Sunday, 19 January 2020

TRADE OF THE WEEK #30 - MYCRON STEEL BHD



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

Outcome
Gross Profit : RM7,009
Return on Investment : 20%
Duration : 2 Days

I was on my year end break overseas when I saw this opportunity. The time zone was not a convenient one; Malaysia’s market opens around dinnertime and closes at 3AM. 

Not too long ago we advocated staying out of the markets during the Christmas break to spend time with loved ones. But the itch has got to be scratched, I suppose. In my defence, I’m terrible at taking long breaks; most of the time I’d think about work, though not at the expense of having a good time with my family.

The reason that I mentioned the time zone difference has a lot to do with this trade. I confess that as incredulous as it sounds, the success of this one boils down to one very simple fact:

I checked the markets at 7:30PM (9:30AM in Malaysia). MYCRON looked good; the stock gapped up at the open, trading at around 36.5-37 sen. Had a nice dinner, went to bed. 

Then I woke up at 2:30AM (4:30PM Malaysia time). MYCRON didn’t move much: it didn’t rally and it didn’t retreat. So I decided to buy boatloads of the stock. The next day, I made 20% yields!

Well, this wasn’t the only reason I traded the stock, but what happened here helped me make up my mind. Conviction is a scarce commodity; somehow I got it in the middle of the night.

Don’t worry, I’m not saying that the secret to profitable trading is to sleep for most of the day and check the markets just before closing time. But maybe we need to really test that theory!

I’ll break down the rest of the triggers that made MYCRON an obvious trade, in my mind.

THE TRADE

To start with : I’m not an expert on the steel industry. Not even a casual observer; it is not really a ‘sexy’ sector, and to my lasting discredit, the team and I tend to focus on the more prominent, news-making, sentiment based, and politically linked companies.

But we understand why stocks move, and we can afford to not be specialists - at least in this case. We can afford to be sector agnostic sometimes, because at a foundational level, stocks tend to behave in similar ways, especially if some new trigger causes them to rally.

So, on 30 December 2019 (my time zone), I did a cursory look at what was driving MYCRON. I’ll list out the peculiarities one by one - each occurrence was a positive check mark for me to trade the stock in large size, and with conviction.

1) The stock breaks out to its highest point in 11 months.
2) The breakout was supported by real news.

The news piece was not hard to dig up; it was just a simple Google search. The story was apparent for all to see.


Now for a small bit of news analysis. It is important to understand that this was a big deal; it was a long and laborious effort to convince the Government to impose higher sanctions to punish dumping activity.

This development has the potential to be a game changer for the long suffering local players - or at least the cold-rolled coils manufacturers. It’s the kind of development that can move the needle from losses to profitability. In short, it’s a piece of news that can fundamentally transform the company’s fortunes.

I was also generally aware that steel counters are not exactly hot commodities these days - excuse the pun - due to dumping activity by foreign companies. It’s been that way for years; again, I'm not an expert, but I do read the papers. 

It was very noteworthy that this petition was led by MYCRON. The mention of the name alone lends some credence for the company to be seen as a major beneficiary. But don’t believe me, believe the prices. The stock moved immediately after the news came out. The stage was set for an even stronger price move.

MYCRON’s daily chart up until 30 December 2019

3) Stock gaps up + strong breakout + volumes emerging.

Now for a small bit of price/volume analysis. And by ‘small’, I mean anyone can do this. It does not require an exertion of massive brainpower.

Gap ups are powerful triggers, and better yet when they are paired with a price breakout. We touched on the same principles recently with the EKOVEST trade; that one was good enough for RM5,000 in profits in two days.

In MYCRON’s case, it’s similar. Notice that the stock closed at 32 sen on 27 December 2019, after the news came out. That was a gap up in itself.

More importantly, on 30 December, it gaps up, again! There was no selldown or weakness. As you can see in the chart above, MYCRON opened at 35.5 sen, or a massive 10% gain overnight.

4) ‘Small candle’ indicator.

Small candles are good for three occasions - during dinners, in the bathroom, and in the middle of a stock’s price breakout phase. If you’ve been following our content for while, you can probably guess that I consider the last one to be the most romantic.

Note the above chart again. See the right-most part? That’s the small candle. Essentially the stock didn’t move too much beyond where it started the day. From 35.5 sen, it peaked at 37 sen, then gave up to 36 sen; you know, normal fluctuations.

But the crucial thing is that it made no wild moves. It didn’t collapse to 30 sen. And equally as important - especially if you’re thinking of buying the stock - it didn’t skyrocket to 45 sen.

