Monday, 23 December 2019

JOIN OUR XMAS GIVEAWAY AND WIN A FREE BOOK !



'Tis the season to be jolly... and not trade.

If you're still trading by the last week of the year, we urge you to reexamine your life choices. Everybody's away for the holidays. Bankers and traders are clearing their leave days.

Our trading advice during XMas season is a sure-win proposition : please don't trade. Take a few days off and come back next year. This is a stressful business; take it easy, and use the free time with your family.

As we are writing this, we are currently in a different time zone. We're still checking prices of stocks we like. We will take our breaks right after this post is published... maybe. Yes, we're better at mouthing off than practising what we preach. Listen to our earlier advice; don't be like us.

But nevermind that! We are in the spirit of giving, and give we must.

We are excited to announce our collaboration with Ringgit Oh Ringgit as part of their 2019 XMas Giveaway! Please check out the full gamut of completely free offerings, with books comprising personal finance and investment topics, and free vouchers too!



The contest period ends at 11:59PM, 25 December 2019. Damn, just look at the list!
  • 1 x winner for RM100 in AEON Cash Vouchers from Ringgit Oh Ringgit 
  • 5 x winners for Tengku Noor Zakiah: Malaysia’s Pioneering Stockbroker Book from Kenanga Group 
  • 1 x winner for RM100 in MPH Vouchers from Silent Confessions by Syaza Nazura – the blogger behind Fresh Grad 101 series!
  • 1 x winner for 1Y MyPF Premier subscription + Licensed Financial Planning Consultation worth RM1120 from MyPF – the personal finance platform and licensed financial planner
  • 1 x winner for RM100 worth of clothes from Marquise.my (regular size)
  • 1 x winner for RM100 worth of clothes from Malaysia Plus Size (plus size)
  • 1 x winner for RM300 Cash + 2 x winners for RM100 Cash + 10 x winners for Financial Roadmap sessions from moremoney.my – personal finance education platform
  • 2 x winners for I Will Teach You To Be Rich by Ramit Sethi Book from Kewangan Graduan – Twitter-famous personal finance education platform
  • 1 x winner for The Innovators by Walter Isaacson Book from The Pelham Blue Fund – the anon group doing stocks and warrants trading on Bursa Malaysia
  • 3 x winners for RM50 Parkson vouchers from Mun Hong – fellow personal finance blogger
  • 3 x winners for Enam Angka Menjelang Dua Puluh Lima Book by Azraei Muhamad aka #FinancialGory – Twitter-famous personal finance education platform

To convince you further, let us reframe this opportunity as a trade setup:

Profit potential : win a free book (and other free goodies) and possibly eternal enlightenment.

Loss potential : none, unless if you consider clicking on a few links is a waste of time. It is not. How dare you.

Our contribution is the following wonderful book. It made Bill Gates quite upset; what's in this book is the honest truth, and it does not serve to flatter anybody!


The book is worth RM89, but what do you care? You can get it for FREE!

And of course, this is not the first time we have given out a book. Behold our first round winner, and the book that he was rewarded with!



But wait, what does a book about Silicon Valley have anything to do with trading? Our answer is: everything.

To be a good trader, you must inculcate a desire for curiosity. We don't have that problem: we are voracious readers and consumers of news and information.

We particularly like finance history and business history : real life accounts of successful / unsuccessful enterprises, and what to learn from them.

We will keep giving out books for free. Possibly for 20 more seasons. It's a never ending cycle of us-giving-and-you-getting. We are doo-diddly-crazy!

To stand a chance to win in the next round, all you have to do is follow us for updates. Follow our Twitter and Like our Facebook profiles. Share and retweet if you can; we appreciate each and every one.

And we have learned so much. Reading made us better traders. It gives us an edge, because we are aware that most people do not read as much as we do.

We hope you will find joy in reading, and by extension, joy in learning.

Have a nice end-of-year break, spend some quality time with loved ones, read a book.

We wish you a Happy XMas and Happy New Year. For all your support, we humbly thank you. If it were possible, each and every one of you reading this gets a book, Oprah style.



Well, that's it for us for this year. Let's kick ass in 2020 with some truly awesome trades.

Sunday, 15 December 2019

TRADE OF THE WEEK #28 : HOW TO TRADE 140,000 SHARES WITHOUT VOMITING (KHEE SAN BHD)



Outcome
Gross Profits :RM15,875
Return on Investment : 37%
Duration : 30 minutes

Nerves. Got to get rid of them if you ever want to trade profitably. And by profitably, we mean really meaningful profits.

Instead of being just another brief description of how fast and profitable our trade was - heck, we wrote the same thing just last week, with RM15,000 in profits too - this time we will share a useful piece of skill. And you will need this if you want to record five-figure profits per trade like we did.

