Sunday, 26 April 2020

THE GUAN CHONG GAMBIT [TRADE OF THE WEEK #34]


Outcome
Gross Profits : RM7,335
Return on Investment : 34%
Duration : 2 weeks



 From the Editor In Chief of the Pelham Blue Fund

My skepticism about everything was at all time highs.
I didn't believe in the markets, I keep getting things wrong about the market's direction, and I had doubts about the long term viability of any investments.

The problem was that although we can trade perfectly fine in irrational markets - we quite like the volatility - there is an issue when we analyse a company's fundamentals. No matter how good they are, we keep circling back to a most important question : we are heading towards a recession, aren't we? 

So the skepticism brings some conflict. We would love to accumulate positions for the long term, and although you may not believe this, we could use a bit of less trading on a day-to-day basis. Sometimes it's just exhausting, and most of the big money is made on the sitting and waiting.

Guan Chong Bhd (GCB) is a company we are quite familiar with. Decent business, global standing, economies of scale, all sorts of great stuff. It's already doing big things, and will keep getting bigger. 

And even though we are out of this trade in GCB, we still like it for the long term.

We went into this trade with the thinking that we can hold on to it indefinitely. We changed our minds halfway, hence making this a fundamentals trade that turned into a technicals one.

FUNDAMENTALS MATTER

Why do we do deep dive fundamental analysis? It's not just for research and to correct our biases/expectations on a stock. It's also, really, to make ourselves feel better about the stock. Especially one we wanted to hold for a while.

GCB is in the cocoa refining business. Chocolates are a steady growth business for the long term,  and as long as dentists tell kids not to eat them, kids will keep eating them. And they'll turn to adults, and still eat them.

But I digress - it's these kinds of fundamental research that I was reading on (consumption trends by product, geography, sourcing of beans, difference between premium and mass market chocolate product margins, Ghana's economic outlook, etc).

I remember catching myself while reading about the living income differential structure in the Ivory Coast at 2AM on a Sunday morning. My thoughts were "what the hell? Go to sleep already - this shit is not that important".

But it actually was important - we were putting some money on the line.

We have made profits from GCB in a previous trade, but the fundamentals need revisiting.


SOME BRIEF OBSERVATIONS ABOUT GCB AND THE COCOA MARKET

1) Limited exposure to China and Europe.

2) Overseas expansion ongoing, with facilities in Indonesia, Ivory Coast (2021) and recent purchase of a German facility. 

3) Cocoa price stable at around $2,200 per tonne. The last time GCB was making losses, it was impacted by a $3,100 per tonne cocoa price peak in 2014.

4) GCB has locked in about 80% of FY2020 sales due to forward orders from chocolate manufacturers (Hershey's, Mars etc).

5) Cocoa grinding is an economies of scale game. GCB is comfortably Asia's biggest grinder and the world's fourth biggest for years to come. Barriers to entry in this business is high.

6) Ivory Coast and Ghana has instituted an added tax (LID) to boost earnings of small cocoa farmers. GCB will likely pass through the cost to its customers. Barry Callebaut - the world's No.1 cocoa player - are already doing this. The quantum of the LID is currently $400 on a per tonnage basis.

7) We think chocolate demand is going to be stable and growing for years to come.

8) We don't see cocoa prices skyrocketing anytime soon due to current surpluses. In fact, inventory is building up as global firms have already secured their prior orders. New orders this year are slow amid the COVID outbreak.

9) The situation in Ghana and Ivory Coast is still normal, with relatively small numbers of COVID infections.

10) Short term negative impact expected for GCB due to closure of its cocoa grinding facilities due to MCO (last 2 weeks of March, and likely first 2 weeks of April at least). (Update, 23 April 2020 : it is in fact operational, at 50% of the workforce)

11) Main concern going forward as an international business is to reduce cost of transportation and overall tax liabilities. Forex fluctuations may also impact earnings (reporting currency is in MYR, although its earnings are mainly denominated in foreign currency)

THE TRADE

The technicals aspect was at least as compelling as the fundamentals. During the March market crash, GCB fell to as low as RM1.50 before staging an epic recovery. It went back to RM2 levels - up 33% in just under a week - when we contemplated a trade. And this trade was best expressible with a call warrant; it's the only way we'd take up the risk, since the payoff is quite decent.