It became obvious that there was still much strength in the stock. For one, the price chart defied the ‘sell on news’ adage, meaning that the stock was still perceived to be undervalued. The second kicker is that MYCRON ended the day at its intraday high of 37.5 sen; the absolute best case for a momentum stock.

On balance, it was worth the risk to get an exposure in the stock. And this was decided based on what I talked about right at the beginning...

5) The ‘gap up’ price was sustained throughout the day.

This is where the fact that I went to bed and woke up mattered. I was genuinely surprised to see that MYCRON was still at around the same levels throughout the day. It basically meant that nobody was really selling serious volumes; on the other hand, it was apparent that someone’s buying, slowly and stealthily. Then I wanted to buy stealthily, too.

The following five minute chart on 30 December 2019 shows my point.


So of course, before the market closed I ended up buying some, and outlined the parameters.

Join our Telegram to get real time access to market calls

I ended up buying a large enough size for the trade to be worth the trouble : 90,000 shares. Not easy to do when this made up 4% of MYCRON’s total volumes on 30 December.

Then, on the last day of the year, all hell broke loose. Steel counters - cold-rolled coils or otherwise - rallied massively. EMETALL went up 39%, YKGI up 9%, LSTEEL up 19%, and so forth.

But MYCRON led the way by virtue of having rallied earlier. On 31 December, it hit an intraday high of 26%.

I knew to sell into the red-hot rally: it was just a matter of letting go of small lots without disrupting the prices. On balance, I think it worked out well.

Here’s the overall stat for the trade, and note the average prices (the average purchase price was slightly higher as I bought at the closing of 30 December - no choice but to go in at 37.5 sen.




So yeah, on balance, I suppose it was worth the trouble. Even on holiday.


Sunday, 12 January 2020

WANT TO TRADE CALL WARRANTS? USE THIS GUIDE AND CHECKLIST (2020 EDITION)

 When searching for call warrants in the wild, bring binoculars. Source

Last Updated : 12 January, 2020


There are hundreds of call warrants on Bursa Malaysia now. Even if you are the most sensible value investor in the country, you should still have a look at them as a viable way to express your market views.

Call warrants are many things, but they do not exclusively belong to speculators and those with an inclination to get poor quick (although most of the time this is what happens to speculators).


To mitigate the odds of making mistakes - you will make them, but hopefully under very strict parameters - you will need a guide. 

Trading warrants is more than just chasing a trend. You can be reactive (following the herd) as well as proactive (letting the herd follow you).

Contrary to popular belief, call warrants are usually issued to highly reputable and highly profitable companies. They can be speculative instruments, but they should not be compared to penny stocks where syndicates are just waiting to tempt you into parting with your money. You know which ones; we don't need to tell you.


In this post, we will share a list of important parameters and characteristics, broadly covering three aspects:


1) The call warrant identification stage : choosing the best one.


2) The 'mother share' fundamentals filter : things to watch out for when identifying a company to trade. This is supposed to complement your number crunching and typical fundamental analysis activities.


3) Managing the trade : this is about setting parameters. You have to control the trade, or the market will do it on your behalf with terrible results.


CALL WARRANTS ARE A FILTER FOR GOOD COMPANIES

We like call warrants as they tend to be a very good filter of the best companies (to trade) on Bursa Malaysia in the present. 

Investment banks that issue these things have to be choosy when it comes to picking a company to attach their call warrants to. Among the basic criteria for a company to qualify for a call warrant issuance, as far as we are are as follows:


1) The company must have an average market cap of above RM1 billion over a period of three months. This is especially important for small/mid cap companies whose market value has just exceeded that mark. Among the popular issuances in recent months include call warrants linked to DAYANG and DSONIC.


Incidentally, having new call warrants mark these companies as 'tradeable' stocks in the market. 

They have hit that RM1 billion mark and they stand a chance of maintaining that mid-cap classification, which then allows local or foreign institutional funds with such a mandate to buy into them. Obviously that would be very supportive of price and momentum.


2) There must be substantial trading interest in the company or sector. This happens when the company suddenly starts reporting strong quarterly earnings, or if the sector suddenly emerged as a favourable one. Examples are our prior successes with PENTA and GCB, which we happened to get into early. We were among the very first buyers of their call warrants on the day they were issued.