We have developed the capability of holding large sizes. We are small fry retail traders, so for us, a large size is 100,000 shares or more. We can buy this much and handle the swift movement in the share (or warrant) prices, even if we had to carry this position overnight.

Just how big is 100,000 shares as a position? It's quite simple : a half sen movement upwards would net us RM500 in gross profits. A 10 sen movement? RM10,000. We have experienced both ends of this spectrum. Nowadays we are mostly calm, whichever way the position goes.

But of course, if we screw up the trade, or managed to buy the counter at its peak price point (we do this quite often), a move down can quickly kill us. So this is where we needed to learn about what it takes to be totally chill, sans the Netflix.

CALMNESS

You might think this skill is innate. Maybe some pros are born with nerves of steel. (Editor's Note : we reject the gender-specific term titled 'balls')

Maybe some traders are numb to pain or mental trauma, making them perfect for trading without emotion.

But no, it didn't work like that for us. We are human(s).

We'd love to tell you that there's an easy fix. But there isn't.

Do you know how Navy SEAL cadets have to be completely and utterly destroyed when they trained, and then rebuilt, to become real soldiers? It's a bit like that for us.

We have committed some major trading mistakes in the past. With enough mistakes, and enough experience, we became accustomed to our trading ability.

When we started out trading, a 15,000-share position would freak us out. For context, that's RM150 in profits or loss for each 'tick' in the stock. Visions of homelessness ensued : believe us.

We were a bundle of nerves. Fear sets in. We can't help but think of the very worst case scenarios - "if this thing falls 4 sen, I'm dead!".

Our bladder would magically shrink - we'd feel like we have to go all the time. We'd feel like regurgitating from both ends of our orifices; this is normal. 

Best of all, we'd take a position over-the-weekend (held from Friday to Monday) and voila! We'd lose sleep over the weekend.

Bear in mind that this was years ago. As we traded bigger and bigger lots, and somehow developed something resembling competence along the way, we dealt with bigger losses.

And by big, we mean five-figure losses. It sucks; and it always does.

We once lost RM10,000 in 10 minutes. In other situations, our (delusional) refusal to cut losses meant that we turned a RM10,000 into RM20,000. In other, other situations, we just got trapped in an illiquid stock. And we get eviscerated.

We're not saying that you need to experience the same thing we did to be able to trade like us. (Editor's Note : actually, strictly speaking, this is true)

But once you've been through all this, and assuming you still have capital left to trade, your nerves harden. You will no longer get rattled by temporary paper losses exceeding RM1,000 or more.
In this line of work, you should ideally trade with an amount of capital than you can afford to lose. This applies to most non-professional traders. Do not equate the success of your trading activity with your financial health. Detachment is necessary.

When your emotion is detached, you will no longer encounter nerves. You'll sleep well at night, at least. Give us a RM20,000 paper loss to carry overnight - we we'd still sleep like a baby.

Nerves is really a reflection of how worried you are. How worried you are is a natural extension of that basic human instinct: fear.  And to eliminate fear, you need two things : courage and conviction.

To be a great trader, your conviction needs to be absolute. If this is lacking, there may be something wrong with your trading angle. Perhaps that stock you're targeting is just too hot to handle.

Maybe you're worried that while you're trading, Trump will say something frighteningly dumb and brings down the market. If fear dominates your thinking, and your trading, you're really better off not trading at all.

And lastly, here's what courage and conviction brings: calmness. The way we approach a trade is simple : mentally, we'd accept the potential losses already. We know the exact amount, since we would go in with a predetermined stop loss point, or an absolute amount of acceptable loss.

We ALWAYS do this. Read our Twitter thread in its entirety to get an idea of how this process works. 


When we trade, we are no longer worried. The focus must be on the execution, and reaction in the fastest possible time frame to any developments affecting the stock. When we have clarity, we have calmness.

To put it another way, we know exactly the kind of sizing that we are comfortable with. Evidently this would not work if we were trading 500,000 shares in the short term: even we cannot stomach a RM2,500 potential loss per 'downtick'.

The lesson is :

Trade what you're comfortable with. 

Try to trade without fear, because if there is, you're probably not convinced enough about the trade.


THE TRADE

On 5 December 2019, we very quickly deduced that KHEESAN has a nice angle to support whatever was happening in the stock price. The company saw an exit of a troubled shareholder and subsequently the entry of a new one. It is also undertaking several fundraising exercises concurrently,


Here's the tasty (and crispy) part : Mamee Double Decker, the snacks giant, is investing in this company. But to understand the power of this angle, you need to know why Mamee would be a big deal. This article from a few years back helped set the context.