We have made similar trades about a hundred times. To get a decent payoff which is a fair reflection of the risk taken, we prefer call warrants.

Our assumptions were simple:

1) There's a good likelihood of further market recovery at least in the short term, despite lousy underlying fundamentals (for the country, not the company).

2) GCB's stock doesn't have to move much for us to achieve great double digit percentage gains.

3) The call warrant that we chose was exactly the right one. It had to be, otherwise we might be screwed and lose shit-tonnes of money. I don't want this to affect our own living income differentials!

The warrant is GCB-CL, an issuance by Kenanga Investment Bank. It's pretty cheap, and its sensitivity to the mother share movement is acute.

(Editor's Note : if you're unfamiliar with the basics, here's how it works. Warrants move where the underlying 'mother share' (the actual stock) moves. There is a price setting mechanism by the investment bank where they have to make sure the warrant price reflects the mother share price exactly.)

Hence the table below shows exactly what's in store, if our trade works.

We analysed the odds, and they were favourable. In hindsight, it's easier to say that it was probably an asymmetrical trade with a higher-than-average probability of success.

This likelihood of success presents itself only under strict conditions that must be met:

1) A positive broader market momentum
2) GCB continuing its uptrend to break new highs in its share price

Best of all, it didn't have to move much for us to strike it big. As the table above shows, a mere 10 sen movement (RM2.04 rising to RM2.14) is enough to yield a 42% payout.

But of course, everything has a catch. In GCB-CL's case, it's awfully illiquid. Gumption is needed if we were to build up a meaningful position in this.

The other little problem is that GCB's stock sometimes swings like a mother.... you know.

The cross below shows a huge one-day swing in the stock - a 12% movement between trough and peak. And of course the warrant moves proportionately. These are the risks we have to live with.


Now comes the technicals application. It's part tactical, and part contrarian. We absolutely had to enter the market when the stock is weak or unenticing, not when it's in the green. You can try doing this; it's not easy.

So we made a conscious decision to buy into GCB-CL when the mother share seems to be at a weak point during the day; this essentially means when it's close to break-even point or even better, when it's in the red.



The protocol for us was simple:

1) All the stock has to do is not fall below RM2.
2) There's a channel (shown above) between RM2 and RM2.10 where we should ideally finish any buying we want to do inbetween these points.
3) Wait for signs of incremental upward movement before fully committing.

We got 250,000 warrants at the start, on April Fool's Day.


We then upped the ante a bit by buying another 100,000 warrants at an average price of 5.3 sen on 6 April. After that, we supplemented the position with small lots only, just to see how far it can go.


In the days subsequent to our first purchase, we patiently (somewhat anxiously) waited for a positive sign. This came in the form of stable movement in GCB, and incremental movement upwards in the stock. Exactly what we wanted to see.

As you can see below, the second purchase was initiated when GCB breaks out of the channel. We thought of it as a teaser of what was to come.


And the breakout happened, giving us ample time to consider an exit.


So the whole trade was wrapped up in 12 days.


When we began formulating this trade, we initially wanted to hold on to the position for longer term, effectively making it an investment. But we decided not to.

The movement in the markets at the time unnerved us, and since we had no clue whether the market will reverse or go up forever, we had to consider the payoff.

34% yield in 2 weeks? Hard to turn down.

Is GCB stock still volatile and high risk? Oh yes. It can suddenly fall 20 sen if conditions are not favourable, and we'd have risked too much on the line.

Perhaps we had sold too early and the warrant is set to go to 20 sen. Or perhaps we timed it right. Either way, our views revert to neutral once a trade is done.

We still think GCB is a great long term investment proposition, but if there's a recession coming, we would not want to stand in front of that freight train. 

We have traded the same stock seven months apart. Hope to revisit it again sometime.

In the two weeks following our trade, GCB looked like weakening, and then it shot up again.


And you know what? I think we just changed our minds again....


