ideas and an incredibly agile philosophy towards trading. Being the obsessive nerds that we are, we recommend his biography, which we consider to be one of the best investment books you will ever read. He really did started from the bottom before making his billions.

We have picked out our favorite lessons from George Soros which we kept in mind when we traded Mi Equipment Holdings Bhd, the latest publicly listed company on Bursa Malaysia as of July. These are:

1) Learn From History. Anticipate the Thematics.

2) Invest First, Investigate Later.

3) Ensure That Expectations Are Met.

4) When They Are Met, Pile In, Hard. Utilize Leverage and Ride the Profits.

We applied these lessons to our trade and made reasonable profits, though as always our exit point can be considered conservative. But first, let's go back to the beginning.

Note : We will use a series of tweets to prove that our thinking was made in real time in relation to our trading activity. (Sub-note : please follow us on Twitter)


You must have known about the markets in June. For lack of a more appropriate word, it was a truly shit market. Between May 1 and June 29, the FBM KLCI fell by about 200 points, or more than 10%. We can waste time and talk all day long about what caused it, but the following picture practically sums it up.

"I'll put my finger up emerging markets". Source

Anyway, in an environment where on a daily basis you will find 90% of Bursa Malaysia stocks in the red, it helps to start filtering your stock picks. Our fund was in the fortunate position of being 100% in cash as of early June - we had a disastrous May with a series of hilariously wrong market calls, so we took a step back.

But first, a brief on IPOs. In recent years, we have catalogued the characteristics of what makes a successful and unsuccessful public listing for trading purposes. We dislike big money, super-liquid, high volume IPOs due to their low upside potential and oversaturation. The really big ones off the top of our minds include AIRASIA X, ASTRO, and LCTITAN. They all flopped spectacularly.

We like lower profile listings that are less liquid. For the most part they also possess characteristics of a growth company despite their recent earnings successes. Obviously hype and links to popular political figures clearly boosted previously successful listings - we understood and respected these factors as potential catalysts. Recent successful IPOs that we liked include BAUTO, OWG, and SUNCON (this last one may have been an exception as it was a big-money listing). Again, we say this in terms of trading - it's not a commentary on these companies' fundamentals.

While we do not actively seek out each and every one incoming IPO to trade, we were vaguely aware that MI hits all the right spots in subtle but incredibly important ways. In the interest of brevity we will list them out.


1) A good company with excellent growth potential.

2) A good sector with excellent growth potential.

3) Relative to its peers, the company occupies a not-so-well-understood niche.

4) Its 'friends' (as opposed to peers, but they both are cogs within the semiconductor industry; technically they are not directly comparable) are well-understood businesses and seem to be fairly valued by the market.

5) They talk a good talk. Some lovely promises were made; if anything, the message given by the company is of unbridled confidence. 


1) Not too liquid.

2) Good price (a range of between RM1-2). It's fairly affordable.

3) Retail investors will most likely determine the stock's trajectory (it's too small for real institutional focus)

4) Market capitalisation is fairly small. There is room for sentiment to propel it to new heights.

5) At 10.5 times PE, the stock is already at a 17% premium to the IPO price. Wait, did you say only 10.5 times?


1) Markets are bad. Really, really bad.

2) There is a dearth of opportunities right now.

3) A promising IPO/listing is as good an opportunity as any right now.

4) These kinds of listings are generally market-neutral.

5) It's an exciting semiconductor proxy.

6) By extension, some may consider it a tech proxy.

7) If the stock falls below IPO levels due to a weak market, it's already undervalued for a stupid reason. Thus there is significant upside potential.

"If I were a robot, I'd swipe right on all of these". Source

A disclaimer : we did not prep for this trade. We are vaguely aware of the key details (and always attuned to the current macro/market environment, of course). We made the decision to enter this trade on the second day of MI's listing, and this was after a cursory examination of the price and volume activity.

These detailed rationalisations are mostly after-the-fact, which brings us to our next point.