3) It must be reasonably easy for the issuer to conduct market making activities and to hedge its exposure to the call warrant's underlying stock. Market making means the automated buy and sell queues that you see in the warrant every day : the spreads must be tight and they must reasonably reflect real prices; otherwise nobody will trade the call warrant. Note that issuers typically do not take a directional position associated with the call warrant; they only hedge, and make a market.


4) It most likely reflects the market's prevailing biases. Hey, it's just supply and demand. I offer a product that I think you will buy and make me profitable. That's why the leading counters and sector leaders have a shit-tonne of call warrants linked to them.

Everybody and their grandmother has an opinion on Proton now; that's why DRB-HICOM remains so popular. If you can think of a stock that's arguably getting 'hot', rest assured there is (or will be) a call warrant to trade. It's a natural filter for good companies and good stocks.


Also, if you're new to call warrants, here's a crash course before we get into the details. Credit to Macquarie, who are far and away our most trusted and reliable warrants issuer in this country.




THE TRADING GUIDE AND CHECKLIST

Note : A checked item does not necessarily mean it is good for trading. It's just the little things to care about when you're looking for a good call warrant.


SECTION ONE : THE CALL WARRANT IDENTIFICATION STAGE

  • (  ) Is it one of the first call warrants to be issued for this presumably promising company? (Good if it is; it may mean the company is emerging as a favourable stock from both the fundamentals and technicals perspectives)
  • (  ) Is the mother share priced at RM3 and above? (Stocks above this price point exhibit more volatile price fluctuation characteristics, which makes it good for expressing a short term viewpoint.)
  • (  ) Is the call warrant less than a month old? (Good if it is. You might be among the early ones to identify it as a good trading prospect.)T

For the following items, refer to our other post on choosing the right call warrant as a guide. It explains why we look at these traits.

  •  (  ) In terms of liquidity, volume and price, is it the best call warrant available?
  • (  ) Was there a previous disconnect between the call warrant and the mother share due to some short term event? (Better if there was none)
  • (  ) Is the call warrant cheap in absolute terms?(It should typically be anywhere between 9 sen and 20 sen; this is our personal preference. Cheap enough to accumulate a large position, and attractive enough to entice the herd)
  • (  ) Has the warrant undergone a slump due to a recent weakness in the mother share price?(Better if there was none. An easy example is the usual post earnings decline for strong momentum stocks. Even if earnings were fantastic, there is a better than average likelihood of profit taking at this point. This can seriously hurt the call warrant's value, of course)


SECTION TWO : THE MOTHER SHARE FILTER


 When the mother share is a good one, the call warrant will grow up and become exemplary children

  • (  ) Is this the best company in its sector? (This typically means that its shares tend to outperform peers)
  • (  ) Is the sector within your sphere of competence?(No matter how good you think you are, you're never going to know all the sectors all the time. Stick to what you know best, perhaps a sector in which you have demonstrated an ability to make profitable investments from fundamental analysis)
  • (  ) Are the dynamics of the sector easily understood? (For example, the earnings prospects of glovemakers, manufacturers are relatively easier to analyse from a short-to-medium term perspective. Conglomerates, tech - not so much)
  • (  ) Presumably the stock has a catalyst. Can you attach some solid, actual figures to it? (Determine if the recent moves are facts based or sentiment-based. Either one is OK, but you need to fully understand why it moved, and why it may not continue to move at some point)
  • (  ) Is this sector beating the broader market? (Very important. It means the company will outperform the market during good times. During bad times, assuming the catalysts are intact, the company will not decline as much as the FBM KLCI itself)
  • (  ) Would this sector story/theme last beyond a single quarter? (Better to identify long term themes. An example is the recovery in the poultry segment last year)
  • (  ) IS THE STOCK FLIRTING WITH A PRICE BREAKOUT SOON? (Very important. it's a gauge of the existing enthusiasm in the stock. Most of our TradeOfTheWeek posts contain examples of price breakouts)
  • (  ) Market beating profit margins? (This must not be hard to explain or a result of a one-off gain. It must be fundamentals backed)
  • (  ) Market beating revenue growth? (Relative to sector peers and broader market)
  • (  ) Net asset value (NAV) growth on a year-on-year basis? (This shows that the company's earnings was not diluted from rights issues, for example. Long term business growth supports the case of long term positive momentum for the stock)
  • (  ) Is it nearing a dividend or rights ex-date of some sort? (This may mean that the recent momentum is because of some interest in shares acquisition before the ex date; it's not a good sign since the trade is supposed to be fundamentally oriented)
  • (  ) Is it a stock in a previously unfancied sector? (This may offer higher upside potential, particularly is there an earnings recovery theme)
  • (  ) Is it a contrarian or conventional pick? (Contrarian picks offer higher upside potential but you may have to wait longer, leaving your call warrant vulnerable to time decay)
  • (  ) Is it gaining momentum pre-earnings or consolidating/gaining new momentum post-earnings? (Important to factor in the short term cyclical nature of momentum stocks)
  • (  ) What is the MAJOR SHIFT that could propel the company to greatness? (Always better to list down and properly articulate what the catalysts are)
  • (  ) Is the stock clearly undervalued by most fundamental measures? (Good if it is. But it's also important to have the right call warrant)