And our wild speculative guess. (Editor's Note : a nice story doesn't make it true. We are admittedly, usually full of crap)




In the morning hours of 5 December 2019, we noticed a sudden large move in KHEESAN from 35.5 sen to a peak of 43 sen. The stock demonstrated a 'stepladder pattern' with no upside limit in sight; this was shown by the fact that the stock broke 40 sen quite easily.

And it never got below 40 sen again; it sort of leisurely stayed there, which is indicative of steady accumulation activity. You can see the price pattern from the five-minute chart below.

 
We smelled an opportunity. The stock stood a chance of moving further in the afternoon session. So we crafted some basic trading parameters with limited downside, and potentially huge profit upside.

But as you can see below, we initially had conservative expectations about the stock's prospects. But we were willing to commit to large sizing.

For a change, let's get to the ending first, because that's the least interesting part.

What happened in this trade, we sheepishly admit, was mostly sheer dumb luck. We got in at the most opportune time, mere minutes before the stock suddenly explodes. We'd have been OK if the stock had reached 45 sen, but instead it shot up to 54. We thank the trading gods.










The last notable thing about this trade is this : we knew to count our blessings.

This swift movement was not going to last forever; we know by experience. KHEESAN's strong breakout past 50 sen was mainly due to people chasing the stock; it became super volatile at the 53-56 sen range, with inconsistent buy-and-sell orders. This rally is exhausting itself, and we saw this from a mile away.
The act of holding large sizes is not just about accumulating them during the buy phase. It's also about having the conviction to sell them.

We had certainty when we essentially dumped the whole 1,400-lot position into the market. We keyed in a sell order at 50 sen when the stock was at 54.5 sen; we wanted the market to absorb our holdings entirely. Notice that we did not sell small lots, or considered holding on to half in a greedy chase for even greater profits. That would be the wrong way to think about this.

The right way is to realise that it was time to exit completely. Our order was keyed in at 50 sen. We managed to sell at 54.



https://twitter.com/pelhambluefundhttps://twitter.com/pelhambluefund/status/1203667009852059648?s=20/status/1203667009852059648?s=20


https://twitter.com/pelhambluefund/status/1203667009852059648?s=20


Be sure to learn this : know when to hold without wanting to vomit - accumulation and holding phase.

But also know when and how to completely regurgitate everything - sell all when target is reached.

In other words, attain that calmness, and then you can control your bowels however you want!

Sunday, 8 December 2019

TRADE OF THE WEEK #27 : RM15,000 IN 9 MINUTES WITH SCANWOLF



Outcome
Gross Profits : RM15,186
Return on Investment : 37%
Duration : 9 minutes


We just did the math recently. RM1,666 in profits every minute. RM27 in profits per second. This was a fast one.

On this blog, we are generous with our information sharing. Learning is one thing though; application is another. And in this regard, our competitive advantage lies in our ability to apply, faster and better, than most people out there. (Editor's Note : sorry for the boastful tone)

We are extremely competitive about trading; oftentimes we are driven by rage and/or fear. But most of all we are guided by the desire to do the following :  

what is the best trade we can make given the circumstances?

Think of the butcher. He or she cuts large hunks of meat every day; it's their vocation. Given time, experience, and a lot of trial and error, they eventually will become better at butchering. They will do it faster, thus optimising their outcome of getting as much meat properly cut by the end of the day.

The business of trading is like that. As a vocation, we can only improve with experience. Certain things become ingrained in our minds. Reaction time is quicker. We even start spotting interesting things and patterns in a flash.

And as we get better - so the idea goes - we are able to execute a trade faster, and derive bigger profits.

As practitioners of price/volume analysis, this was essentially the key to our success in the SCNWOLF trade. We have seen the same pattern before, and we had to act fast.

The problem is that in the realm of instinct driven trading, there is not much we can teach you other than the amusing but irrelevant observations above. You can't exactly truly apply what we just said; the experience has to be your own, not to mention the time and capital commitments that come with it.

And yet, we keep writing about these kinds of trades, simply because it is such an amazing, powerful tool in our arsenal. We want to convince you that this is entirely possible to do, and to repeat. There's not many other avenues that can earn you RM27 a second, OK.

To get more details on how this kind of trade works, we'll keep it simple: it's really a repetition of how we traded GETS, DOLOMITE and SEDANIA in the past. Price/volume analysis, pattern recognition, followed by quick execution and exit. The catch is that you absolutely cannot screw up any of the three, otherwise your profits will go poof. 

Our advice? Read about those three trades, and come back to this one. Our profits in these type of trades are getting larger; our improvement as traders is an ongoing process.

