Wednesday, 1 April 2020

RM8,000 PROFITS IN 7 DAYS : GAMUDA BHD [TRADE OF THE WEEK #33]

Outcome
Gross Profits : RM8,097
Duration : One week


Last week we had talked about the fundamental aspects of GAMUDA. We simply made a point that it was better off keeping its highway concession business for long term cash flow generation. Just do this and it wouldn't have to worry about potential political ding dongs and the unavoidable exposures, simply because it's one of the few truly reliable first class construction contractors in this country.

This time, for the proper trade that we did in regards to this angle, we'll talk about the technicals. We had the fundamentals in mind, justifying our assertion that the stock was massively underpriced (since the blog post was published on 24 March 2020, GAMUDA's stock has gained 15%). 

But to truly make money from a good trading angle, it's all about position sizing, good timing, a bit of market intuition, and some luck. This trade is not that complicated once we get to the gritty details, we promise.

To keep this very simple, we managed to make RM8,000 in profits, with 40% and 15% yields in separate trades, mainly due to three factors:

1) Good proxy / tradeable instrument to express our bullish view

2) An extraordinarily strong broader market in the KLCI

3) A little bit of skill 

Skills are obviously necessary lah, but we will focus on the first two as they are key to enlarging profits and to increase chances of a successful trade.

The proxy here is GAMUDA-WE, a company issued warrant that only expires in 2021. It had a nice run last year due to positive movement in the mother share, but by late February, it all went to hell. In the span of just one month, the warrant dropped by 88%. 

We assume that you don't live under a rock, or if you do, you probably have decent Wi-Fi. GAMUDA and pretty much every single Bursa Malaysia stock fell by oh so much due to the epic market meltdown in March.

The GAMUDA mother share itself fell by about 40% in just three weeks. But with a huge conversion price of RM4.05 for GAMUDA-WE, and compared with the mother share's price of about RM2.50 at the lows, the warrant was technically... worthless.

GAMUDA-WE : One month price performance from 21 February to 21 March 202


THE TRADE

Over a seven-day period, we committed to several trades in GAMUDA-WE. We simply chose the warrant because... that's what we usually do.

The weight of our convictions means we are willing to get that extra leverage factor.  Had we bought the mother shares instead and enjoyed that 15% price gain, our profits would likely have been about a third of what we eventually got from the warrant.
At 4-4.5 sen, just from a pricing standpoint alone, the warrant was absurdly cheap. It only had to move one sen for 20% in gains. It was fairly liquid (allowing for easy exit) and fairly volatile (giving it a chance to move swiftly based on trading activity), making it a great candidate for proxy trading.

We already knew from the recent market rout that stocks like GAMUDA are totally not liquid and very volatile. This sounds bad at first, but the volatility offers a chance for us to catch the upswing. We could possibly buy at lower prices and benefit from a sudden move up - and we did.

Now, what could push the price up? As much as we'd like to say it was from our quality analysis and timely blog post, it likely was not.

This brings us to the second crucial factor : the major recovery of the KLCI in the stock market. It was a wave that took everything with it, including GAMUDA. More importantly, we had anticipated it.

We have lived through market shocks and profited from them before : the current one was unnerving, but more in the sense that we fear not getting into obvious profitable opportunities.

A 100-point move in mere days does not come often. Statistically speaking, we have not seen this happen at any point over the past seven years. The last real big move was on the first trading day after the 13th General Election in 2013, when market moods were at all time highs.

We had an idea what a big move in the KLCI would do. First it's the blue chips that will rally big, followed by the sector leaders, and then the momentum counters. In a final thrust, pretty much everything rockets up.

Amid this grouping, GAMUDA was the surest, clearest sector leader around in construction. The company is really, actually, good - we do believe in the fundamentals - and the stock is tradeable. Even better, we had found our valuable warrant proxy that we cherish so much.

The right company, the right stock, and the right trading instrument. That's what it takes.

 Sniffing for opportunities - 20 March 2020

FIRST ROUND

We got lucky. On 20 March 2020, we happened to accumulate the warrant on the very day the market bottomed out in the near term. Maybe it was intuition, maybe it was a pure fluke. But we did enough to buy a major position in GAMUDA-WE just before the mother share skyrocketed.

GAMUDA shares shot up from RM2.52 to a peak of RM2.81 on this day, primarily influenced by the FBM KLCI's historic move. The index gained 80 points that day, and as we've just said, when it's a market tsunami, everything is dragged along with it. 
And of course, the warrant correspondingly reflected the mother share gains. We recall vividly not wanting the price to go up, since we haven't finished accumulating yet. But we are not complaining about the outcome. 



With an average purchase price close to 5 sen, we ultimately disposed a sizeable position at 7 sen within the day. The gains were too good.


SECOND ROUND

To really get to grips with short term trading, you have to consider the external situation before even considering whatever targeted stock you have in mind. In order to prevent dumb mistakes (which we make often), the state of the market is a good barometer of whether to trade at all.