SECTION THREE :  MANAGING THE TRADE ONCE IT HAS BEEN MADE

This is where you have to do periodical checks on your position. Don't get married to an idea; base your thinking on facts, not presumptions.

  • (  ) It's been a few days/weeks. Is the stock still trading within 5% of its recent highs? (This is a gauge of whether the trading interest in the stock is sustained)
  • (  ) Is there a sensible time loss or stop loss for capital preservation purposes? (Always have these and follow them strictly; no room for flexibility if you want to avoid severe losses)
  • (  ) Was the position fully accumulated at the start or is there room to build up on it? (This is an indicator of confidence at the start of the trade. Never acquire more shares when the position is showing a loss)
  • (  ) Can you withstand a 1.5-2 months' slump in the stock price? (No big deal if you can afford to buy and hold the stock. But if you buy call warrants, this can be fatal. Use this is a variation of the time stop; sell if the position is not showing any profit after the timeline is up)
  • (  ) Is there another call warrant which is exhibiting better characteristics? (This implies that your original choice was wrong. Some call warrants outperform others)
  • (  ) What is the deadline for this trade to show profitability? (You can be right and still lose money if your timing is wrong. If you're not profitable by this date, cut)
  • (  ) Have you missed an opportunity to take profits? (Call warrants are volatile by nature. If your paper profits evaporate completely, don't try and hope for a recovery in prices. Acknowledge your mistakes and sell the position. The paper profit essentially validated your trading thesis. When it's gone, you're no longer operating within the same parameters)

And that's it. Try to think rationally and always detach your ego from the trade. Know your limitations and don't waste time things you can't control. Keep the decision making to yourself; never let the market do it for you.

We wish you a good trading year for 2020.

Monday, 6 January 2020

HOW A DECADE OF TRADING CHANGED MY LIFE : A PERSONAL REFLECTION


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


Every now and then, I’d remind myself to check my privileges. It’s easy to complain about the state of life, petty Malaysian politics, and the world, but these days I tend to be more reflective and contemplative.

In my professional life and career, I have been in the capital markets, one way or another. The whole trading thing was a bug that I caught early, and have never really let go. The reward was worth the pain.

The percentages tend to change, but I view the whole trading endeavour via the following ratio : 20% monetary rewards, 80% pursuit of learning. The second part obviously leads to to the first part, if you’re a good enough trader.

If the ratio was reversed, it would have likely wiped me out a long time ago. Heed this important lesson : you must not trade with the desire to get rich, ever. If you do, you’ve set yourself up for failure, because what you’re really in love with is the outcome, not the process.

Desire to learn is not an innate skill for me, as it is in direct contradiction of how lazy I wish to be. But I forced myself to work hard, as it's the only way I can compete with everyone else in the stock market.

For the longest time, I’ve been trying to change how I trade for the better. Yet I didn’t realise that trading also changed me, mostly for the better, I think. I’ll touch on three aspects in which it had a profound effect on me.

It will also be a review of my journey over the past decade, of sorts.
HOW I SEE MONEY NOW

Perhaps you’re wondering how I managed to come up with all this capital for the trading business.

No, I did not win the lottery and I did not get much from the family aside from moral support (well, there was that one time when I was given a stake and subsequently squandered it. As a wise investor once said : if you're going to fail, do it when you're still young!).

Here's what it takes to come up with enough capital to start a trading business. 

1) I allocate at least a third (33%+) of my monthly income just on savings. They sometimes go to the trading account, or unit trust, or simple cash accumulation. Sometimes I'd save 50%. I earn enough income for this to make sense; I’m acutely aware of my privilege.

2) I do not have property or any fixed asset obligations that require large debt payments. There’s just the one car and the usual credit card expenses. I sacrificed a place I can call my own (and the debt commitment that would hang around my neck for 20 years) for cash, and liquidity.