As you can see, the reward is worth the effort.


THE TRADE

What do you make of a chart that looks like this? The stock was essentially dead before December  rolled around.

SCNWOLF daily chart - 2 December 2019

And if we break down that big spike into 5-minute charts, the movement looks like this:


Yes, roughly nine minutes was all it took. But of course, when we were in this stock, and with our large sizing, those nine minutes felt like forever. Einsten's theory of relativity never fails to amaze us.

So much had to happen in those nine minutes, and we somehow trained ourselves to synthesise info and turn it into a trading opportunity. But getting in was one thing, staying in is another.

If there were a second-by-second account of this trade, it would look somewhat like this semi-fictionalised internal dialogue.

Stage 1 : Pattern Recognition + Information Seeking

2 December, AM

9:13:10 - saw SCNWOLF movement at 20 sen levels. Bloody thing was last traded at 14 sen the day before. This was a big move - WTF?

9:13:35 - checked Bursa Malaysia company announcements. Stupid old laptop - loading time is slow.

9:13:58 - oh no wonder, some good earnings there. Uncles will be chasing this stock, maybe. The early ones get the gains.

9:14:15 - damn, it broke 20 sen! Low liquidity at levels above - everybody's buying, no one's selling!

9:14:18 - shit, here we go...

Stage 2: Execution - Purchase

Aite, first dip in the waters....

20 seconds later... big lots commitment.
48 seconds of observation... it keeps going up. Let's get juuuust a bit more.
About 3 minutes later, after getting nauseous looking at large gaps in prices. Last hit.

9:18:34 - OK, think we're done. If this thing goes back to 20 sen, we're screwed. Keeping the faith though. 180,000 lots is big though - damn.

Stage 3 - Holding on for Dear Life + Getting the Hell Out

9:20:15 - What the hell... this thing is skyrocketing. Obviously the feeling is... should've bought more.

The next five minutes of our lives looks like the following minute-by-minute price chart...
We actually sold at 28.5 and 32.5 sen

This thing jumped 20% in seconds! It's really time to exit on the way up... the mania won't last forever. Even more importantly, we can't sell large sizes once nobody's around to absorb them.

Let's get the first bit out of the way..

OK, time to jump ship. Bye.


And that's pretty much how it's done. A nine-minute tale for the ages.

Sunday, 1 December 2019

PROTON BREAKS SALES RECORDS, BUT DRB HICOM STOCK GOES DOWN. SHOULD YOU BUY NOW?


Many of us would fail to answer this question frankly, and truthfully : what do you suck at?

Self-denial will probably paralyse the truth-telling part of our brain, causing us to come up with ever more feeble excuses for failure of comprehension. After all, the three hardest words in the English language is 'I don't know'. The nine hardest words? 'I don't want to admit I suck at anything'.

Being good at trading is all about humility, and repeatedly absorbing painful lessons. A bad trade idea can be met with self denial, but the money that was lost would force you to accept things as they were. The reality was : you sucked at that trade.

Amongst our many fatal flaws is one particular thing that we suck at : analysing conglomerates. DRBHICOM is one such example; we had a very rosy view of its short term prospects, but we have been proven to be over-optimistic.

THE INHERENT FLAW OF GIANT BUSINESSES

Imagine conglomerates as a big ship. It's made up by many parts, but those parts have to be sturdy for the ship to remain afloat. One leak can bring down the ship, similar to how one underperfoming business can bring down the overall (consolidated) profits of a conglomerate.

To take this analogy further, the ship is made up of complicated parts. People who maintain them may not even see the leaks at first. You can guess how far a ship with holes can go - nowhere fast.

Conglomerates used to be en vogue - ten years ago they were, but not anymore. In a market upcycle, where growth and optimism are boundless, scale is everything. Bigness for the sake of bigness. Waves of consolidation and mega mergers. And best of all - the stuffing of unrelated businesses into a 'diversified' and 'synergistic' business portfolio.

The word 'synergy' triggers a sensation of vomiting in our mouths. It's the kind of one-size-fits-all word that essentially means and proves nothing. Synergy is a band-aid to rationalise a vague solution to a concrete problem. And you should know how the corporate sector loves their synergies.

In a sprawling family business with diversified interests - retail, real estate, and manufacturing as part of a portfolio of business interests, for example - the conglomerate structure may make sense. But as scale reaches its plateau, and with the business cycle heading to an inevitable downturn, it becomes more compelling to break the structure apart.

This tends to happen when the business owners start seeing the dreaded 'conglomerate discount' becoming wider and wider in their share price (Editor's Note : in other words, the discount of the stock price compared to net asset value).

When the pooled group of diversified businesses are valued at less than the sum of its parts, it's time to consider chopping them up.