Sounds logical right? A good market means can trade stocks lah. But you wouldn't believe how many brave souls dare try their luck with momentum counters on a day of red ink. These are the people who bought into DSONIC at 80 sen before a nasty drop in the KLCI brings it down to 60 sen in a couple of days. Meaning : if the seas are stormy, don't go swimming.

We had sensed that the 80-point gain in the KLCI was just the beginning. For context, the index had dropped 246 points (!) from the beginning of March until its lowest ebb on the 20th. We took account of the probabilities and permutations, such as an immediate drop in the KLCI in the subsequent days, followed by renewed strength.

Things were volatile, and the downside risks substantial. But all we had to do was wait and see if the right opportunity and environment presented themselves. It took a few days.
 
These are good indicators to keep in mind:

1) Post earnings strength in the stock is a bullish indicator

2) A broad based market rally will benefit the sector leaders first

However, while we had initially intended to wait for GAMUDA's earnings to be released before getting into GAMUDA-WE again, the technicals and price activity prompted us to re-enter.

On 25 March 2020, the warrant had another run-up and hit a peak of 9 sen before retreating. The mother share was as volatile as ever, and recorded consecutive red candles over the next few days (closing price lower than opening price), even though the prices are heading up on aggregate.

After a retreat to 7 sen - our previous exit price - we started looking again. At this point, our focus returned to GAMUDA's technicals, as explained below.


That box pattern was the trigger we needed, because it was highly suggestive that a breakout was imminent. So on 26 March, we re-established a smaller but still sizeable position in the warrants. GAMUDA's earnings also came out on the same day, as it turned out.

If the FBM KLCI were to gap up again the very next day (as it had been doing all week), we'd take our chances with GAMUDA possibly doing the same.

As it turned out, the stars were aligned.

A good market - the FBM KLCI was up by 25 points at its peak

A breakout in technicals - GAMUDA gapped up and went all the way to RM3.

And the stock gained post-earnings - a good sign.

On 27 March, GAMUDA hit RM3, completely obliterating our expectations here.

From our earlier blog post : not 12 months, but a few days as it turned out !!

We've had enough. It was a Friday, and our expectations in this stock trading theme were nearly fully met. As GAMUDA hits RM3, we planned an exit, and by doing this we made double digit gains in 24 hours.


Right market. Right stock. Right idea. Eight grand.

Tuesday, 24 March 2020

GAMUDA IS BETTER OFF KEEPING ITS HIGHWAYS


From the Editor-In-Chief of The Pelham Blue Fund

I remember having a conversation with an analyst in the middle of last year. We were discussing the prospects of Gamuda Bhd and its proposed RM6.2 billion sale of four Klang Valley highways to the Government - well, the old Pakatan Harapan government, to be precise.

My question : "Why is this deal good? They're going to lose a Penang-sized chunk of revenue and damn vital recurring income source, bro"

The analyst : "But you see, this is good for everyone. Once sale finalised, got big special dividend coming bro. Everybody's happy"

Me : "So now you're saying people are buying the stock just to get the dividends? And after the sale they're going to put all their chips on all the Penang Transport Masterplan stuff?"

Analyst : "Yes, pretty good short term yields, isn't it?"

Me : "But how about the lost revenue and long term recurring income..."

Analyst : "You obviously don't understand, so let me explain to you again..."

 Source : company filing

And he did. I enjoyed getting thorough explanations without having to do much but listen intently. I also tend to see the explainer's biases. Indeed, the sale is a good move, if you look at it solely in a short term context. Fat dividends tend to do that, and you know how fund managers are always under severe pressure to meet their KPIs.

Before I get into the details, you're probably wondering why I'm talking about GAMUDA now. It's because the deadline to finalise this highway takeover agreement is going to end on 31 March, 2020.


The second bit is that in case you haven't noticed, we had a change in government recently. This deal has nothing to do with the new government. It looks unlikely that this would be pushed through.

From a taxpayer and local citizen perspective, I've always thought this deal was a 'what's going on?' kind of transaction. Call me naive, but from a shareholder's perspective, I fail to see the long-term economic benefit for the company.


The logic for the rakyat also escaped me : so, in order to reduce the toll burden of Klang Valley motorists, the Government was going to buy the highways and grow its overall debt burden, which in turn will likely cost Malaysian taxpayers (all over the country) more in the long run?

And the company's giving up a stable income source, or to put it indelicately, its main cash cow?

How fat is the cow? In GAMUDA's last full financial year, the concession business generated revenue of RM496 million. It's pretax profits from that? RM303 million. The business generates 7% of GAMUDA's total revenues but a full one third - 33% - of its pretax profits. You can see why investors like highways; the concession business has a pretax margin of sixty percent.

Last year, the promise of a big payoff led to intense interest to buy the shares. One estimate put the potential special dividend - one-off payment from the proceeds of disposal - of between 48 and 96 sen per share

Below is GAMUDA's share price performance from February 2019, when the takeover was announced, to February 2020, just before the Pakatan Harapan government's collapse. That's a 52% gain in the stock.


And... that was the top. Below is the seubsequent Perikatan Nasional period stock performance (late February onwards) looks like this. A 40% decline.