Saturday, 18 April 2020

10 BOOKS TO (MAYBE) TURN YOU INTO A MASTER TRADER !




This is it. The day has come. We have finally crossed over to the dark side for a clickbait/listicle post.

Don't envy us - we're making big bucks from our ad revenues online.

Story of our lives & wallets...

Do you know what Bill Gates does all day? He reads. How about Warren Buffett? He reads. How about Bernie Madoff, arguably the most iconic of the three? Oh, he reads

It's not just that they read. These guys read as if their lives depended on it. And why shouldn't they? The pursuit of knowledge lets you excel in whatever you're already doing. OK, forget the third guy.

To be really good at what you do - let's say trading - you have to absorb as much information as you can. In this line of work, curiosity itself is the competitive advantage.

Now, we don't consider ourselves to be at the right end of the IQ spectrum. To make up for this, we just try and out-hustle everyone else. We work hard, and we still find the time to read.

At this point, surely you may ask :  

"where got time and money to read meh??"

Our answer :  

"Uncle, all you have to do is stop buying four packs of cigarettes and three Starbucks cafe lattes every week. You do this, you can use the money saved to buy books instead. Or three books at the discount stores. Did you know that you can get e-books on Kindle for as low as RM15? Now you do."

As for time... well, it's really a matter of whether you want to spare some or not. As for interest... let's just say that if you don't read, it's likely that you will be easily out-muscled and out-hustled by most people who are also dabbling in the markets. A bit embarrassing, right?

Believe us, if you don't read up on your shit, your trading skills will peak at some point. You have to supplement your mind and your skills with new knowledge.
Also, believe us : that RM49.90 you spend on the (right) book can result in RM10,000 in profits down the road. Consider it an investment : we have done it ourselves. 

SO WHAT TO READ?

The following list is for intermediate to advanced investors and traders. There are also free resources online if you're a beginner who is just starting out. (Check out our own free trading guides and FAQ for beginners!)

Our advice : just get that one book you really like - you know, the one with the smiling uncle with a bit of a belly, promising easy riches and touting their success in predicting the past dotcom booms  / global financial crisis / SARS crisis whatever, promising easy and quick riches in the stock market. You know the ones we mean. 

But after that, learn about investing or trading from free online resources. There's just so much free quality content. People are dying to give it to you for the clicks. Just look at us. 

Really appreciate it guys....


And after that, consider getting some of the books below.

The following is a list of books that really influenced us in our blossoming trading career. Without reading them, we would not have been able to make great profits.

These are the books worth buying, and they will give you a good grounding on the philosophy of investing, and trading. These are mostly finance history related, or oral accounts of trades and deals from the people who have been there and done that.

Be be forewarned : none of these books offer easy money making tools or surefire ways to profit. There is really no such thing. But you will understand the minds of the world's greatest investors, and what it takes to truly excel.

By understanding history, and philosophy, you will get a much better grasp of the market.

Be a sponge. Go and absorb.

Editor's Note : the following links lead to Amazon, but we are not paid to endorse it.

#1 - The Snowball - Warren Buffett and the Business of Life by Alice Schroeder



Of course we are fans of Buffett. You should be too, but not for the reasons you might think.

This biography is the definitive account of Buffett's personal life and professional successes. It's 976 pages : if you're as absorbed by it (and read to the end) as we were, we should have a chat.

But if you think by reading this book, you can invest like him: forget it. The book is not about that at all.

It's really an exhaustive account of Buffett's moral values and self-belief, and how he never let anything get in the way of those two. It's really not about the money for him - whether he was worth $200,000 or $70 billion, he'd still have his modest house, cheap car, and hamburgers for lunch and dinner.

We love the specific accounts on some of his biggest wins, including the American Express trade (situational investing : we dig) and his love for the margin of safety.

It's also a story about a man with a lot of flaws. He's trusted the wrong people, laid off thousands of staff, lost bucketloads on a losing investment he was married to (it's called 'Berkshire Hathaway'), how he ended up with two wives, and his rejection of Benjamin Graham's core value investing principles (he transcended it). His successes are well-documented, but read also about his screw-ups, and you'll learn a lot more about investing.