Case in point is the Sime Darby demerger exercise. The group had their fun during the boom times as a giant conglomerate - plantations, automotive, real estate, industrials, et cetera. The merger happened in 2007, and the demerger in 2017. That's one (or two) good business cycles for ya. Our point is, when a structure stops making sense, corporates are wise to break the conglomerate structure apart. 

A breakup of a conglomerate brings multiple benefits. You 'spin off' the main business (the main holding company) because you realise the individual parts are worth more than the sum. Just by doing this very basic readjustment of structures, you can unlock billions in value

Why is it beneficial? Because shrewd investors prefer exposure to specific businesses they like. With SIMEPLT for example, they can get pure exposure in plantations, without worrying about volatility in the automotive distribution segment, or lousy near term prospects in the real estate business. 

The second benefit is even simpler: individual businesses can now be fairly judged by the market. Again, the sum of the parts - the classic conglomerate structure of a 'parent' holding company holding stakes in all these different businesses - may not get optimal valuation. Because there's fear: you think the nonperforming businesses will erode the earnings contributed by the better performing ones. 

You might even get confused and become unable to value the business properly, like us. We suck  at analysing conglomerates, because sometimes we miss the leaks in a ship that looked sturdy at first glance.

The SIME case was a well-timed exercise to derive value from a market of investors that are hungry to chase yields. Other conglomerates remain glued to their existing structures, and DRBHICOM is a prime example.


IT'S IN THE DRIVE, BUT IT DOESN'T DRIVE THE STOCK

PROTON makes up an overwhelming majority of DRBHICOM's revenue. You would think that the group lives or dies by the strength of the carmaker's performance. And they have performed superbly, with PROTON cars literally becoming *gulp* a status item for some people. The X70 received rave reviews for its classy interior and classy design. 

To a nearsighted uncle, the PROTON X70 that his son-in-law's driving sort of looks like a Land Rover from a distance.  The son-in-law parks the car a few houses down the street to keep up appearances. Everybody's happy.

PROTON kept breaking sales records in 2019. Sales increased by 46% year-on-year! By September 2019, they sold as many cars as they did in the whole of 2018!

But it's not enough, at least for the stock. Despite PROTON's wonderful performance, and despite the automaker singlehandedly swinging DRBHICOM into massive profits, the stock has stagnated.

This is what market apathy looks like. After peaking at RM2.96 on 23 August 2019, the stock has dropped 21% as of 29 November.


As a final gut punch, DRBHICOM reported great net profits in the second quarter of RM44.08 million. For context, a year ago they recorded an RM11 million loss. How did the market respond? The stock fell by 3% the day after the announcement (28 November).

At present, the stock is close to its lowest point in four months. By the time you read this, it would likely have headed even lower.

 From DRBHICOM's latest media release. Link.

In an imaginary world where DRBHICOM was broken up, with PROTON as a separate listed entity (like it once was), the automaker's stock would likely have doubled (or even tripled) on a yearly basis. But the conglomerate structure rears its ugly head yet again.

SIMPLE REASONS : WHY DRBHICOM STOCK IS GOING DOWN

Look, everybody and their uncle knows that PROTON is an earnings driver for DRBHICOM. It's the biggest and might even be the only profit driver. But unlike SIME, this is one conglomerate that is not going to be broken up anytime soon.

The myriad rescue packages by the government, and the complicated politics behind the ownership of DRBHICOM makes this an 'unbreak-able' conglomerate. And unlike SIME, they are involved in businesses that directly serve national interests, such as in defense as well as (yes) the automotive industry.

But the main drag is the postal service. POS, a 54% - owned associate of DRBHICOM, has seen its business prospects fall faster than your expected delivery time for a PosLaju package.
Things are not rosy in the postal service business right now. It is an asset heavy business that are burdened by legacy issues. It employs a large workforce and can't afford to pay well.


POS hurts DRBHICOM's stock mainly in two ways:

1) Stock price deterioration

2) Contribution of losses to the shareholder

(1) is self explanatory. This is the most recent chart for POS. In the below daily chart, the peak-to-trough decline (from its July peak) is 27%. You can do the math as to how DRBHICOM's value of the POS shares it owns is impacted by this price movement.


The stock price movement comes as no surprise : POS's losses simply widened. It's still awaiting that postal fee hike : the government seems to be in no hurry to impose this.

Speaking of losses, POS's has gotten worse, with a fifth straight quarter in red ink.

POS latest quarterly earnings. Link.


This inevitable affected the parent, with POS's performance classified as part of DRBHICOM's 'Services' segment.

From DRB's latest quarterly earnings report. Link.