In the rarefied world of old-world value-based investing, such a statement would send mustaches twirling and teacups shattering. But in trading, there may be times when there is no time for an in-depth analysis. By anticipating the thematics, we were actively testing the waters in the expectation that MI would turn out to be a successful listing.

Pay close attention to the time and date stamps in our tweets. 

On June 21, 2018, the second day of MI's listing, we took the plunge after we noticed that the stock immediately rebounded from a brief spell below its RM1.42 IPO price. At the time, this was all the information we needed to trade. We most likely entered the trade late - our first position was at RM1.59, a premium of 12% over the IPO price.

For the chartists : on June 21, the stock hit a high of RM1.61 and a low of RM1.53.

You may ask : isn't it bafflingly stupid to enter a trade at what was then the intraday high? Aren't you guys aware of the huge resistance point at RM1.60 (huge selling volume there)? If some research house says the fair price is RM1.66, aren't you guys irresponsibly entering a trade with a low upside (RM1.66 target price) and a huge downside (RM1.42, the IPO price) ??

We have counterarguments for all of this.

First, we are fully aware of technical charting and research house reports. But unlike most of the general population of retail investors (in our biased opinion), we do not consider these as dealbreakers (in fact, we do not use any technical indicator, other than the price and volume activity).

We entered the trade as the stock activity already points to a real buying demand - a 17 sen rise above IPO is a big move. We knew that this has nothing to do with the broader market; in fact it was a particularly painful day for Bursa Malaysia. We also knew that in the case of BAUTO and OWG, their stock price appreciation potential was essentially limitless; both stocks rose by more than 50% in their first two weeks. MI could potentially be part of this club.

'Could' is the key word here. This is why we tested the waters first. Our initial position was small enough that any significant move downside (even a decline of 17 sen per share) wouldn't hurt us. We have an understanding of how volatile new listings can get. In other words, we will only build a meaningful position once our expectations are met.


If we were to give one clichéd trading advice for beginners it would be this : dictate your own terms while trading. Never let your emotions or the market dictate them for you. Setting your own rules and parameters are important to ensure that any trading decisions made are not based by emotions or cognitive biases. We do not claim to be geniuses, but we do slavishly follow the rules. 

So, the first rule : set a target.


Bear in mind that on June 21 the highest MI's stock price ever got to was RM1.61, and we bought in between RM1.57 and RM1.59. We are patient realists; we know there will likely be some short term downside volatility. On this day our position was a smallish (in our view) 50,000 shares.

We are also used to downsides, especially during trades that have failed in the past. We have reduced our hesitance in dumping unprofitable positions. The second target was setting a downside limit; we would've sold the entire position if it falls to RM1.51. In stark terms, we were willing to accept a RM4,000 maximum loss on this trade. 

Obviously, the trade must show an improvement before we can consider boosting our position in it.

 This was another of our expectations.

On June 22, the stock performed a bit worse. After closing at RM1.56 the day before, it hit a high of RM1.57 before closing at RM1.55. Our position was suffering not-so-insignificant paper losses. 


On June 25 (the next Monday), the stock fell to a low of RM1.52. This triggered a few warnings for us, and we sold 30,000 shares at RM1.53 - if anything, we were being conservative due to the continuing broader market turmoil.

However, within a span of 20 minutes, MI's stock rocketed back to RM1.59. This was when we really started paying attention. Not only did we replenish the previously sold position by buying back 30,000 shares, we further accumulated another 30,000 shares. This brings us to 80,000 shares owned worth about RM127,000.

For our fund, it was a disproportionately large one position. We were also able to utilize leverage to achieve this - thanks to our track record, our broker gave us generous terms. We were also 100% in cash prior to entering this trade. For all intents and purposes, we piled in, and hard. (editor's note : leverage is having the means to buy a position that is worth more than the actual cash at hand).

Leverage is a thorny issue for some - think of it as a double edged sword that can just as easily destroy you. But in the context of this trade, it helped us derive larger profits than we would've achieved had it been made purely in cash-on-hand terms. Being leveraged allows us to focus on an absolute return target as opposed to a percentage return one. This meant that we no longer aim for 15-30% returns; when leverage is in play, a 5-7% return is worth just as much.