3) Having grown a bit more mature, I now derive the greatest pleasure from paying off my credit card, not from using it to spend frivolously.

4) If there’s any balance left from the remaining 67%, after family obligations, bills, and lifestyle expenses, they go to savings. All of them. Things like clothes and shoes are utilitarian for me, not fashion items; I usually buy them when the ones I currently have are completely worn out.

All four of these are direct by-products of the pursuit of my passions : capital markets, and trading. 

While I like to think of myself as a world-class penny pincher, I have two major sins when it comes to personal spending : electronic gadgets (Apple products in particular), and wanderlust. On both counts, I’m just like most of the Gen Y out there. 

And like most people, sometimes I end up buying things I don’t need and spend to travel to places I really don’t need to. At this point I can say I’ve experienced enough of both. 

Having got those things out of my system somewhat, lately I’ve been more enamoured with the concept of minimalism, and diminishing consumerism. I’ve sold off some treasured possessions and realised that I never really needed them in my life anyway. I like to have more space in my life, hence I create some by eliminating items.

I’ve donated away most of my books (I use a Kindle now) and my rarely worn clothes; my wardrobe now is pretty basic. It’s less Marie Kondo and more on getting rid of shit I don’t need.

I don’t desire for a big house, or a fancy car. I’d see a friend or colleague driving a Benz and my first thought is “damn, the upkeep on that must be a bitch! Probably can use the yearly maintenance cost to buy a few thousand lots of GCB warrants. Hmm...

I don’t mean to pass judgment on others. I just wish for different things. On the disagreeableness scale, I'm at the extreme end of it. My self-validation is almost 100% internal; I no longer profess a desire to keep up with the Joneses/Jamals.

My main desire now is to make enough of a living to take care of my family and to enable me to continue my passion. I’m very, very fortunate that my particular passion is correlated with financial rewards, if I’m good at it. And to attain those rewards, I have been working my ass off, every day, and every night, for many years.

Unlike most people, I’m also able to answer the following questions without hesitation, “What do you really want to do with your life, and what are you most passionate about?”. I’ve already found my calling - it's easier this way, since I can just do it; I don't need to think about it anymore.

I no longer care much for status, and for climbing up the social/corporate ladder. The rat race is not for  me; my fierce sense of self-independence is what truly drives me,  and also to make the best use of the limited time that I have in this world.
THE VALUE OF HARD WORK

Speaking of ladders, I started somewhere near the bottom. I did not graduate from a world renowned university or gained an accent to pair it with. My aptitude in anything finance-related was zero.

I did take up the right undergraduate course, and it helped me open some doors later in my career. But in the beginning, money was a constant, painful problem, like a festering ulcer.

After many fruitless attempts, I failed to get a job for the first five months after graduating. It was not an easy job market, but I was also somewhat lacking in focus and talent. Binge-watching illegally torrented movies and playing videogames were my primary skills at the time.

For about one year, I lived with three friends in a single room, at the kind of flat complex where some dumbass would throw feces in a plastic bag into a stairwell that already permanently smells like piss. It was that bad. Really, I'm not kidding.

Then, somehow I managed to get a job as a stockbroker at a fresh graduate salary - RM1,700. This was almost 10 years ago: I’m distraught that the figure has barely budged today.

Anyway, I was a terrible stockbroker, although I did witness the very peak of Malaysia’s penny stock mania. I saw HARVEST jump from 10 sen to RM2 within weeks. METRONIC, AGLOBAL, NICORP SCOMNET, all had pretty crazy moves. Those were the days, and the sheer craziness left a huge impression on me. Obviously, my first thought is; how can I get rich from the stock market? Little did I know that almost nobody does.

As a licensed dealer, I used to give recommendations to clients and encourage my accounts to do active trades. On balance, my advice was not very good, purely due to my inexperience and naivety. My biggest accounts made money in spite of me, not because.

After realising that I’m the absolute worst salesperson this side of Greater Klang Valley, I knew that stockbroking was not for me. But it was fun, and I appreciated that it was a fully meritocratic profession. The highest rewards go to those who are best at it.

To this day, I respect all brokers in the capital markets, even though it's been called a dying profession.

I got my second job after writing an unsolicited email to the prospective employer, who boldly took a chance on me. Not wanting to fail a second time, I just worked hard, damn the long hours or mental pressure. Again, I had a lot of fun from the learning process.

And in the years since, I’ve managed to elevate my career prospects ever so slightly, with work that pays ever so slightly higher than average rates.