We know, we know. Dumb title. It seems like the kind of 'uncle investor' books we warned you about earlier.

But to our shock, it turned out to be a fantastic book, and a very influential one for us. It radically shifted our expectations and attitudes about investing. We now look for the same types of hidden opportunities (which we call 'artificial mispricing'), and we have a deeper appreciation of stock linked investment instruments like warrants (you know we trade warrants approximately 98% of the time - here's our own detailed warrants trading guide). 

Artificial mispricing is a powerful concept. In this book, Greenblatt goes into details on well known cases such the Hilton Worldwide trade. These trades delivered hundredfold gains : they are worth reading about.

Oh, and we got our used copy of this at a yard sale for RM8. It was by far one of the best investments we had ever made.



#3 - Market Wizards : Interviews With Top Traders by Jack Schwager

 
First released in 1989, the content does not disappoint. Nothing comes close to this book in detailing the mindset of the world's top investors. Many are still around today, so they are hardly run-of-the-mill people or random uncles who got lucky ones. A few are billionaires. 

Anyone with a smidgen of interest in finance history would have heard of these traders. George Soros. Jim Rogers. Michael Marcus. Bruce Kovner. These guys managed billons and were masters of their trades (pun intended).

The best thing about the book is that it's not just about stocks. Many of these guys are macro oriented investors, with a view of everything tradeable on Earth : currencies, commodities, bonds, interest rates, options, et cetera. 

The author is also adept at asking the right questions about trading. He cajoles each interviewee into describing their most successful trades, and how their thought process works.

It also captured Paul Tudor Jones - possibly the most enigmatic and successful trader in the world in the 80s - in all his glory. He speaks freely about the incredibly famous and incredibly successful Black Monday trade in 1987, which turned him into a household name. You will learn exactly how he did it and how you should think about market crashes; it's awesome.

We've read this book front-to-back about 20 times. Need we say more?


#4 - The Big Short by Michael Lewis


You can also just watch the sanitised movie version on Netflix, but you'd miss out on the real life drama. Everybody loves Michael Lewis as a writer for good reason : his stories are as thrilling as how he tells them.
The book perfectly encapsulated the events leading up to the 2008-09 Global Financial Crisis. Apart from some lengthy technical descriptions of subprime mortgages and collateralised debt obligations (which we loved), the real point of this book is not really about the zany iconoclastic traders and how they made their billions: it's actually about the dangers of moral hazard, and systemic failure.

Just about the hardest thing in the world to do is to put on a trade that the whole world thinks is crazy. These guys held on to their beliefs for years; find out how they managed not to lose their minds (though arguably some of them did). 

It's also about how the gatekeepers - regulators and ratings agencies - failed (and can fail again) at their jobs, and why the US financial system (and by extension, the world) need a serious review. By and large, it seemed that we have learned nothing from the crisis. And if you're in an especially pessimistic mood, the same shit is happening right now as we stumble towards a historic global recession.

It's good reading to prepare for the next financial catastrophe. You know it's gonna come eventually.



#5 - The Greatest Trade Ever by Gregory Zuckerman


The whole book is about a trade. It's the famous bet by John Paulson that yielded him and his investors $20 billion in profits in 2009. It's outrageous. It will disgust you. It's a breathless account of what went down, and it's a thrilling read.

We like the book not just because of the account of the trade and eventual profits, though we enjoyed that too. Same as in The Big Short, what we liked was how Paulson & Co persevered with a widely (and we mean enormously) ridiculed idea, and had the guts to commit their whole capital to it.

Being the traders that we are, you know that we prefer concentrated investments on one good idea than wide diversification. The former carries higher risk, but it's a more direct pathway to riches.

To beat the market, and truly get incredible profits, you have to be purveyors of original thought. And you really have to stick to your beliefs. It's not about being agreeable to the world; it's about doing the right thing as an investor. 



#6 - Hedge Hogs by Barbara T. Dreyfuss


You're probably aware of the world's most famous rivalries.

Cristiano Ronaldo VS Messi. Prost VS Senna. Ali VS Foreman. Donald Trump VS a rotting orange. 