A brief detour : here's one of our favorite Soros anecdotes. In one of his most celebrated trades, the Plaza Accord coup, Soros was making huge profits in his long yen position after anticipating this thematic (basically, the 1985 accord was a multilateral agreement to devalue the US dollar to address an ongoing trade imbalance. Anyone who sells short the dollar and goes long the yen or deutsche mark stood to make huge profits). 

Hey kids: learning about old guys in suits can pay off. Source

His traders were more than happy to lock in their yen gains right after the accord was announced - the yen and the mark both appreciated sharply, as was the intention. But Soros was furious. In his mind, this was just the beginning. Why shouldn't he buy a lot more yen and capitalize on a long term trend? He berated his traders and said that he will assume their yen positions if they're going to sell. As one author puts it: "this was the real genius of Soros. He saw that his expectations were already validated, and it was time to leverage to the hilt".

As Soros himself puts it in his book, "we have assumed maximum market exposure in all directions". His ultimate positions were worth USD1.46 billion, or twice the cash value of his fund at the time. His flagship fund, Quantum, eventually made a profit of nearly USD1 billion from this trade. The dollar ultimately fell by 51% against the yen, an unprecedented move in the history of global currencies at the time.

OK, back to MI. Now it's time to recognise a bit of market psychology.

The T4 phenomenon.

'T4' (also known as 'T+4' is typically the time period allowed for retail traders to keep a position without actually buying them. The date of purchase is known as 'T-day', followed by a three-day period (also known as the contra period). 

On T3, the broker will ask the trader/investor whether he/she wants to keep the position. This means actually acquiring bought shares with cash in the trading account. (note: T4 is the ultimate deadline for selling the shares. There are also extended periods such as T8 being offered by some brokers).

The aim for most retail traders is to make money within the contra period. If the position proves to be a profitable one, the trader effectively puts no money down at all; he enjoys all the profits after commissions with his capital untouched. But if he is losing, he can opt to sell the entire thing (absorb the loss) or acquire it with cash. 

This is a very dry explanation, but bear with us. The reason this is important is in the above tweet; those who were caught out by the volatility may be facing a loss; for those who bought on June 20, the first day of listing, their T4 is on June 26 (four trading days later). This is not an absolute rule, but T4 days typically involve forced selling. This means that even for stocks with positive momentum, their price may be somewhat stagnant on these days as the market absorbs this force selling activity. 

We will never know for sure, but in MI's case, the T4 day looks like this:

Notice the weakness.

We had no advance knowledge of this weakness, but we did anticipate the possibility of this happening. Again, the tweet: since this was actually happening, it was time to add to the position at a good price. It was already clear on Monday that the breakout has occurred; we were expecting the rally to continue further (remember our target of RM1.85, as seen on the June 21 tweet). In fact, we bought some 20,000 shares at between RM1.63 and RM1.64, bringing our exposure to 100,000 shares.

At this point our position was already profitable. We initiated our trade on June 21, hence it was only T3 for us. At the June 26 close of RM1.67, we were strongly in the green. 

On June 27, we actually sold our entire position at around RM1.80-1.81. Again, this was a conservative move due to the rapid appreciation in the stock price (MI rose by 28 sen within three days; it can easily fall as fast, or quicker). Hours after we disposed of the entire position, MI hit our RM1.85 target.

As soon as we are out of a trade, we no longer hold any opinions on the stock's future direction. But the trajectory of MI's stock remains positively solid as of June 29 - indeed, it continued rising to RM1.93.


To sum it up: we had a plan. We considered the downsides. We rode the profits. We benefited from having leverage. And we did a contra trade : our gains were pure profits with no impact on our capital position. Note that the entire duration of our trade was during the T4 period (June 21-27).

Our absolute returns? A not-so-insignificant sum.

More Tales By The Pelham Blue Fund