The second reason behind DRBHICOM's lousy stock price performance is more apparent. As a government linked company, the stock simply tracks the FBM KLCI. In this regard, it has obediently followed the stock market downwards.

The symptoms behind DRBHCOM's stock price ailment seems apparent. So this brings us to the most important question : what lies ahead for the stock? Or in uncle parlance, "can still buy onot u sure ah??"

OUR VIEW

The short answer is, yes. But prepare to endure some near term pain. We think investors have just begun giving up on the stock; there will be precipitous declines, perhaps some major selldowns. Perhaps the stock will touch new lows.

But hey, remember how we always like to think about relative comparison? It's when the question is not 'why the stock fell so hard', but 'why it shouldn't have fallen so hard'?

We are believers in PROTON's continuing growth story; the fundamentals speak for themselves. There are further opportunities for market share attainment. The CKD X70 rollout, and the X50 introduction, will continue to hurt the Hondas and Toyotas of this world.

The management team at PROTON clearly knows what it's doing. It's a turnaround story that comes along once in a generation. We don't merely think PROTON will be saved; it has been saved already. This means that an investment opportunity is there.

In other words, we expect PROTON to continue being a massive profits driver for DRBHICOM. But what about POS and its losses? We have an answer to that too.

We anticipate the continuing losses to have been factored into the POS stock price; recall that massive 27% price decline. Any small positive news would likely straighten up the stock again. It's the 'normalise slightly' principle : when things are bad, it just needs to improve a little bit for a recovery in sentiment. We are far too pessimistic to anticipate profits, so let's just say... lower losses?

Our thinking is that PROTON's profits will continue to offset losses contributions from DRB's other units. We do think the automotive market in Malaysia as finite : it's not a pie that's growing larger. But with the strength of the product, PROTON can capture a bigger piece of that pie, weak TIVs notwithstanding.

So as DRBHICOM's stock gets lower, we will consider an entry. We will pay special attention to the weekly candlestick chart. Any signs of long term recovery trend is a trigger to buy for us. With the right kind of environment, and improved fundamentals, a return to RM3 is not an impossibility.

We are not in a hurry. This one is a long game.


Sunday, 24 November 2019

PART II : TRADE OF THE WEEK #26 - TEO SENG CAPITAL BHD




Outcome
Gross Profits : RM46,342
Return on Investment (ROI) : 150%+
(above figure of 24% includes in and out trades at higher prices)
Duration : 1.5 months

(Editor's Note : we understand that our claims might be difficult to believe - RM46k profits?? Hence we are including actual brokerage statements to prove our purchase , and subsequent sale of the warrants)

We had described our thinking in terms of the fundamentals in Part I. This time, it's the execution.

For this post, it's all about technicals, and of course we have an endless array of price charts to share with you.

The angle is simple : TEOSENG-WA was dead in September. But if - and only if - TEOSENG stock stages a rally, the warrant could skyrocket.

And it has to do this prior to expiration in January 2020. Near-expiry warrants can be very volatile if suddenly the underlying (mother share) shows a strong gain.

A 10% move in the stock could very well result in a 100% increase in the warrants if all goes well. 

We were counting on this. 

Staying in a gigantic trade requires conviction and sheer gumption. It's hard for us to describe how it felt like when the trade was ongoing, except that there's always a knot in our stomachs. 

We stayed true to our core beliefs:

Trust the analysis.

Trust the charts.

Trust the execution. 


As a recap, we'll highlight the trade structure again. Our core position (the first batch, as much as we could accumulate) amounted to 330,000 warrants. 

The purchase took about two weeks - the market was nearly totally illiquid. We will discuss this core position for the most part, aside from additional trades we made once the warrant finally took off.

Here's the basic structure. We always define our trades like this.

Buy range for TEOSENG-WA : Between 5 and 7 sen.

Stop loss point : 4 sen (potential loss of 42% of invested capital)

Target price : 12 sen (potential upside of 70% and beyond)

Then the parameters.

Parameter 1 : 
Establish a core position of 200,000 warrants (at 7 sen apiece, the maximum cost is RM14,000)

Parameter 2 : 
Add to the core position if it is profitable (the 'profit buffer' having been established).

Parameter 3 : 
Only buy more if the chart, price, and volume, suggests upside momentum.


PHASE 1 : COLLECTION

It's like a barren desert landscape on Mars. It's empty of life. Nothing's growing. Nobody's around.

In late September, we could also describe TEOSENG-WA the same way.

Got in on 24 September. Bought it ALL THE WAY DOWN.

For the entirety of September, the total turnover for this warrant was about 20,000 lots. About 12% of that was from our purchases.

See the nice descending ladder pattern above? That was us; acquiring bits of warrants as the market keeps selling down.