For the most part, I’m fortunate to still be friends with at least three of my ex bosses, in different workplaces. They still respect me as much as I respect them, largely owing to the fact that despite my many lapses in skill and occasional incompetence, they appreciate two things : 1) I’m truly passionate about the capital markets and 2) I just work hard.

Nowadays, I treat the trading thing as seriously as I do my day job. That means I have to find the time to do the research: it can be during lunchtime breaks, or at 1AM on a weeknight, or up to 7 hours on weekends. Not many people I know go to such an extent, which is all the better for me.

If I keep doing things not many others do, my competitive advantage is already taken care of. You can see the results in the trades that we do. Notice that the trading profits are slowly getting higher on a per trade basis, almost imperceptibly. This is the kind of incremental improvement that I like to achieve.

But the sheer demand of the work meant that I had to give up some normal-type things. No luxurious lunches with friends and colleagues, no nighttime drinks or clubbing sessions, and weekends that tend to go by in a flash.

I have a partner and sometimes I drive her nuts. But she has been fully supportive of the pursuit of my passion, because she believes in me. I can’t really ask for more. Again, privilege.

If you really want to follow my example - you must be nuts - and work on the trading business, my advice is to treat it as a vocation, not as a hobby. This means countless hours and of work and research daily, where maybe only 5% of the insights can lead to a good trading opportunity. You must be persistent, for there is no other way.

Most of the time you’ll be chasing down rabbit holes where there’s nothing. You'd find that your insight sucks, or you'd end up reaffirming your incompetence about certain things or subjects. It can get very frustrating.

You may end up losing your appetite, or mental state, or fall into a pit of depression. I've been there; all you can do is get back up, and move on.

But then again, by doing all this, you’d know that you already have a leg up on most people out there, simply because you work harder. You’d know not to fall for easy promises, or hysterical pronouncements by self-professed stock market gurus.

You can be confident enough to be distrustful of bold forecasts by CEOs, investment forums, superstar analysts, or business newspapers. Their incentives may be different than yours. In time, you will fine tune your internal bullshit detector. Do this and your trading will improve beyond measure.

With hard work, you’d know to completely trust your own judgment. You won’t become a genius, but you’ll be incrementally smarter each day. That’s the way I see it.

Again, as we have stated elsewhere : when we started out, our average profit can be as much as RM100 per trade (!). We’d be ecstatic, though we’d sort of ignore the fact that more than half of the profits would go to pay for brokerage fees! 

Nearly a decade later, through sheer hard work, application, and trial and error, we can get profits that are a hundred times that from a single trade. Proving that this is possible is why this blog exists. Nobody will believe us unless we show the proof.

I'd like to think that the team is a living example of how you can actually make good money from the markets. It is my personal mission to help educate and guide those who are willing to be educated and guided.

We can undertake some very quirky, sizeable trades that many people won’t even consider. We trust in our actions, as it comes from an accumulated body of knowledge. 

All that comes from sheer hard work. You don’t become a brain surgeon overnight, yes? So why is trading any different? 

Bottom line : I don’t treat trading as a ‘hobby’. It is not a ‘side income project’ for me. It's not for 'fun'. I am especially averse to any mention of 'hope'. These are not words that are appropriate for the business; I have spent half my life convincing people of this. Sometimes people don't listen.

This business requires full immersion, all the time. If that doesn’t sound very appealing, that’s probably because it’s not meant for you.



THE VALUE OF PERSPECTIVE


Remember the part about being in love more with the outcome than the process? It’s the equivalent of wanting to be rich, but without wanting to work hard for it.

People are more keen on spending imaginary money that they haven’t earned, with little regard on how to accumulate wealth in the first place. We all have done this at some point, I’m sure. Some of us can't stop daydreaming.

Many of us have dreams of attaining unimaginable wealth. We consider ourselves to be a world-beater-in-waiting. I do it too.

But consider this thought : what’s the bloody point? How much is enough? Have you checked your own privileges?

There are three main components for a ‘good’ life : health, wealth, and time.

The more time sacrificed for work may lead to greater wealth, but the bigger the toll it takes on your health. You know how it is. Maybe balance is what you seek, or maybe it's wealth at all costs. It's up to you.

But whatever is is you want to do or are passionate about - it may not be trading - have a sense of perspective. Know why you do the things you do. Don't stay stagnant; learn, and learn to fail if there's no other way. Do what you do for the right reasons.

I'm committed to do the things I do in trading, but at the end of the day, there are far more important things in life to focus on.

Just be in love with the process, and the money will come.