This highway deal is likely dead in the water anyway as it was the previous MOF's baby. The current government has more pressing things to commit funds on to save the economy and prevent a recession.

It's not just that the highway takeover does not make sense at a fundamental level; this was no impediment to many 'successful' transactions in the past.

But structurally it was never meant to happen in the first place. When you have too many moving parts (multiple listed entities, cross-shareholdings by institutional funds, related party transaction hurdles, regulatory scrutiny, the political angle, etc), that's when a major deal crumbles. Just like any of the proposed bank mega mergers in the last decade.

The baby was... ugly. It's not loved, because you couldn't exactly see if the rakyat benefits from this proposed takeover of four highways. There was the whole brouhaha with the proposed PLUS sale that amounted to nothing except oh, wait for it... cheaper tolls now in return for having to pay tolls for another 38 years.
For this highway deal, I can understand that at least three parties want it to happen : the management, fund managers holding GAMUDA, and the old MOF. Maybe the intent was to take the cash and pivot towards Penang. 

As for the rest, I really don't know, but if one has a five-to-ten year viewpoint that isn't clouded by a special dividend, literally everybody else would probably say "I don't mind owning some highways to get me through tough times". Hardly a radical viewpoint.
  
Look, imagine if your plate of nasi lemak is cut by half. Some random guy - me - comes over and takes away your sambal, eggs and anchovies, leaving you with nasi lemak that's only fit to serve on certain airplanes.

Highways contribute RM200 million plus to GAMUDA's annual net income. Without that, how's your nasi lemak going to look?

What's going to fill the hole? Your income proportion out of revenue from digging holes is much less. This is a company that has massive tunnel boring machines - they should know all about digging and filling holes.

The PTMP is effectively on ice without federal funding assistance, so let's not go there. But I would not want realised present value income (that dividend) in exchange of lost future income that is likely worth multiples.

Bersenang dahulu, bersusah kemudian? No thanks.


The highways is a cash flow lifeline and income stabiliser, and will help GAMUDA weather the current economic turmoil and incredibly lousy sentiment in the construction sector right now. 

The stock was hit by a triple whammy recently - the new government taking over, already weak sector sentiment, as well as the sudden shock in the stock markets. When a stock is hit especially hard, and probably unfairly, it makes our ears prick up. Perhaps there's an artificial mispricing situation there?

As an observer on the sidelines, it made me keen to explore if GAMUDA's worth an investment. And it might very well be at current prices.

Recent fear-driven selling likely has led to the shares being undervalued, and we do not mind collecting some. From our own estimates, we have a fairly conservative target of RM3 and above for the stock over the next 12 months.
 
The economy needs boosting somehow. Infrastructure spending is the easiest avenue to spur growth; there will be some slices for the company somewhere. Name us another construction company that is ahead in line for major projects, or anyone in the construction business who stand a chance to be more profitable. 

I do not mind having a stake in a company that can still record hundreds of millions of ringgit in net income during probably the worst period for the Malaysian economy  in at least 15 years.

Don't feel bad about GAMUDA not taking off anytime soon in Penang. It's got other things going for it. What it needs now is to attain new projects to replenish its orderbook, which is massively dominated by existing MRT2 related obligations. This will be a headache for now, but over the longer term, it will survive and thrive.

Source : AmInvestment Research

To summarise:

First in line for any significant rail transport infrastructure projects, although don't expect the margins to be exciting.

Earnings shortfall from construction/property segments cushioned by highways contribution.

Dividend yield upside of 4.5% at current stock price, according to one analyst estimate.

To be frank, keeping the highways would be the best thing could happen to them right now. 

Thursday, 19 March 2020

STOCK MARKETS COLLAPSING... IS A RECESSION COMING?

Time the crash? We all failed.

What a difference 20 days can make. Since peaking at all time highs in mid-February, US stocks have fallen by a staggering 30% - the fastest drop in history. The FBM KLCI did its best to catch up and fell 20% (!) this year. Maybe we should mention that it's only March.

Everything was pummeled, and everything was shred to pieces. Your portfolios are probably suffering. So is ours. Pity our fund managers and their favorite stock picks this year.

Oh no...

We have been flagging the risks inherent in the markets for quite a while.. but it doesn't matter as we failed to see this crash coming. Neither did Trump or the Fed, of course.

In our blog post in December 2018, we did nothing but predict doom and gloom. Little did we know that US markets would skyrocket all throughout 2019.

But now, suddenly we are being catapulted straight towards a prolonged recession on a global scale.

You'd have thought the experts would know when one was coming, but name us one President / US Fed chair who had correctly anticipated a recession and we will eat a hat.

 Article from Feb 2020 - not even a month has gone by! Source

But to be frank, we were also gobsmackingly wrong on so many things. The markets were irrational for far longer than we anticipated; it literally took years.

The collective herd in the markets - the animal spirits - became detached from all reason and started having faith in Trump and Fed's pronouncements: they were the cheerleaders of a historic rally.

This includes many who think that the president is a complete doofus but still expects him to 'save the stock market'!


