Monday, 18 February 2019

TRADE OFTHE WEEK #4 : DAMANSARA REALTY BHD



OUTCOME
Gross profit : RM6,295
Average Return on Investment (ROI) : 16%
Duration :Intraday (27 minutes), first hour of trading


Five seconds of observation, plus 10 seconds to decide : do we want to go into this trade? We did, and the reward was some fat profits.

This case is an example of using pure intuition, an important skill for any aspiring trader. It's a skill that has to be honed and fine-tuned. Not only would you be operating with imperfect information, you may also end up making hugely consequential decisions with no supporting information.

That consequential decision is to trade, and committing significant amounts of money into it. This is not a random throw of the dice; acquiring this skill comes from mundane observation work, incessant note taking, and of course, our personal favorite - trades that have lost money in the past.

So how to develop intuition? Simply put, our view is that you have to be able to draw historical parallels. You have to notice the following in the stock, for starters:

1) price and volume activity
2) velocity (how fast it moves)
3) volatility (the rate of fluctuation in the price)
4) the broader market conditions (especially important for momentum-type trades)

Got that? Now do it about 100 times, in 100 different trades. It will likely take you years. We didn't say it was easy, but it can be done.

While many may think we can coast and live large for the rest of our lives trading, the reality is totally different. We still have our respective day jobs, and there are as many tough days as good ones. But every loss endured, and every profit gained, must be seen as a learning process.

There are no two ways about it. Lose money, take notes, repeat, and get better at it. And you will start getting gains.

And when you become good enough, you start thinking intuitively. You see similar situations where a stock can deliver massive profits from a large move - because you've seen it in the past and learnt from it - so you decided to go in.

In a nutshell, this is the explanation behind our successful trade in Damansara Realty (DBHD). We didn't need to do fundamental analysis (there was no time). A cursory Google search revealed no new bit of news; not that we expected any. The stock simply popped up on our screen in the 'top gainers' section (huge price movement on low trading volume) and we intuitively decided to go in.

As you probably know, many stocks that go up massively on low liquidity can fall back  to Earth hard. We assure you, with enough learning and intuition, you can tell apart the good opportunities from the bad ones. But you have to recognise the signs quickly, because in this case, time was literally money (to be won or lost).


THE TRADE

A five-minute chart in DBHD on 4 January 2018. As you can see, we sold near the peak for that day.

The key movement here is the move from 24 sen to 30 sen on very low volume. Our initial thinking was to risk a small amount at the 30-32 sen range and see if the stock continues to rise. If it stops, we would be exiting with a small acceptable loss.

Again, when it comes to thinking about loss limits, remember the golden rule; you must be willing to accept a 5% loss for the opportunity to make 10% in profits. (Editor's Note: you can change the numbers, but stick to a risk-to-reward ratio of 2:1 or more).

By doing this, you'll have a clear idea of what's at stake. It will prevent you from being lazy, or not properly observing your loss limits.

So we bought into the stock at 32 sen at first. We know there will be fluctuations, and perhaps some real selling pressure at 30 sen. The 'breakout' was not assured yet.

The key for us to go all in was the price activity between 9:10 and 9:15, represented in the 't' you see here.




The five minute chart, zoomed in. 9:00-9:20AM

We hope you have a basic understanding of these charts. the 't' basically means that the stock ended the five minute period where it started - at 31.5 sen. The bottom end represents a low of 30 sen and the upper part represents a high of 32 sen.
During this five-minute period, there was substantial buying activity in the stock. This recognition, for us, mostly came from our intuition. Remember that this all happened in five minutes.

Then in the next five minute phase, the stock comfortably broke a new high for the day. We thought it can realistically hover in the mid-30s range or further. Having received the confirmation of our thinking in the movement of the stock, we went in and bought more shares.

And it went up as we expected. We have seen this before. Our intuition guided us in this whole trade.

And less than 30 minutes later, by 9:38AM, we exited. The monetary reward of developing this intuition? In this case, it's a 16% gain in 27 minutes. Gains of RM6,000 plus. (Editor's Note : we try not to compute such gains on a per-minute basis as the figures can be truly crazy sometimes, but we do hope to demonstrate the very real and tangible rewards of being a trader who can recognise opportunities like this one). 

Those first fifteen seconds truly mattered in the end.




Thursday, 7 February 2019

THE PELHAM BLUE FUND : 2018 PERFORMANCE REVIEW






Note : This post is a performance review of the Pelham Blue Fund last year. We briefly discuss past performance, thematics, as well as the 2019 outlook. To summarise, we had an inconsistent year in 2018 with major gains in the first half, followed by weak performance in the second.
 

Total Gains in 4Q18, in percentage terms : 2.83%

2018 Total Gains, in percentage terms : 44.3% 

Against our performance benchmarks:

1) Amanah Saham Bumiputera 1 : 7% (2018 dividends)

2) FBM KLCI : -5.16%



4Q18 : Return to Stability, Low Excitement

This period was marked by policy risks as the Government began introducing and implementing new initiatives, some of which severely affected certain sectors such as gaming and telcos. As you may know, the end of October also marked a period of accelerated decline in the global markets, with US and Hong Kong indices falling as much as 10% within two months (for context, these kinds of declines have not been seen in such a short time period since the global financial crisis).

Similarly, oil prices staged a similar fall due to oversupply concerns. The commodity hit a four-year peak in October 2018 before losing almost 20% in value by the end of the year. These factors and more have shaken the market's stability and investors' confidence, driving down stock prices.

