Why we avoid Speculative Penny Counters? Fund Managers Perspective

As per our article prior before this, the item 1 and to 2 to be avoided:

 1. Take out companies that does not have good Fundamentals & 2. Avoid Management team that are not prudent/sincere

First of all, the company does not make money. The company is under the care of their management for the last 3 to 5 calender years, can not make money. What is the reason for you to jump in? Because you love their products or the bosses? We only go in if we see catalysts that will change the future P&L of the company. VISIBLE Few Quarters of Improving P&L. Do not chase when the news or rumors for AKAN DATANG PROJECTS to be awarded. Most of the time, we are wrong, the market is correct. If the management is sincere, he should work hard on his business and not finding money from speculating the market especially his own counter. When this happens, is he protecting shareholders value or damaging it further by playing with it?

Let's look at Fund Managers perspective. 

For you to start an account with any Fund House, your minimum capital injection is RM 1m cash. But normally FM do not do RM 1m, for an account to have a meaningful investment portfolio, we are normally looking at RM3m to RM5m. There will be a Standard IMA to be signed (Investment Mandate Agreement - stating the rules and agreement details). One of the COMMON CLAUSE to be agreed - NO PENNY STOCKS. Why? 

The volatility is high and earnings is not consistent. 

Normally the agreed Return on Investment is about 10% per annum. Anything above they shall be a watermark and the sharing percentage will kicks in, normally in the range of 20% on top of 10% achieved. But some FM also produces negative return during certain years.

Eg: Year 2014 made 15% return 

First 10% no sharing, balance 20% of 5% is shared with FM. 

The world greatest investor Mr. Warren Buffet able to do average of 22% for the last 40 years. But a lot of people of there trying to outdo the Fund Managers by trading speculative stocks. 

Points to Ponder:

Fund Managers have the whole research team to brief them on Market Outlook and Stocks Analysis. They are the so called among the smartest people in our Industry, agreeing on a return of 10% to 15%. 

And we are aiming 50% to 100%? 

I would say before we look at 50% return per annum, perhaps we may stay calm, do our analysis and most importantly eat our Humble Pie first before punting speculative counters. Perhaps we stand a better chance by going to Casino. 

Disclaimer and Declaration

The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares is citied for illustration purposes.

Regards,

Humble Pie

 

Investment Management Portfolio - Is Practicing Fundamentals Analysis Sufficient?

Dear Friends,

Is Investing is as easy by just looking at Fundamental Analysis?
Not that simple ....

There are main categories that one must look at before making a trade.

1. Fundamental Analysis
2. Management Team / Major shareholders
3. Economic / Industry Analysis
4. Political sentiment

What we have been sharing in our article so far is the Fundamental Analysis (FA). The good thing is FA plays the vital part of engaging a company - To Buy or Not to Buy. But we shall not blindly use only FA for decision making process. If it is so easy as looking only at FA, we shall only use screener and buy the companies that PE<10 and P/NTA <1. Is it that simple?

Management Team / Major Shareholders:
Bear in mind, good company is run by Great People. The brains and movers behind. If the bosses is reliable and generally sincere in doing business, you shall see their words/promises is highly achievable. Read their annual statement and hear their speeches, is it always being delivered or empty promises? Every year does they make better achievements and lowering business costs or spending more money on themselves and more perks given to directors?

Economic / Industry
Let's face it, every industry has different valuation. Under different economic situation, the valuation also varies. There is no hard and fast rules on this, get the industry average possible around 10 companies about the sane size and you shall have an idea how it goes.
Currently why Healthcare stands to get better valuations while Property suffers? Yes, market perspective on future expectation of the income to be generated.

Political
Policies and the tax structure do impact the industry and the economics. As the policies keep changing, our investment ideas also changes.

How to make a good trading decision?

1. Take out companies that does not have good Fundamentals.
 Rational - if the management can't even make profit for the company consistently, how are they going to take care of you shareholders?

2. Avoid Management team that are not prudent/sincere
Management words are meant to be the future direction of the company, If he breaks his promises/make artificial statements, his reliability is indeed low. As his business partner (shareholder), you also wanted to con me (again and again nonsense statement and promises), how this relationship can go far?

3. Choose the Industry that are in the Theme Play, focus for the next 1 to 3 calender years. Fund Managers tends to invest for Medium to Long Term and no one hit wonder. Contra and few weeks trading period is too risky. Theme Play companies need more time to fully value itself.

4. Avoid companies that are being hit by Government Policies (tax, subsidies cut and tightening rules). Go for the companies which the Government is supporting for the next 1 to 3 years. They are the so called 'children to be nurtured for the next few years'.

If you apply the 4 condition above before trading, the likelihood of you making losses will be greatly reduces. Even we made the wrong call, we do understand what is the risk involved.

Happy trading!


Disclaimer and Declaration

The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares is citied for illustration purposes.