It took a worldwide pandemic to bring markets down, but collapse the markets did. And now, in a matter of weeks, suddenly we find ourselves in a world of pain: markets, deleveraging, recession, ineffective policy, companies going bust, unprecedented travel curbs, national lockdown... you think anyone contemplated any of these in January?

For future reference - this shit will happen again - it's important to note the key triggers for the collapse.

1) The COVID-19 outbreak turning into a global pandemic

2) Emergency rate cuts by the Fed, signaling recessionary concerns

The Fed's been bumbling around : it suddenly did an emergency rate cut of 50 basis points, and this action carried all sorts of Armageddon-ish implications. Do you know when the Fed usually does rate cuts? On the eve of recessions, or at the peak of a bubble.
Note the 'emergency' term in the rate cut. It is not seen primarily as an economy support measure; instead, it's a recession indicator. On 15 March, the Fed cut rates to zero. It did not bother waiting for a scheduled 18 March meeting to announce because the whole world now knows; it's an emergency, and markets are in a panicked state.

After seeing that this further cut had absolutely no effect on the markets (rate cuts are not very effective at warding off new viral strains, it turns out), the markets threw an absolute fit. Everybody ran for the exits in record time. It was a stampede of bulls throwing themselves off a cliff. The message is "The Fed can't save us, and no one will".

The day after the zero rate cut, in a truly historic rout, we got this - the biggest decline since 1987's Black Monday. Wall Street wishes that the markets would just close already.


While we do believe that the market collapse is fundamentally justified, it was exacerbated, and accelerated, by the coronavirus. Whatever feel-good grandmother stories we had about perpetual US economic growth and jobs growth were banished by reality.

The economic concept of sudden stops suddenly dominated the news, and it's as virulent as the one infecting us right now.

We just popped this generation's bubble, so now let's get ready for that impending recession. 

It is happening as you read this.

But we do not feel vindicated by our predictions, because they do not matter. Now is the time to be really, really concerned. So, what happens next?

The below formulation is reproduced from our November 2018 blog post, where we explored the chain of events that would lead to a market bubble popping, and then an economic recession. We will expand on these themes for your knowledge.

The gist is : we are in the middle of this impending economic downturn which will be catastrophic for some businesses and people.

Jobs may be lost, companies you didn't think would go bankrupt will eventually do, and all you can do now is prepare for the storm.


CHAIN OF EVENTS LEADING TO RECESSION

A bear market can bring about a vicious self-perpetuating cycle, but we don't want to be emotional or fear driven in our thinking. Let's look at the broader market environment sequentially, which means that as one thing occur in a long chain of events, the greater the likelihood of the next thing in the chain occurring.

Here we outline a progression of events that are already happening in the world today.

Scenario A (Macroeconomic): Global economic growth slowdown ----> Lower demand for key commodities (palm oil and crude oil) ----> Malaysia's economic growth slows down ----> corporate earnings (banks, construction, property companies etc) slows down ----> added pressure from even weaker ringgit (due to our weak fiscal position) ----> [Scenario B] for Bursa Malaysia stocks

Scenario B (Markets/Sentiment) : Lower investors' expectation ----> stocks lose premiums over book value ---> lousy sector prospects ---- > lower investors' expectation ---> further stock market declines


And, to cap it all off:

Scenario A and Scenario B occurring concurrently ----> steadily weaker quarterly GDP growth ----> negative GDP ----> recession scenario.

Blue = Events that are already happening as you read this
Green =  Events that are at risk of happening soon (give it six months)
Red = Apocalyptic worst case scenario that will probably cut the KLCI's value by half


What previous stock market crises look like. Black is where we are now!

Let's run through them to get an idea of the current progression.

Scenario A:

1) Global economic growth slowdown : HAPPENING, the world is now expecting this.

2) Lower demand for key commodities (palm oil & crude oil) :  HAPPENED with the OPEC+ collapse brought about by the Saudi-Russia price war, driving down prices even more. Randomly rhymed there. At the time of writing, we just hit $26 per barrel of Brent crude. Shit.



3) Malaysia's growth slows down : HAPPENING, with Malaysia's 2020 GDP forecast downgraded further to just above 3%, as per one research house estimate. We did 4.3% in 2019, by the way.

4) Corporate earnings (banks, construction, property) slows down :  HAPPENING. Banks' earnings are closely correlated with economic growth. Let's just put it this way: no one's taking up loans at the moment, hence interest based income will suffer. As for construction and property, forget about earnings growth already lah.

5) Added pressure from a weaker ringgit due to our weak fiscal position : HAPPENING. Ringgit is at its lowest point in nearly three years, while our fiscal deficit is widening.

 The rest of the world is following China's lead

Scenario B :

1) Lower investors' expectations : HAPPENED. The FBM KLCI dropped 16% this month alone. What do you think?

2) Stocks lose premiums over book value : HAPPENING. Several research estimates pegged the FBM KLCI trailing price-to-book at 1.4 times as of end February. The index has dropped by quite a bit since then. We expect it to have dipped to around 1-1.1 times by now, which would be comparable to global financial crisis levels. Once it goes below 1, stocks are no longer trading at a premium to book value, indicating investors' absolute pessimism towards future growth for the companies.

