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.)