This book is about high(est) stakes trading, in the billions of dollars, and the two people who briefly ended up controlling one of the world's most important energy markets : liquefied natural gas.

LNG is the most volatile of the most volatile in the world of commodities. Energy trading is not for the faint of heart, and two traders staked billions of their firm's money to win. They did potentially illegal, market manipulation things. They traded so big, they put another multibillion-dollar hedge fund out of business. The LNG market prices got so distorted that the large companies that pay to actually use natural gas ended up suffering huge losses.

This book is about what happens when traders become detached from the things they trade. To some of them, it's just numbers and contracts. All they want to do is trade them and make up the differentials. 

This rivalry reached its boiling point as billions of dollars were put on the line. The loser ended up causing the collapse of his entire $6 billion hedge fund. The winner? He ended up an overnight billionaire and finished the year with a 317% (!) gain.

But this book does not glorify ballsy Wall Street traders; on the contrary, it criticises them. It's also an examination of what happens when the excesses of the system hurts society, financially and literally. It's also about the vagaries of luck and consequence : the trade could have easily turned the other way against the eventual winner.

#7 - Soros : The World's Most Influential Investor by Robert Slater



It's a biography of arguably the greatest trader or the 20th century. How can you not read this?

The thing that really struck us about Soros's life was that he was born, and brought up, to think about risk is a completely different way than mere mortals. He survived the threat of annihilation during the Nazi occupation and made his way to the UK, penniless. He found his calling and became a legend, but he was always more of a philosopher than a financier. He is a deeply flawed man, but a shockingly humanistic one at the same time.

The lesson from his life and his trades - many of which are extensively documented in this book - is that when the right opportunity presents itself, the courage of conviction has to drive your decision.

He was not afraid to risk it all, because he used to have nothing. Soros understands risk, and the courage of conviction, better than most people. Which is why he's so good at what he does.

As an aside, the book contained a chapter entirely about his massive 'Black Wednesday' trade against the British pound, which netted him US$ 1 billion in profits. It's a wild, minute by minute account of the trade, the incompetence of the UK government at the time, and how politics can come in the way of sensible decision making.

Whether you think of Soros as a monster, a capitalist vulture or as a folk investment hero, this book is worth a read.


#8 - Adventure Capitalist : The Ultimate Road Trip by Jim Rogers


Jim Rogers was Soros's partner in the first Quantum fund. He was basically the big picture guy, while Soros was the chief trader. 

They parted ways after the Quantum Fund became way too successful to contain two domineering egos. But Rogers is, and has always been, an original thinker. And his big picture thinking is, BIG.

He's the kind of guy who buys into Pakistan stocks when the country is at the brink of war and about to shut down its stock exchange. He bought into Chinese shares the very moment an exchange opened in Shanghai. He held on to them and made thousands of percent in profits after 15 years. He's that kind of guy.

He's aware of his flaws, calling himself the worst market timer in the world. He just buys into an angle and wait until they catch up to his world view. What also makes him special is that he's a truly 'macro' investor in the purest sense : he can buy into stocks in Angola, Chile, and Malaysia, at the same time, if he likes them enough. He can buy into currencies, commodities, stocks, whatever. As long as there's an instrument to fit his investment ideas.

This book is all about that and more. He undertakes a round-the-world trip and makes observations about the places he visits; their economy, stock market, and future prospects. He picks up a few investments along the way, with a holding period of forever.

We like that he has a gift of explaining topics like currencies and how they relate to the economy and stock markets in a coherent and entertaining way. You'll feel smarter after reading this. Really.


#9 - When Genius Failed : The Rise and Fall of Long Term Capital Management by Roger Lowenstein


There are tons of books out there about failed businesses. Sometimes there's fraud, like Enron or Theranos. Sometimes it's just about hubris, and overestimating your smarts.

This book is about how Long Term Capital Management, a hedge fund comprised of traders and quants, including two Nobel prize winners, got caught up in their ideas and blew themselves up (financially).

How hubristic were they? Well, to give just one example, they kicked out all outside investors to invest just their own money - the quants, who are principal owners of the hedge fund - only to lose it all a few months later. How much? Just a few billion.