3) Lousy sector prospects : HAPPENING. With overall economic growth weakening, expect lousy performance in a broad range of sectors. You know that tourism and aviation are already in the dumps due to COVID-19. There's also banking, telco, property, manufacturing, construction, etc etc. The silver linings are healthcare and utilities only, and just maybe, our favorite chicken stocks.

4) Lower investors' expectations : HAPPENING. We capture this as Round 2, which means that already weak expectations can go even lower if market conditions are bad enough. And they are already bad enough.  

The next outcomes: 

1) Steadily weaker quarterly growth : HAPPENING. We have cut our GDP expectations for 2020. First quarter will be terrible, if not negative. We already face a loss in GDP of up to RM17 billion this year from COVID-19.

2) Negative GDP : HAS NOT HAPPENED. But if it does...

3) Recession scenario. We'll put it this way. The FBMKLCI was at 1,860 points in April 2018. An economic recession will likely cut it in half, so prepare yourself for the possibility of the index hitting 900 points and below, if it gets bad enough.

Our personal opinion? Expect a lot more of red ink ahead.


Tuesday, 3 March 2020

TRADE OF THE WEEK #32 : MI TECHNOVATION BHD (TECHNICAL BREAKOUT TACTIC)

Outcome
Gross Profit : RM4,300
Return on Investment : 11%
Duration : 2 Days



For once, the breakout isn't the one on our faces. It's in MI, a brilliant company that we have obsessed over since it listed.

We made some good money when MI made its debut on Bursa Malaysia back in 2018 - RM13,000 in four days - but as is the case for short-sighted traders, we would've made multiples had we just held on to the stake. Please lend us a half million ringgit credit line and we promise to hold on to these kinds of golden opportunities, OK?

Since then, the stock has only gone up, then down, then up again. The chart is a thing to behold.


We would not have been able to stomach this kind of volatility, but here's the thing about MI: it proved its worth in the best way. The stock is racing up now simply due to consistently strong earnings. It did take a 55% correction but now it's made up the entire downward phase. Long term shareholders should be pleased.

We are not one of those lucky people, but we do know when to go into the stock : when, and only when, it stages a technical breakout. To do this successfully, and by all accounts, we managed that with an 11% gain overnight, the trick is to be patient. 

Like, stone cold patient, and not of the Steve Austin variety. No head smashing; just stay put, and wait for the right time to open up a can of... well, let's move on.

Our confidence in this play was higher than usual, because we were replicating tried and tested techniques. If you've been reading this blog for a while, you'd probably see that the application is identical to past successes; same play, just a different stock.

To simplify, we'll do just a bit of technical analysis here. First, understand the chart. Then, understand the context, and why MI stood a good chance of breaking out exactly when it did.

We were just waiting to go in, and it took weeks. No biggie; we nailed it as we intended.

ZONE A & ZONE B

We hope you're familiar with these squiggly wiggly charts, cause we're in candlestick territory now.

There's this thing called a consolidation range - basically, a horizontal 'channel' where the stock just fluctuates. It tries to go up but fails a couple of times, and the aggregate outcome is that it went nowhere. Oh, and pesky things like coronavirus scares ended up driving the stock down. But then it went back up after the dust settles.

Below is the recent consolidation range for MI. In this daily chart, we divide this into two distinct rectangles: Zones A and B.

Zone A is the first range of between RM1.80 and RM1.95, where the stock was just hanging around and chilling - it didn't seem to be in a hurry. 

Notice the transition between the zones. There's a succession of price increases which brought the stock to RM2, that pesky, psychological resistance point.

If you're new to this, know that when a stock breaks RM1, RM2, RM3, whatever, it usually takes a while to go beyond. This is why we didn't want to trade as soon as it hit this point in Zone B; we figured that it's going to spend some time trying and failing (just like in Zone A)

Here's the recipe for a sustained technical breakout:

1) stock needs to fumble around for a while, and build some strength. 

2) stock needs to have a collapse in price, then recovery. This is how you know it's well supported by the market.

3) when the breakout eventually comes, it should look obvious. Because when it does, the whole market will jump in and buy into it.

Understandably, you may be wondering what the f are we talking about. But we just put technical concepts in layman's terms. Showing how we traded is probably more illustrative of the concept than us trying to explain it.

In practical terms, all we did was that we kept watching MI throughout January and most of February, waiting for the right time.

ZONE C, AND THE RIGHT INSTRUMENT

Now for the fun part. We planned this meticulously because the eventual breakout beyond Zone B will be spectacular. Why? Because it would be a new all time high breakout, and it's more powerful than the face of a 15-year-old kid with too much testosterone.

Zoom out the chart a bit and you'll arrive in Zone C. We have to go way back for this, so what you see below is the weekly chart for MI.


The last time it was around RM2.10-ish was in September 2018. It took a while for MI to get back into that range where it could plausibly break a new high. We had already estimated that there's a good likelihood of this breakout, and the timing couldn't be better.

Context is oh so important. The next insight is simple : MI is making all these positive moves so close to its next quarterly earnings announcement. 