Regards,

Humble Pie










 

How a Penny Stock Being Speculated (Due to request from readers)

Dear Friends,
3 days since the article of  'Penny Stock In Red - Down and Hurt' published, we received some questions from our members on how it works? Why is it so? This article is a follow up information to share for educational purpose. There is no real company and no real case in this posting.

Reason to choose a penny stock for speculation purpose:
1. Market Capitalization is small normally below 100m.
2. Easy to control as the shareholders are in small group and limited
3. Putting a little margin with broking house entitle you to get a higher multiple limit
4. Companies that are not making money/accumulated losses is high.

What are the criteria to fit in this Game Plan?
1. The stock must be non liquid.
2. Common understanding on not to sell during uptrend till the project is done.
3.Basically the project lasted for 1 to 3 months.
(why the project must stop at sometime near future? they can't always be paying brokerages till it eats up the margin).
4. All projects must come with an exit plan.

Why needs to increase the price? The main objective is not to give angpau to traders out there.
Here are the reasons ordinary people unaware of. An example of a targeted case study details are as below (no real company and no real case - only example):

NTA: 0.05
Mother Price: 0.05
Par Value: 0.10

Normal Corporate Exercise

With the current scenario above to raise cash, definitely private placement or issuance of bond is not likely. The group is not able to issue bond/place out shares below par value of the company. Mother price at 0.05, Par value 0.10. Issuing placement at 0.10 will not be making any sense as no one will take the placement of shares.

They need money but can't raise funds. So what do they do? They will work hard to get more projects / awards / contracts / Joint Ventures so that it creates a good market news flow for the company. People will start to follow the company. If they gets the project/ upcoming project to be awarded, price will goes up fast. That is where you always see when the price go up, it will always follow by Corporate Exercise (right issue / placement of shares / bond issuance).

Mother Price: 0.05
Par Value: 0.10
Increase to 0.20 (4x of the initial mother price - Now they are fit for Corporate Exercise)

Here we can see another issue, from 0.05 to 0.20, the price has gone up 4x, Some people are not comfortable to pay high price for exercising the right issue of the shares. How to entice people to accept the VWAP (Volume Weighted Average Price)? Even if the good companies get the new projects / awards / JVs , some people might still think that it is expensive to buy.

Simple: It comes with the free warrants and people will feel good about it, so they will accept the deal. Assuming Rights issue 1 to 1, exercise price of warrant 0.10. You still have to pay 0.10 to convert the warrant become mother shares 5 years later.
That is corporate exercise.

What about the bad ones (not corporate exercise)? For group that normally engage in this activities they need to fulfill an AGENDA/OBJECTIVE. Jack up the price, spread the news out there will be new projects / new shareholders / new asset injection but after sometime, things just died off. Worse part, nothing happen just the price increase. You will be able to notice a lot of those cyber troopers sending good feeling messages at major investment blogs or forum asking you to buy. Give you a high Target Price.

Yeah, you are so lucky, you found the DEAL OF THE YEAR. In this case study, the company NTA is around 0.05, the price has gone up to 4X (without any new projects / awards / contracts) and the bosses are so nice, in love with their company thus unwilling to sell their portion to you even tough it has been making losses for the past 5 years with huge accumulated losses.

Do you know how many good / big / profitable companies listed in Bursa are trading below NTA and P/BV <1? And this stock you are trading can assure they can make more good money? Before you know, it has reach their targeted price, the distribution of shares will kicks in. And yet, there is no good news, awards or anything. It is merely shares accumulation at low and distribution at high. Get caught again? History does repeat.

Disclaimer and Declaration

The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares is citied for illustration purposes.

Regards,

Humble Pie

Penny Stock In Red - Down and Hurt

(Case study, no real case involved)

Bursa queried the counter/slapped with UMA. The company replied in its response - 'Not aware of any corporate development or explanation that could give rise to the unusual trading activities.'

Bursa further exercise caution to give further warning. Traders and punters not listening.
Till a big Investment Bank impose cash upfront for this counter and it went South. Other brokers follow suit.

What went wrong?

Let me share some info on am example trading of a speculative counter.

For a share price around RM0.10, market capitalization let's say RM 40m +-.  To control the shares, the so called caretakers will Corner the stock till 80% at least and 90% best case. An additional RM 10m bullet with 3x credit limit on cash collateral gives you about RM30m credit line (in some cases you may get 4x of cash collateral).

With 90% of the stocks Fully Cornered and additional RM 30m credit line on hand, you may buy the shares all the way up with less obstacles. When you reaches let's say 40 cents from 0.10 (price you accumulated the shares), it reaches a market capitalization of RM 160m (yes, your money has grown 4x). When broking house stops the credit limit, you may not be able to roll further once your stock hits T3 and T4.

So what do you do?
T4 at 4pm comes, FORCE SELLING WITHOUT LIMIT TO BUY BACK.

Think again, what was the initial cost invested? Yes, 10 cents.

Disclaimer and Declaration

The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares may be citied for illustration purposes.

Regards,

Humble Pie