They trusted only their formulas - as well as their sky high IQs - and didn't play it safe. They leveraged to the hilt, and paid a dear price for it. Imagine the guy who used 1-for-100 leverage to trade forex and lost a few hundred ringgit. Long Term Capital Management essentially did this in a gigantic scale and lost billions of dollars.



#10 - How to Trade in Stocks by Jesse Livermore


If you've never heard or read about this guy, you can't really call yourself a trader.

Livermore was the most successful speculator or the early 20th century. In 1907, he almost brought the US stock exchange down because his short selling of companies was so accurate and devastating; he was actually persuaded to stop his trades and take profits by none other than JP Morgan, the namesake behind the bank.

He repeated this feat in 1929 by anticipating the historic market crash. Adjusted for inflation, he became a billionaire just by trading. Nobody really came close at the time, or since.

In this book, Livermore gets very detailed about his trading philosophy. Turns out that they aren't all that complicated; it's only the superhuman discipline that's required to trade successfully the way he did.

But what really nails it for us is that while history does not repeat itself, they tend to rhyme. Investors' psychology, market manias, scam investment opportunities - literally everything that we see and experience in the present day have already occurred 100 years ago. And 100 years before that.

The market is hardly special, and people hardly change. Perhaps with that insight in mind, we can be just a bit more careful in how we trade in the markets.

Sunday, 12 April 2020

NEW TO THE STOCK MARKET? WE ANSWER YOUR BURNING QUESTIONS!

In our current MCO daze of busy-ness, boredom, and cabin fever, we reached out to Twitter and asked people to ask us back.


Let us tackle your brilliant queries to take our minds off of endless ZOOM meetings and incessant leaky aircon, both of which will continue until at least 28 April. 

We promise to be light on clichés and any sort of inspirational stuff. This is not Pinterest OK. All facts, no sugar-coating. Well, maybe a little.

We will link constantly to free online resources (especially Investopedia) to make a very important : hey, if you really, really want to learn, it's all out there and (almost all) free lah. Google is your best friend.


STARTING OUT
 
To start in the investing or trading business - never call it a game - you have to find an approach that works for you.

Are you short term or long term oriented? 

Do you like growth stage companies (with added risk) or do you prefer getting steady income dividends?

At the start, figure out your investment goals. (Investopedia)

Then, determine your risk appetite. (SmartAboutMoney)


This handy diagram matches your risk tolerance with the kind of asset classes you should get.




This is for illustrative purposes, but you can see that trading is a high risk business with high probability of losses. It's the only way to attain high returns, which we define as 10% yields annually or higher.

In other words, it's not for everyone. Trading might not be for you, because it requires considerable sacrifices from a monetary standpoint. Be prepared to make repeated mistakes and pay the dreaded 'tuition fees'.

Don't trade for the excitement or the adrenaline rush. This is a sure way to lose money.

We believe in the business of trading as a pursuit of knowledge, simply because we are passionate about it. Monetary rewards are almost a secondary consideration, because when you become truly good at something, the money takes care of itself. 

Learn to trade, but trade to learn also. 
 

A CHANGE OF PERSPECTIVE



We are armchair philosophers, so let us dissect this by offering a different viewpoint on portfolio management and asset allocation. 

We don't look at different sectors for asset diversification. Instead, it comes from how we think about our fund allocation.

Any exposure in growth stocks is a trading position. Even if it lasts 3 years or more. The target here is simple : massive capital gains from an appreciation in the stock price.

Any exposure in dividend stocks is an investment position. This is because the priority here is for a steady income flow from dividends. The capital gains portion is nice, but it should be secondary. 

Assuming dividend payouts remain the same, dividend yields go up when the stock price falls, and vice versa. You have to be mentally OK with this, otherwise you will keep dumping bank stocks when they hit new lows and buy them back when they hit new highs.

These distinctions helps in our personal investment approach.

What you see on this blog is primarily the activity from our trading portfolio. But in a personal capacity, we divide our money like this.

Let's say we have RM1 million in funds to deploy. This is how we'd portion it out. 



Investment : high dividend, steady income flow, reputable names. Relevant sectors : banks, telcos, utilities, real estate investment trusts (REITs). 60% of total funds. This is the 'safe' portion.