On balance, it's not too much of a leap to theorise that the current stock price move is related to upcoming earnings. Even more so when a stock tries to break new all time highs. 

We know enough to understand this and to have replicated this type of trade before. It got us RM10,000 profits in GCB in three days, so we were quite confident that we know our shit.

The last important but is not so much insight than a tactical decision : get the right trading instrument to amplify returns. We found that in MI-CG, a recently issued call warrant. We discussed this approach in our VIP Group quite early on.

Commentary on 7 February 2020

Amplifying returns is why warrants exist. You can buy more at a fraction of the mother share price, and boost returns even if the quantum of movement is smaller.

The call warrant was the perfect thing to trade once MI shares break out. And on 19 February 2020, it did so with conviction.

Also, here's the thing about breakouts: the longer the consolidation phase(s), the stronger the price movement is when it goes beyond that range. On 19 February, we actually ended up in MI-CG at what we'd usually consider to be a sub-optimal price : 15.5 sen. It closed at 13.5 sen the day before, so we were obviously late into this.

 Made the call on 19 February

But did being late matter? Not if there's a chance it can move higher. The previous all time high is RM2.21. We entered MI-CG when MI was trading at around RM2.16. There's about 5 sen to contend with, and if our theory was correct, by the time it tries for RM2.21, our call warrant position would already be profitable. 

And let's not forget how exceedingly difficult it is to achieve double digit % gains in 24 hours.. we dedicate our lives to find trades like these.

No prizes for guessing what happened next. 


This range was good enough for us to get to where we wanted to be. At 11% gains? Quite happy to exit. In less than 24 hours, in fact.


Oh, and all that stuff we said about expected earnings? On 20 February, this came out.


 All in all, not too bad.

Sunday, 23 February 2020

THEY SAY GOT GOVERNMENT STIMULUS? HERE ARE THE STOCKS TO WATCH !

"Saya kena sabar..." Source

We have not been able to find a coronavirus cure for people yet. But for disrupted economies? The cure - seemingly - is to spend, spend, and spend some more.

On 27 February 2020, the Government is expected to announce a fiscal stimulus package. It's the same thing that a happy marriage requires: stable fiscals and some stimulus from time to time. 

There are estimates that put this package at at RM8 billion on the low end, and RM15 billion on the high side. You should know what this whole thing is about : combating disruptions caused by the coronavirus outbreak. 

Hotels have slashed prices after 95,000 bookings canceled. People are in danger of losing jobs. Nobody's flying. Former and future Prime Ministers are evidently in distress. The solution is at hand. 

Our package may not be as well endowed as those of Singapore's or China's, but let's hope the market thinks it's big enough. 

Because if it does... ! Some stocks stand a chance of rallying. And as observers of stocks, we have a list of those that are most likely to benefit from this stimulus.  

Similar to out Budget 2020 Watchlist, we'll use our patented three-star grading system again.

* - "Can watch lah if bored"
** - "Can get the heart rate up abit only"
*** - "Uncle says you need to watch this"

AIRASIA***
AAX **
AIRPORT***
BRAHIMS**
AEON*
BJFOOD**
BONIA*
GENM***
GENTING**
OWG**
PARLO**
GETS*
KTB*
WARISAN*


This plan is intended to help businesses that are directly affected by the outbreak, especially the retail, tourism, and aviation sectors, says our MITI Deputy Minister. 

Our current assumptions:

1) No direct aid for manufacturers (at least in the first round), as the impact of the coronavirus on the supply chain (for anyone that has China exposure) has yet to be quantified. We do foresee this to be a problem, but the impact will be assessed later.

2) The focus of this rescue plan is on the services industry, hence we are not highlighting any construction or infrastructure plays. You know them already; you don't need us to tell you to loom at EKOVEST and the gang. There will be newsflow on mega projects and such, but that's a different story.

3) We think Bank Negara will cut rates in March due to current exceptional circumstances. This has ramifications on all sorts of things, but we won't mention the affected names here, so as not to muddle the main angle.


More details on the stocks mentioned below.



AVIATION

AIRASIA, AAX - Main (or only) aviation proxies on Bursa Malaysia. There is clear intent to get people to fly again. Domestic routes, deep discounts, special packages... there are many ways to encourage it. Some concrete tourism initiatives (backed by Government funding, most importantly) will help achieve this.

AIRPORT - The first, possibly biggest, direct beneficiary of any stimulus measures related to the tourism industry. It's Visit Malaysia 2020 and you gotta get visitors to come somehow.

BRAHIMS - Airline catering business. Cheap entry price for the stock, which has seen some up-and-down turbulence lately.




RETAIL

AEON - Direct mall proxy, to benefit from recovery in consumption sentiment, possibly through a stimulus measure or two.

BJFOOD - Direct F&B proxy, with concentration of key brands and franchises in tourist heavy locations. Tourists flock to Starbucks for safety; it's just human nature.

BONIA - Direct retail proxy. It's been hit hard by the virus already; any measures to encourage tourists to visit Malaysia would reinvigorate sales.