To be truthful, we initially thought 23 September was the point in which the warrant would skyrocket. But it did no such thing.


First position, 24 September 2019. Bought between 6 and 6.5 sen. 779 lots.

What the warrant did, however, was go down from 7 sen to 4 sen. Doesn't sound like much? Well, that's a 42% decline in five insufferable days.

The best part? We were already saddled with 150,000 warrants, bought between 23 and 27 September. LOLs are in order. 

So what does a 42% paper loss feels like?

A kick in the teeth, plus your eyeball is gouged out at the same time. 

We did not panic, though. We figured it was a waiting game. TEOSENG-WA looked like it was completely screwed (as were we), but the mother share was doing juuuuuust fine. Of course, we had to keep telling ourselves this.

TEOSENG. Highlighted is the price on 23 September 2019.


Notice here that TEOSENG hit a high of RM1.17 on the 23rd - the day we bought the warrants. 
The mother share basically fluctuated and went nowhere for a few days, aside from a single day (30 September) when it touched RM1.10. A couple days later it found strength again.

We took note of two major things:

1) TEOSENG-WA fell 42%. But TEOSENG only fell by 6% at its worst point.
 
2) We will hold on to the warrants as long as TEOSENG stays above RM1.10, also known as our 'puke point'. A price collapse to RM1 would essentially cause us to regurgitate our insides like Niagara Falls.

We drew a line in the sand. If the mother share goes bust, we go bust. But there was no reason to panic just yet - we were comforted by the steady but un-enticing movements in the mother share. It can be boring; just don't go down.

At this point, our 42% loss translates to about RM4,000 in lost capital. It's a major amount relative to the capital cost.

This stretch was not easy to stomach. Nobody else was in the market, and the low trading seemed to point to dumping activity at lower and lower prices.

Second position, 26 September 2019. Bought at 5.5 sen. 468 lots.

We only knew to do two things at this point, and to do them well: buy on the way down, and stay calm. TEOSENG's stock held steady during this phase.

(Editor's Note : we would never average down a position. The distinction here is that we kept buying on the way down simply because we haven't accumulated our full position yet. We did not buy to average down, and neither should you, ever)
We continued to accumulate small bits here and there. On 30 September, TEOSENG-WA hit a bottom of 4 sen on low volume. We didn't make any moves here - we were keen to see how it progresses. Any slight increase would be incredible for us.

We got our wish on the subsequent days, primarily because TEOSENG's stock moved from a low of RM1.10 to RM1.16. The warrant followed.

TEOSENG-WA daily chart, 30 September to 4 October 2019

We felt that the worst of the downturn might be over. A move from 4 to 8 sen is of course, a 100% gain. We were in paper profits mode again.

At this point, the trading in the warrants is still erratic. One day can see about 500 lots traded for the whole day. On another day, like October 4, there were 18,000 lots.

For TEOSENG-WA to truly rally - and we had anticipated this - there needs to be more volumes coming in. This meant new entrants into the stock. Remember that as TEOSENG goes higher, the warrant becomes ever more appealing.

Here's our insight : new volumes coming in is just the beginning of the trend. Hence it was extremely important to hold on to the position.

But this was admittedly hard to do - we had to train ourselves mentally to deal with it. The human mind is preconditioned to be afraid of losing money; if we get this trade wrong, we might end up losing all paper profits that we were recording at this point in time.

Just as a fun example, imagine that you're being presented with two options:

1) The chance to exit a trade with RM5,000 in profits, or 35% yields on capital invested.

Or

2) The chance to wait and attain 50% gains (five figure profits), but with a possibility that you might lose all profits, and even enter into a loss.

Our primitive brains aren't well-equipped to choose anything other than option 1. But here's the thing.

To make truly insane profits, you have to commit, and commit completely. 

When your investment thesis is being validated, it's not the time to exit. 
It's the time to ramp it up.

So guess what we did when our TEOSENG-WA position went to 8 sen on 4 October? We bought some more, and try to disregard the fact that our paper profits were at 26% - if this was any normal trade, we would have exited with delight.

4 October 2019. Bought at 7.5 and 8 sen. 999 lots (for good luck)

What we did may seem counter-intuitive, but it really shouldn't be.

When an investment thesis is validated, you can choose to either exit or keep going. You keep going if your analysis suggests further upside, and if you can afford to sacrifice some profits. That's what we did, essentially.

We became just a bit more confident in the trade. However, the challenging phase was not done yet. We were about to be served a plate of humble pie.

After 4 October, the warrant becomes dead... again! Obviously we expected otherwise.

