In the third week of the month of March 2020, the stock markets all around the world crashed. Many investors, me included, had experience sharp drop of the value of their stock portfolios. I sympathize the predicament of every investor who suffered during this period. This article is written purely for sharing of an investing behaviour for readers to ponder about its merits and pitfalls in order to make informed decisions, rather for criticizing anyone’s investing strategy.
Recently, one question puzzles many people in i3investor. Can someone lose 90% of his wealth dabbling in Dayang in 2020?
In my article on Dayang when it was trading at RM1.10 as published in i3investor 11 months ago on 12 May 2019 in the link below,
https://klse.i3investor.com/blogs/kcchongnz/2019-05-12-story206052-The_cash_tale_of_two_contracting_companies_of_Sendai_and_Dayang_kcchongnz.jsp
I was comparing the cash flows of Dayang and Eversendai. I concluded that,
“With good cash flows, Dayang is likely to do well in the future if oil price remains good as present.”
I have also written an article in i3investor when a buyer of my book sought my personal opinion whether he should use Margin Finance (MF) to buy big on Dayang as its share price has plunged from RM2.95 to RM1.18 in the link below,
https://klse.i3investor.com/blogs/kcchongnz/2020-03-28-story-h1485697246-Double_Down_What_to_do_in_a_turbulent_stock_market_Part_2_kcchongnz.jsp
I provided some facts and figures and the different scenarios and left him to make his own decision.
In this “speculative” article, I try to find answer which may interest some people.
Can you lose 90% of your wealth dabbling in Dayang recently?
The answer to this question may be important to understand certain behaviour which could result in devastating outcome which could destroy one’s wealth in the stock market.
Let us have a look at the one-year share price movement of Dayang in Figure 1 below.
Dayang was trading at RM1.28 a year ago on 17 April 2019. It dropped to 84 sen four months later. Since then its share price moved up to a few critical stages; back to RM1.00, up to RM1.35, RM1.80, RM2.50 and to the peak at RM2.90 on 21 February 2020, just about two months ago, before plunging down to a low of 75 sen, barely a month later on 19 March 2020. Its share price has since recovered back to RM1.28 on 17 April 2020.
Figure 1: Share price movement of Dayang
Assuming Jill, with her initial capital of RM1m, bought Dayang shares at RM1.00 apiece. As on today, at RM1.28, Jill would have a paper gain of RM280k now, or 28%. This is not bad at all for a return in one year, more so considering the present rout in the stock market. If Jill had sold her share at the peak of RM2.95, she would have made close to RM2m, or a whopping 195% in less than a year.
So how could one who have done the same thing but lost 90% of his wealth, or RM900k from RM1m?
It depends on the context of the loss claimed. The culprit is again “the use of margin finance to the max.” Let us hear the story of Jack below.
Share MF on Dayang: The Bright Side
Let us talk about the Bright Side of MF first.
Jack, after convinced that the use of OPM is such a wonderful thing on earth, he digs out his saving of RM1m, and went to the bank to borrow another RM1.0m. The banks were too willing to lend to him. Why not? Banks earns a start up fee for the margin account, 5% interest every year and higher brokerage fee etc.
I have tabulated the return of the use of MF on Dayang as shown in Table 1 in the Appendix. The assumptions are as below.
Initial capital = RM1m
Borrowing = RM1m
Total initial capital = RM2m
Whenever share price had gone up, borrowing another 50% of the increase in value of the shares
Top up investment at when the prices had gone up to RM1.35, RM1.80, RM2.50 and to the peak at RM2.95 respectively.
After buying 2m shares of Dayang at RM1.00, the share price went down to a low of 84 sen a month later on May 28. That didn’t worry Jak as he had a target price of at least RM4.00 based on the potential high profit growth of Dayang in the future. He was right. The share price went up unabated to RM1.35 in Mid July 2019, RM1.80 on 11 October 2019, RM2.50 at the end of year 2019, and finally shot up to a high of RM2.95 three weeks later on 21 January 2020 as shown in Figure 1 above. Jack was so happy, and he used the MF to the maximum.
On 21 January 2020 when the share price was at RM2.95, the market value of Jack’s Dayang was worth RM9.2m. Jack made a whopping profit of RM4.8m after deducting total MF of RM3.4m as shown in scenario 4 in Table 1 in the Appendix. His total wealth came to RM5.8m in shareholding in Dayang.
However, with a target price of RM4.00 in mind, Jack did not sell Dayang, even he had made so much money. Instead, with his gambling instinct, he doubled up again buying more shares with the additional facilities happily provided by the investment banks as a result of the rise of share price. How he wished to make a killing in this once a lifetime opportunity making huge profit in Dayang.
By now, his average buying price for Dayang is RM1.41 per share.
The Dark Side
Shortly after reaching the peak of RM2.90 on 21 February 2020, its share price plunged abruptly and sharply to RM2.20 in just two weeks on 2 March 2020 due to the sharp fall in the US market as a result of increasing fear of Covid-19 pandemic. There was a chance that Jack could sell at this price within a few days’ window. He could still had made a hefty profit of RM2.5m, or 250%. But he didn’t sell. How could he sell Dayang at RM2.20 when the peak price was RM2.95 recently and target price he had in mind was RM4.00?
After that the share price plunged sharply again all the way to 75 sen in just another two weeks on 19 March due to the collapse of crude oil price. Along the way, with no bullet or wish to top up, the investment bankers did not show any mercy and started selling indiscreetly as the equity of the holding had gone far below the total MF. Jack ended up with all his shares sold due to margin call at an average price of RM1.28, the same price at its close on 17 April 2002 after it rebounded.
Jack lost just 13 sen per share from his average cost of RM1.41, for a total loss of RM408,000 as shown in scenario 6 in Table 1 in the Appendix. With that loss, Jack’s wealth is reduced to 592k.
After the heavy loss, Jack still has 59% of his original wealth. However, compared to his wealth during the peak when Dayang was trading at RM2.95 of RM5.8m three months ago, he was left with 10%.
That is the “Power” and the Dark Side of using MF for quick gain dabbling in the stock market.
Conclusions
Margin Finance merely amplifies your gain or loss in investing. Dayang has again shown that the use of MF can make you rich in a very short-term, but it can also break your arms and legs. The question one needs to ask is what is the purpose of investing; is it to get rich quick while not worrying about any risk at all, or to build long-term wealth steadily over the long-term?
So, before investing, have a goal; understand your personal risk profile such as your age, your career or business stability, the status of your financial position, your family situation, your risk appetite etc. What other people do, or practise may not suit you at all.
More importantly, in order to be successful in investing, one must treat buying a stock as investing in part of a business. He must understand the business, its performance, finally if it is offering at an attractive price. There are some good investment books in the market to provide you with some guidance. This book below is one of them.
If you are interested to purchase one and posted to you within a few days during this lockdown period, you may email me.
Happy investing.
KC Chong @ckc15training2@gmail.com
Appendix
Table 1
https://klse.i3investor.com/blogs/kcchongnz/2020-04-19-story-h1506043383-Dayang_Can_you_lose_90_of_your_wealth_kcchongnz.jsp