Trading : growth companies, short term strategies, IPOs, event driven / situational trades. Intent is to achieve 10-15% returns on a per annum basis from every trade. 30% of total funds. This is the 'high risk high return' portion.

Cash portion : 10% of total funds, to be deployed if an opportunity arises for a new investment or trading position.

Now, as to how many stocks you should look at : we are big believers in a concentrated portfolio, because that's the only way to achieve extraordinary gains. You know who else likes concentrated portfolios? Warren Buffett.

For our Investment portion, we'd stick with four or five names only, to be rotated as necessary for years to come (reduce position in X and increase in Y due to shifts in dividend potential, share price, etc).

For the trading portion, we only take one or two highly concentrated positions at any given time. We do not add 10 growth stocks to stretch out the money.

Our best ideas have to generate the most returns relative to the capital that we have. 

And if you want to through the considerable trouble of active investing in the first place, you need to really make your money work for you. 

Believe in yourself, because your three best ideas will likely make more money than your next ten best ideas, combined.

Note that these are how we personally approach things. It flies in the face of the diversification principle, and we're fine with that. What we're saying is that we have found an approach that works for us. So find one that works for you.



Read our personal experience to learn more about how to survive for nearly a decade in the business. It's not aspirational, but that's what it takes.

When navigating the markets, you will undoubtedly undergo the three Cs - cry, constipation, and crash. Control your emotions. Control your bowels. And never panic.

Overly simplified, the cons are :
- you will lose money at first, probably a lot
- tedious, time consuming
- you may give up after an unbearable loss
- a single bad move can turn a 10% annual gain into a 30% loss

The pros :
- it really gets better with time
- you will learn the value of hard work and knowledge accumulation
- the monetary reward is a fair reflection of your skills
- you will know so much shit; economics, companies, capital markets, etc.
- you will develop a rare and considerable skill set that lasts a lifetime

FUNDAMENTALS V.S. TECHNICALS




Beginners should learn both. End of story.

Technical analysis (TA) definition and overview. (Investopedia)

Fundamental analysis (FA) definition and overview. (Investopedia)


We always despair when FA and TA are described in competitive terms. They are not enemies; they are siblings. They are 50:50 - commit time to just one and you've only learned half of the full story.

We use both to help formulate our understanding of the company and its stock. It helps us synthesise a trading view or idea that we can actually use to make money. Read our TradeOfTheWeek posts where we combine our TA and FA knowledge in glamorous and fabulous ways.

The best part about learning both FA and TA is this : having proper knowledge in both aspects reinforces your conviction in your own ideas. 

If you buy into a stock without understanding the FA aspects, you may not know why the stock is trending downwards. And if you had gone into it without understanding the TA aspects, you would never know where is the best entry price, and where to set your profit target and stop loss points.

Without FA, we wouldn't have been able to make RM40,000 plus profits from a chicken and egg stock.

Without TA, we wouldn't have been able to make RM15,000 in nine minutes from a price breakout opportunity.

Both matter, so don't deprive yourself by picking one over the other, my dear.

CAPITAL REQUIREMENT



There are endless debates about this, but we'll get straight to the point.

To start trading or investing on your own account, you should have a minimum of RM5,000. It's not too small that your double digit percentage gains don't mean much, and not too big that you risk getting wiped out at the first attempt (unless you do something reaaaaallllyyyy silly, like following tips)

Second condition : it must be money you can afford to lose.

You can also try paper trading, but we skipped that part when we started out. Personally we (still do) feel that you have to put up real stakes. Feel the weight of your responsibility towards your money, and feel the pain of a badly thought out trade, if it comes to that. Experience will toughen up your soft underbelly.


ADVANCED SOFTWARE FOR TRADING TO BECOME SUPER DUPER PRO POWER


Tell you a little story.

Once upon a time, when we were just starting out, we had all the nice gadgets. Got a couple of nice wide monitors to use to 'view the global markets'. We paid hundreds of ringgit a month to 'specialised charting software'. It was a setup that was nice to look at - several monitors, really advanced charting system with a thousand indicators, et cetera.