Up until 14 October, the chart looked like this. For context, TEOSENG's stock hit RM1.20 on 4 October, but hovered at the RM1.16-1.17 range in the subsequent days up until the 14th.

TEOSENG-WA daily chart, 4 to 14 October 2019

So from that 26% in profits, did we lose all and enter into losses again? You bet.

This period was a crucial one. We held on to our convictions, and we were comforted by the fact that TEOSENG's stock is showing upward momentum potential; slow movement, but better than nothing. The stock will take care of what happens in the warrants, eventually.

It's that mantra again : boring (movement) is fine, just don't go down.

So we spent that entire week just sitting back, shutting up, and wait. Again, not easy - but we are used to this, having been in this line of work for a while.

When there is nothing to be done, sit back and wait. For many itchy fingered traders, this is the hardest thing to do. 

At any rate, we can deal with the warrant being at 6 sen. Our average price was 7 sen; we can take the losses. At least it's not 4 sen (yet). 

PHASE 2 : BUILDUP

We know it can be a bit confusing jumping back and forth between the charts of the mother share and the warrant. But we need to show this to explain our thinking.

 TEOSENG daily chart - performance since our entry

When the stock shows this, we no longer care about minute by minute movement. Not even the day-to-day, not so much.

We look at it on a weekly basis. And on this basis, you can clearly see that the uptrend is there.

TEOSENG weekly chart - same time period

This was our justification. It offsets any fears and worries that we have about TEOSENG-WA. Perhaps the warrant is slow, or going nowhere. What we can be sure of is that if the stock keeps moving, the warrant will catch up eventually.

And more importantly - this is the best part - the warrants will move faster and harder once people notice that they are absolute bargains.
On 15 October, we got a nice bump in the warrant. It moved from 5.5 sen to a high of 8, closing at 7.5 sen.


During this phase, guess what we did? Yes - we bought some more.

16 October 2019. Bought at 8 sen. 425 lots.

There were more small purchases in subsequent days between 15 and 31 October. Eventually our core position amounted to 330,000 warrants, at an average price of 6.9 sen.

The accumulation and buildup phase was over. We knew it was time to sit tight and be patient. And so it was for the next couple weeks.

PHASE 3 : LIFTOFF

We'll keep this part short; you probably know what happens next.

The following chart comprises the day we first entered and the day we exited. 24 September to 7 November when we exited - about 1.5 months.

TEOSENG-WA, daily chart

We got our rocket ship, and we held on until the end.
We even traded some at the top end of this rally, such as on 4 November.

By this point, we were holding more than 450,000 warrants in total.

To be honest, we never expected such a swift rally. We were preparing to struggle up until end of November, when TEOSENG reports its quarterly earnings. Or worse, up until January, ensuring us of a miserable Christmas.

Our mindset on managing this trade - a massive position that was never less that 4,000 lots on its way up - is straightforward; if the trade is exceeding our expectations, same goes for the profit potential.

We were planning to exit at around 14-15 sen (implying potential profits of 100%), but we stuck to it. If it can go to 15 (already beyond our initial 12 sen profit target), we thought it could go to 20.

All we needed to do was time our exit to match the end of the TEOSENG stock rally. It jumped from RM1.20 to RM1.40 in about three weeks. This 16% jump was enough for a 150% increase in TEOSENG-WA; again, it's the principle of a near-expiry warrant suddenly attaining high valuation.

On 7 & 8 November 2019, we sold everything. We were far too big in this; we felt lucky to be able to hold this position all the way. Our selling range was between 18.5-20.5 sen; as it turned out, this was right at the peak.

How big was our sizing relative to the daily volumes in the stock? Well, our selling accounted for 17% for the total turnover for TEOSENG-WA in those two days.

3,989 lots sold.

3,310 lots sold.

Not bad for something that we first bought at 7 sen.

POSTSCRIPT

On 20 November 2019, TEOSENG finally released its earnings. They were fantastic.


The results basically confirmed our analysis in September. We never intended to carry the position beyond the quarterly earnings anyway. Our belief is that the poultry sector angle - the trading angle - has come to pass.

This is the real power of the artificial mispricing principle. We had the perfect conditions to go in, and the perfect instrument to trade to express this view.

This is how you can make 150% profits in a month and a half. Insane.

For further reference:

PART I : TEO SENG WARRANTS. RM46,000 PROFITS IN 1.5 MONTHS. HERE'S HOW WE DID IT.  

- 17 November 2019

A BRIEF, CRYPTIC NOTE ON POULTRY STOCKS - LEONG HUP & TEO SENG 

- 16 October 2019 

The trade was originated and shared with our Telegram subscribers back in September. Join our Group to get real time updates and trading recommendations.

More Tales By The Pelham Blue Fund