LEISURE  & HOSPITALITY

GENM & GENTING - Suffering from cancellation of all tour bookings from China this month, as well as Singapore's entry ban for Chinese visitors and foreigners with recent travel history to China.
GENM and GENTING could really do with some major moves to get visitor inflows from other countries.
 
OWG - Proxy for Genting (F&B operations) and Penang tourism (The TOP in Komtar).

PARLO - Tour and tourist services company. It's in penny stock territory, hence any positive tourism policy announcements may be enough to move the needle for these guys.
 


TRANSPORTATION

GETS & KTB - Bus companies as public transportation proxy. They are not very profitable, but they do attract multitudes of budget conscious travellers.

WARISAN - Under the radar and often ignored car rental and holiday tours company.

Tuesday, 18 February 2020

HOW TO OVERCOME A LOSING STREAK IN TRADING !


This is a man who did not stick to his stop loss points. Source.


Late to a trade, only to buy at the peak?

You expected the market to zig, and it zagged instead?

Everything you do goes wrong, with your fifth-in-a-row losing trade?

We've all been there. Believe us. Nothing saps confidence and capital more than a losing streak.

We are not superstitious types (maybe just a little 'stitious'). Streaks are just consecutive occurrences of the same outcome. We can bore you with citing statistics and discuss the wonders of the Gaussian distribution table, but let's not do that.

Look, losing makes people emotional. We lose the capacity for logical thinking, bit by bit. If it gets bad enough, it makes us desperate.

Because we are losing something, we subsconciously feel like we have to regain everything, at all costs. This is the kind of asymmetry that lures people into making outright bets : how else would you describe feeling certain about winning 10 to 1 odds?

In trading, you're not just losing your capital. You can lose your mind if you're not careful!

HOW TO LOSE IT

Imagine this (very real) scenario : markets have just opened and you're down by RM10,000 immediately after your latest stock trade get impacted by a corporate announcement.

You bought Stock X at an average price of 55 sen. Now it's down to 48 sen; a 12% loss. And oh, you forgot to set your loss limits, or even trading parameters.

The reason you really got into this situation was because you've lost a total of RM10,000 in four previous trades. Now you've just made this one big, ballsy bet that you're sure will make up for all the losses.

Reckless? Sure, but the streak would have to end eventually right? And it's OK to make big wagers to win back that RM10,000 loss, right?

Well, the reality looks like RM10,000 in actual losses, and another RM10,000 in unrealised losses. Instead of getting to break even, you have just doubled your losses. To put it kindly: you just goofed big time.

So what do you do? Your options are :

1) Stay patient and wait for the position to turn around.

2) Trade other stocks like mad to make up for this RM20,000 loss.

3) Get out and just sell the position. Cry. Live another day.

We'll discuss the options shortly. But the answer may surprise you.


"If you really want to gamble, come here and support GENM shareholders in these trying times"


WHEN TRADES BECOME BETS

We've written before about how dangerous post-event justifications can be. Literally anything can suddenly be rationalised. It's not our own judgment that's faulty; it's the dumb market and criminal market manipulators that whacked your beautiful and totally righteous trading position.

It's not just the market that zagged instead of zigged; it's your own mind as well. And also your dignity, if you let it happen long enough.

When a rational trade turns into an irrational bet, the major change is in your mind. You panic. You try to explain things away.

Let us cut the bullshit and go straight to the point:

You're embarrassed. You're ashamed that you got things wrong. 

Losing so much money in such a short time makes you feel like an idiot. 

You instantly regret putting yourself in a position to lose this big.

All of us has been in this position. Those feelings are real, but you will get over them eventually. (Editor's Note: or in worse cases, you'll get burned for life and spend the rest of your days complaining about Malaysian politics on Twitter)

But in the context of trading, if you really want to be good enough to make life-changing amounts of money, you have to live by this maxim : don't waste time feeling sorry for yourself.

Take it from a group of moderately successful finance blogger-traders who know by experience. We've turned a RM10,000 loss into RM20,000 before.

The example above is a real-life example: it's us. It was quite easy to achieve: all we had to do was continue being in denial.

It took us a while to come to a new way of thinking. Then it took a while longer to apply that in our trading execution. We are still learning, and we always will be.

This also describes a two-day cycle after eating really spicy nasi lemak, 
 and the subsequent bathroom odyssey. Source.

We don't have overblown or complicated theories to offer here. Our insight is very simplistic:

You must detach your emotion from trading at all times. 
To do this, always plan your trades.

We are not robots, but save the feelings for later. 
When you're in trouble, take action first. 

It's quite simple lah - when your apartment is burning, do you sit around for 20 minutes moping and feeling sorry for yourself? Absolutely bloody not, right? You'd jump out of the window and break both legs if it saves your life.
So why would it be any different in trading? If you think the stakes are lower, then we wish you all the best in losing money for the rest of your trading days.

Remember : action before emotion. Plan to act when you need to save yourself.

MAKING THE RIGHT CHOICE
 
Let's return to the potential options mentioned earlier. In each scenario, we'll show how they can turn from emotionally driven actions into intellectually driven ones.