In Malaysia, the selling activity during 4Q18 spans sectors and business lines. GENTING, TM, YTL, AIRASIA were among the big caps that took a big hit. We also saw price shocks in the mid cap and small cap spaces, with PRESBHD falling by as much as 50% (due to a margin call and forced selling by its major shareholder). Previously favoured stocks such as DSONIC, VS, and most construction companies also fell steeply for various reasons.

The good thing from all the events described? They actually contributed to a more volatile market, allowing for certain opportunitistic trades to be done and replicated. We have captured short term trading opportunities in some of the stocks above to capitalise on the artificial mispricing - a core mandate for this Fund - as well as short term volatility present in the indices.

Hang Seng put warrants continue to be a decent source of active trading income, as Hong Kong reacts strongly to the shocks in US and China. For put warrants, we would only consider a trade when the price shocks is at its greatest. That means we don't trade day in day out; it is much too dangerous.

On the other hand, having learned some important lessons during a very challenging 3Q18, we made the decision to reduce active trading activity significantly to minimise losses. In addition, unfortunately there was a drought of opportunities in 4Q18 to make consistent, market beating profits.

A broadly negative market means that a market bottom is never assured. We are also wary for the souring prospects for the Malaysian economy. Analyst estimates put GDP growth at 4.7% last year, yet from our own admittedly basic research, overall corporate earnings have been broadly negative over the same period!

This is not something that we feel is realistic, or sustainable. There will be a point where either the economic data makes sense, or the markets will readjust its expectations further. Basically we expect GDP growth to slow, reflecting the already slowing corporate earnings trajectory.

At this moment, in early February 2019, there seems to be a positive lull in the global markets. After a miserable last two months of the year, global markets have rebounded at least 10-15% from their recent lows. This positivity is contagious: indeed, Malaysia has seen an increase in investor inflows in January. Whether that translates to a long term holding position, or a short term bargain hunting trade, we do not know yet.

The Fund's 2.83% return in 4Q18 is reflective of greater prudence and a reduction in trading activity. We do not want to risk a 10% quarterly loss. Relative to the market, the quarterly return is considered encouraging, though we acknowledge that more can be done, and in a better way.

As part of the longer term vision for this Fund, we are actively seeking more stable and consistent returns to reflect better risk management. We have shown in 1Q18 and 2Q18 that it is possible to record strong double digit gains, but these kinds of opportunities are seasonal and not meant to last. This is an opportunistic Fund; we are committed to ensuring a better deployment of capital this year, even at the cost of lower overall returns. Our plans for 2019 is described later in this message.

2018 Review

It was a year of mind boggling highs and disappointing lows. To sum it up, our investment style worked particularly well during the first half of 2018. It fared a lot worse in 3Q18 and 4Q18, indicating that our style is a seasonal one. We are cognisant of this serious issue, and are making active changes to improve.

If you're a regular reader of our investment blog, you may have got a better idea of our typical investment approach. While we do have a mandate and a proven competitive advantage, our 'hit rate', or trading consistency, was admittedly spotty in 2018. There were simply too many opportunities missed, and major losses that held back our overall performance. Our task this year is to iron out those deficiencies and ensure that we can make optimal returns, relative to market conditions.

To avoid being a 'six-month wonder', we have significantly reduced our trading activity. With our extensive research, we have established very strict parameters for identifying and trading a stock or warrant. Being selective is our main challenge for the year. A scattershot approach works wonders in a bull market, but in a very challenging one, a degree of wariness and conservatism is important.

We have different approaches that work well to a certain degree. Some are based on market conditions, or the current investor sentiment. We are continuously working towards cutting down approaches that don't work too well, and those that are inefficient.

Our focus is on identifying the very best opportunities only. We will not trade until we find them, even if it takes weeks or months. Less is best.

2019 Vision and Approach

We largely agree with the general view that the market is heading downwards. We believe that an economic slowdown in Malaysia is inevitable, as well as a (further) slowdown in corporate earnings. Some past market champions have already stopped paying dividends; don't be surprised if more join the fray.

While this may be considered a bearish view, as an opportunistic Fund our job is to react to whatever market conditions presented to us. Our mandate is to beat the market and deliver returns in good times or bad. This has not and will never change.

In light of this, let us reiterate : we are going into cautious mode for the first half of 2019, at least. This means that the Fund will be extremely selective in its trades. We will only consider opportunities where we have a definite competitive advantage.

Our 'edge' lies in two things : short term artificial mispricing (driven by negative news, for example), and special situations based trades (momentum breakout, IPO listings, et cetera). There will be no massive speculative accumulation of warrants. There will not be any buying of cheap stocks if there are no catalysts to accompany them.

Furthermore, we are slowing things down in order to ensure stability and sustained returns. In 2019, the Fund aims for modest monthly returns of between the 4-5% range. Once this is achieved, we will cease all trading activities until the next month begins. In fund management parlance, this is known as 'going flat' - we value being in cash and the leverage it provides to capture only the best opportunities.

There is no guarantee that each month will show profits. On the other hand, we prefer to show smaller, sustained returns compared to the 2018 performance where overall performance was distinctly divided into two halves of the year.

This Fund is a trading fund. Its specialty is in capturing short term trading activities; nothing more and nothing less. Unlike most funds, our active exposure in the market is meant to be minimal. Once we hit our targets, we dispose of the position and return to 100% cash. Think of this as ammunition in order to capture the next big opportunity.

There may be minimal trading, but we will constantly observe the market for trading opportunities. As always, we have a watchlist of stocks that we observe over the longer term, simply to analyse and understand the stock/warrant's behaviour. Many companies with positive fundamental prospects are currently langushing in the market right now; we are waiting for the right opportunity to strike.

Best Regards,

The Team
Pelham Blue Asset Management


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