The amount of money we made from having all that? Habuk pun tarak.

We were naive and clueless. 

 Sekadar gambar hiasan


The lesson was simple : we had all the fancy stuff and it didn't matter one bit, because our knowledge base was still low at the time. We simply did not know how to use the tools and what to look at.

So we went the minimalist route. We ditched the screens and stopped paying for software. Nowadays, we still use the free web-based online trading platform to trade. Anything to do with charting, we're OK with using the same platform. We still don't pay for any charting software to this day.

So how to look at multiple screens and charts and all that? We simply opened up multiple trading accounts with different brokers. Now we can look at 10 different screens and charts if we want to. And the cost of all that? Zero. (Editor's Note : well, technically it involves a RM10 fee for the CDS account opening but the brokers all waived it).

Limitations can lead to ingenuity. More screens will not make you a better trader. Get rid of the unnecessary stuff and focus on the important things like reading up on FA and TA, or doing daily stock sweeps, or keeping a trading journal.



But coming back to the original question : how can we keep our eyes on so many stocks without specialised trading software?

The answer is : you have to know what to keep your eyes on. And for us, it's fairly straightforward.

1) Our watchlist - personal list of stocks that we may trade or invest in, if we hadn't already done so (we don't trade anything if it's not in this list)

2) Top volumes - to get a sense of what the market is like

3) Top gainers/losers - to look for potentially overbought or oversold stocks.

These are the things we look at during trading hours. And we can do this on a single screen, or two at most. We don't use any specialised alerts; we just look at the markets to find what we like. 

To keep with the minimalist theme, and the principle of concentrating our money on our very best ideas, our watchlist usually comprise of less than ten names most of the time. Even then we'd only trade one or two at a time, not all of them. Some we watch but never trade, sometimes for months. And if we have a better idea, we bring it into the watchlist and remove the old one.

We recommend that you develop your own watchlist. Filter down the stocks that you really like, perhaps 5 or 6 of them. Learn about their respective TA and FA aspects. Keep watching them for months even if you're not trading a single stock. You will learn a lot from this.

RELATIVE COMPARISON




No, we don't mean comparing which of your trader uncles are more generous with their ang pao handouts.

When screening counters, you can track momentum, which we define as repeated price breakouts.

You can also track news-driven sector movement. For example, during the first weeks of the COVID outbreak, the glove stocks all went through the roof. There was good reason for that, and a couple months later, they can't produce enough gloves to meet global demand. The stocks go up.

And yes, we try to unearth potentially good names every single day (or night) when we do the stock sweep. What's good goes into the watchlist.

Now, let's say you want to filter out stocks in the same sector. This is where relative comparison comes in.

In all sorts of stock analysis, whether it's price-earnings, price-to-book, net asset per share, earnings per share, stock price performance (absolute or percentage basis), net debt, dan lain lain, it's just a bunch of not-very-useful numbers, unless you have something to compare them to.

Hence, this comparison is necessary for you to benchmark the performance of whatever stock you're looking at. 

Does Stock A have a price-earnings ratio of 15 times? Compare it to the sector average. If the sector average is 12 times, some would say Stock A is overvalued (which is reflected in its stock price). Some would say Stock A deserves the valuation, because their earnings are so much better than others in the sector. No wonder the P/E is high, right?

To decipher that and more, you'll need some rudimentary FA skills. But you need to compare something to something else. This is how you screen the right counters.

From a TA standpoint, there's one thing that we do all the time. Direct comparison of price gains among stocks in the same sector. 

Just a few recent examples:




Perhaps one stock clearly outperforms the other over a time period. Maybe you'll want to take a closer look at the leader? PUT IT IN YOUR WATCHLIST.

Or perhaps you like the laggard stock instead, the ugly duckling of the sector which is unjustly ignored? PUT IT IN YOUR WATCHLIST.

So what you're essentially doing here is that you're filtering your choices down.
 
Find an approach that works for you, know what to look at, know where to look at, and understand each stock's characteristics. Get ahold of the TA and FA aspects. Never trade blindly.


<Part II coming soon... maybe>

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.

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