1) Stay patient and wait for the position to turn around.

At first, you may think this is a totally rational thing. Maybe you've spent hours poring over charts and liquidity trends.

Maybe you've found that 9 times out of 10, Stock X ends up rebounding, but only after taking temporary losses of **gulp** 25%.

It definitely sound like the things a ballsy trader would do : "Just ride it out, bro. Take the losses and swallow it like a man".

Don't succumb to the toxic masculinity. Get rid of that thinking first. What you need now, and always, is not (just) guts, but a plan you can follow to the death.

What you want is not to let your losses run wild, but to draw a very clear boundary. It's OK to be patient, but determine an exact point where your patience must run out. Set stop loss points in terms of absolute value, and time.

Absolute value : when losses hit RMxxx , sell. We advocate to set very specific loss limits per trade, in every trade. We try to cap our own losses at 5% of capital invested, and we made sure not to let losses run into high four figures. (Editor's Note : find a level that works for you; these are our own)

Time : If the position does not recover by <Month/Day/Time/>, sell. No dilly dallying, no grandmother excuses. Sell means sell. Your (figurative) house is burning, remember?

What we want to highlight is this : having convictions are good, but there will come a time when you'll have to admit to being wrong. And there's nothing wrong with being wrong. Don't let shame be the enabler that grows your losses.

"Move fast. Break things" ~ Mark Zuckerberg. Source.

2) Trade other stocks like mad to make up for this RM20,000 loss.

You can probably see why this can be a slippery slope. It's actually more of a sheer cliff with a 100-foot drop: the probability of being dead is high.


This is yet another example of showing ballsiness, or throwing caution to the wind. By doing this, you have just committed the following mistakes:

a) Overconfidence in your own abilities

b) No planning in order to achieve a tangible goal

c) Opening yourself to an unlimited loss potential

Well, for (c), it's not really unlimited. You only stand to lose as much as 100% of your invested capital. Do you wanna put yourself in that position?

The solution to trading losses is not more trading. It's more on having the right plan to follow in reaction to different sets of possibilities. Again, this is where your stop losses - time, absolute value, percentage figure - come into play.


3) Get out and just sell the position. Cry. Live another day.

Having learned this lesson the hard way, nowadays we have a simple rule.

Let's say our loss limit was 5%. If it is hit, we automatically start exiting.While the exact, rock solid rule would be to sell the entirety of the position in one go, we allow ourselves to be human for a bit.

So when loss hits 5%, we'd sell off around 40% of the position.

When it hits 5.5%, sell off another 30%

When it hits 5.8%, sell off another 30%. Suddenly we'd realise that we had sold off everything.

Note that the percentage loss limits, and positions sold off, are just examples. You have to determine what works for you.

Just the act of partial selling is much easier to do than committing to sell all in one go. The mindset is different.

If you still had 100% of the position, you'd be tempted to roll the dice, even to take it to lower prices. You risk bigger losses this way.

But by selling of small portions, you're essentially forgiving yourself in real time, little by little. Even if you only decide to sell 10% of the position, you'd feel differently about the other 90%. Try it yourself.

Exiting losses can be painful at first, but it brings clarity later. There is much to look forward to in the future: new opportunities, bigger profits to target. 

Pain, then clarity. If that sounds familiar, it's because by taking losses, you were essentially in a grieving process. But it does get better.


Breathe. Calm down. Stretch. Source.

WHAT COMES AFTER SELLING? 

Big losses, losing streaks that don't seem to end, constant pain. What's the cure?

It is so simple you might not believe it. The solution is :

Get out. Do less. Get small.

Get out means : exit, and take a couple days off. If you had been in a serious losing streak, you're in pain. Mentally and physically. You'd lose your sharp thinking, you'd become superstitious, or you end up making decisions that are unguided by logical thinking.

Boxers don't jump straight into the ring the day after they get their ass kicked. They follow a recovery process.

But getting out was the easy part. The next step is to make good use of that newfound clarity.

A lot of losing streaks end with the trader blowing up the majority of their capital. It's because they do not know how to scale, and when to do less. Overtrading is an easy problem to detect, even though people tend to realise it after they have traded dumb positions 20 times, not during.

What we like to do is create self-imposed filters. We try to detect stupidity during the act being committed.

So we track everything : number of trades, number of stocks, total costs, win-loss ratio, et cetera. At the end of every day, we'd review our trades and look for signs of flawed thinking, or in other words, dumb decisions. Then we reflect and we try to improve the next day. 

Doing less means risking less capital. Instead of trading 1000 lots, try 200 lots. Smaller profits, but smaller potential losses also. If you usually trade once a day, try trading twice a week. Give yourself some time to recharge your batteries. The market will always be there; no need to rush back into it. Don't be an addict, because the market is not a high to chase after.

In time, with a series of smaller but consistent profits, you'd have extricated yourself from a rut. Your mindset is now different. With greater clarity, eventually you'll be ready to get into trading in large sizes again.

We'd rather be wrong early and often, rather than later when we'd have lost everything. It's not just in trading; life is a lot like this too.

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