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)