Wednesday, 1 January 2020

TRADE OF THE WEEK #29 - EKOVEST BHD (BANDAR MALAYSIA AGAIN!)


Outcome
Gross Profits : RM5,200
Return on Investment : 11%
Duration : 2 days

Let us get one thing out of the way first. We don't understand how/why people trade stocks like EKOVEST and IWCITY.

This is why : we see such big volumes traded, meaning that many, many people out there were making seemingly do-or-die bets. 

We also know that people have been making months/years-long bets for these counters to gain. 

This activity is all down to Bandar Malaysia, that mythical mega-project that will save us all - and by 'all', we mean Malaysian property developers, construction companies, and uncle punters. 

Truly, uncle, you are the master of your domain. And by 'domain' we mean crazy-ass bets that we ourselves are too frightened to make. We thought we were risk-takers; we pale in comparison to the uncles who buy millions of shares in EKOVEST & IWCITY using their margin accounts, with the expectation of them going up.

And you know what? The bets did pay off - this time, at least. The secret ingredient to stay invested is really to have absolute faith in the big boss, the government, and the project. We are not being sarcastic or cheeky; a good trade is a good trade.

“But Pel, you were also in this trade, right?” You may ask.

The answer is yes, but we were really small fry sideline traders. Our gains are minuscule in comparison to the master traders, some of whom probably bought millions of shares using margin financing. 

OK, this is the part where we get a bit cheeky. Because our trade does not involve having any faith at all in the big boss, the government, or the project.

For context : we are intimately familiar with the Bandar Malaysia angle. We have traded it since 2015. The only difference between now and then is that Jibby is no longer Prime Minister. But the thematics of the Bandar Malaysia project is still similar; it was just tweaked a bit.

And boy, we have had some lovely experience trading this theme! On balance, our last big trade were successes, but they were also traumatising. Basically we got spanked and then thrown into the meat grinder; the fact that we had any profits to show for it was a legit miracle. 

Traumatising or otherwise, we know a tradeable angle when we see one. So we are not averse to consider this angle again.

But the cheeky part is our little insight here, which will go a long way towards explaining this trade.

Sometimes, the technicals can filter out the noise. We don't care about how high people think the stocks can go. We definitely don't care about ‘limit up’ potentials. Some of the ‘sifu’ trading group chats were downright hysterical about this. We are simply amused.


Nonetheless, based on experience (and some intuition), we saw a trading opportunity with some serious upside potential. And a price breakout is what this boiled down to.

We can tell you that the price breakout strategy works. Price/volume analysis is our domain, hence the 'breakout' in the stock price - beyond their consolidation range - is a validation for us to pull the trigger on a trade. We were reactive.

What the uncles have been doing were not reactive, but anticipatory - they would have simply bought during the consolidation period, knowing that the details for this (new iteration of) Bandar Malaysia would eventually be finalised.

But this range lasted seven whole months - and we don't have enough cash to just go in and wait. We don't, and can’t, trade that way.

THE TRADE


We are fidgety beings. Unlike many self-professed trading ‘experts’ out there, we are distrustful of our own predictive capabilities. We get served humble pie often; it’s really a staple of our diets. As it should be : the moment you think you’re a genius, that is when you’ll lose everything.

We are saying this to differentiate ourselves from the ‘cowboy’ speculators out there who can make gigantic bets with lousy odds. The chance to gain RM50,000 in profits is not something we’d consider if there’s a close-to-equal chance of losing RM49,000. 

Our competitive advantage is not our predictive powers. Rather, we can unwaveringly commit to an idea, within acceptable risk, and for limited duration. We only stick to what we know best, and in this particular instance, it’s the commitment to trade early stage breakouts.

Let us simplify a core pillar of our trading philosophy. This one is on the technicals side of things - pure analysis of charts, and movements in volume and price. Our specialty.

Our belief is that the earliest stage breakouts offer the highest profit potential. Let’s call it Stage 1.

With each subsequent Stages, the opportunity for profit diminishes greatly. This is basically why we almost never do repeat trades after profiting from the Stage 1 breakout: because Stage 2 & Stage 3 might either be false breakouts, and worse yet, random price fluctuations. We learned not to touch these phases from experience, and from tens of thousands of ringgit in past losses.

Another reason why you should never trade Stages 2 & 3 is simple : hubris. If you had made huge gains in Stage 1, you’d start having a higher opinion of yourself. You’d think of yourself as a sure-can-win master of this stock. In other words, ego gets in the way - this is always bad for business.

Another rule : the longer the consolidation period, the stronger the breakout. But ! A caveat : don’t get emotionally invested about the sustainability of the breakout: it might fail a few days later and come crashing down.

To explain this properly, it’s helpful to understand the context of EKOVEST. Why the stock broke out, and why it failed to stay up.

To start with, look at this.

The above is the daily chart for EKOVEST from April to December 2019. The most important bit is to look at the spike at the right side: this was the major price breakout which occurred on 13 December 2019: a big move from 82 sen to 90 sen.

More importantly, the ‘breakout’ represented a seven-month high for the stock. Due to the lengthy consolidation period - defined as the flattish price movement from April to December between the 70-90 sen range - the 13 December price breakout was a strong one.

Evidently there were lots of volumes and buying interest coming into the stock. This much is clear. The second part is the ‘why’ of the breakout, which of course is no secret : it was related to the Bandar Malaysia announcement.

That’s all well and good. Now for the five-thousand-ringgit question : how do we know to buy into the stock right at this point? Surely there’s a chance it could fall back thereafter.

Of course there’s a chance. The trading skill that you need to have to undertake this trade is this: commit to a position, take responsibility for the risks assumed, and know when to exit.

In layman’s terms, let us simplify this down to the molecular level. To begin with, we chose to trade EKOVEST-C3, a warrant with good liquidity and volume characteristics that we prefer. It’s also attractively priced. (Editor’s Note: here’s the guide for choosing the right warrants)

A little short story to explain our thinking:



EKOVEST just broke out. It’s a strong move - seven-month highs.



Oh look! There are huge volumes at around 90 sen! It didn’t really weaken for the rest of the day. 



It already peaked at 92.5 sen earlier, but the major accumulation seems to be at 90 sen. And by huge volume, we mean that it’s hugeee.



OK, so we’ve got a choice : do nothing or buy near the market close? EKOVEST-C3 doesn’t look too bad at 19 sen. Parameters are simple : if EKOVEST breaches 92.5 the next day, we’re gonna see major gains on the C3 call warrant.



It’s really an arbitrary set of decisions:



EKOVEST breaks 92.5 sen immediately next day - PROFIT

EKOVEST falls below 89 sen - TOO BAD, TAKE THE LOSS


Add the following condition : EKOVEST must break 92.5 sen within the first two hours of trading the next day. Otherwise we’d exit - maybe even at break-even levels, with no loss other than brokerage fees.



OK, we decided to take up the trade. The estimated gains are worth the trouble. We think there may be a small window of opportunity for a quick exit at the peak of the buying frenzy in EKOVEST, IF it happens.



End of story. 


We explained as much to our followers on 13 December.

Notice that these are very specific set of events that need to occur for us to even stand a chance of realising any profits. Only one permutation out of the many possible outcomes would make this work. We trusted our understanding in the technicals, and of course, our collective experience in the markets.


Long story short : we’ve seen this trading opportunity before. We just have to be smart about the execution.


The next Monday, on 16 December 2019,  EKOVEST gapped up - the stock opened higher than its previous closing price - and temporarily broke new highs beyond the 92.5 sen peak of the previous day.


We knew we have enough time to exit at a substantial profit. So we cashed out of EKOVEST-C3 while the going was good for EKOVEST.

We absolutely did not care about whether EKOVEST can stay up or - holy shit - break the RM1 mark.

That simply did not  factor into our equation; what matters is that we follow our rules, and take profits when the targets are met. This is admittedly simpler in thinking than in practice; we are all too familiar with the temptation to get greedy.

But this time, there’s a happy ending to this.





EPILOGUE


Now for the sad part. The price breakout was not sustainable, for the simplest of reasons : sell on news. 

The daily chart right after the price breakout looks like this. The rest of December wasn’t a fun one for those who had bought shares at the peak.

From 95.5 sen to 79.5 sen by Christmas. 16% decline.

You may have also noticed that we ended up selling our warrants at the peak of EKOVEST’s move. This had nothing to do with predictive powers - it was just that our trading angle had effectively expired.

The difference between our method and the cowboy traders?

We spent two days and made 11% yields. The risk level was fairly high, but the duration was finite. Quite happy with the profits. Our trading angle was very short term.

How about the cowboy traders? They may have spent many months invested and made gigantic gains, but the risk assumed was simply crazy. They might have been gigantic losses, if EKOVEST had gone south instead.


But then again, maybe we’re just jealous because we have no earthly idea how to trade like these people do. *wink*

More Tales By The Pelham Blue Fund