kcchongnz blog
Are all freebies goodies Part 2 kcchongnz
After the first part of my article titled above and as appended n the link below,
http://klse.i3investor.com/blogs/kcchongnz/106438.jsp
I received a number of good constructive comments and criticism. I like constructive criticism, as besides learning from others, they also curb some of my cognitive biases in investing such as over-confidence, confirmation bias, etc. and as a result, save me from losing some money too in some of my investments. Thank you very much for your comments.
Here, I would like to deal with some of the comments. First this one first.
[Posted by buddyinvest > Oct 14, 2016 09:59 PM | Report Abuse 
KC didn't play the game the market wants. KC, this is an art not a science as you always say.
Swim with the wave, not against it.]
Mr. Buddyinvest, you are half right and half wrong. You are right that I don’t “play” the “game” the market wants. Investing for me is for building of long-term wealth. It is a serious matter and hence I never treat it as a “game” to “play”. How can we ever over-perform the market if we “play” the “game” of the market? Have you ever wonder why 90% of individual investors under-performed the market?
http://klse.i3investor.com/blogs/kcchongnz/104168.jsp
You are wrong to say that I always say “this” is an art not a science. Finance and investing is not a pure art, and neither it is a pure science. It is a combination of them. Pay some attention to the “science” aspect of the company too; whether it is a good company, and is it selling at a good price with a wide margin of safety, and then only invest in it. If this good company you have bought gives out “freebies”, that is good. Capitalize on it, try to sell at its peak when new investors are chasing up its share price way beyond its intrinsic value.
That is the way to “play’ the “game” the market wants, but “play’ it smart. Discover the gem yourself first, before others, and before those corporate exercises. So in a way, I do appear to “play” the “game” too, but in my own way, and not the market wants me too.
No, I am not saying it is easy to do that, and that I always able to do that.
“Investing is not easy; anybody thinks it is easy is stupid.” Charles Munger
Let me handle a few more good comments below:
[Posted by ronnietan > Oct 14, 2016 09:46 PM | Report Abuse
In companies with earnings, and PE of say, 7x, a split often takes the PE to say 10x.
This occurs in virtually every case, eg contrast price performance of Lii Hen and Hevea, with splits, and Latitude, without.
Theory defies the experience. If we follow the scientific method, where there's conflict, it's not evidence and the actual that's wrong, but the theory.]
[Posted by SALAM > Oct 15, 2016 03:59 PM | Report Abuse
KC, 40% of retailers are punters, 40% are pun-vesters(partly punters and partly investors), the rest are genuine KC followers/disiples who are FVI.
The examples given by KC above suits the majority who might have made their money and run...
What is your comment on VS, Gkent, Hevea then ??]
[Posted by andy87 > Oct 15, 2016 05:42 PM | Report Abuse
kcchongnz, how about gkent case? gkent share price going very stong after bonus issue. any learning from there? TQ.]
The comments below answer aptly the first comment by ronnietan above, which I think I need not elaborate further.
[Posted by Ricky Yeo > Oct 15, 2016 05:43 AM | Report Abuse
@ ronnietan you are correct if theory defies experience then we should examine theory but in your case, it is likely you are having recency bias, grabbing near term memory evidence to prove a theory to be wrong. And by the way, things with splits is sort of a self fulfilling prophecy. Because others knows others will take advantage of the splits to make penny return thus that cycle feed on itself, but we are talking about irrationality here, which will hardly make you any money in the long run. If you need to disprove a theory, start with 1000 random samples.]
Let us look at those stock mentioned above; Lii Hen, Hevea, and V.S, and George Kent, have all these exercises created value for the company, for the existing shareholders and the new shareholders?
Again we need to do some simple event studies for those corporate exercises.
Figure 1 below shows its share price movement of V.S Industry before, at the time, and after the ex-date of the corporate exercise of the one share split to 5 shares, followed closely by the 1 free warrant for 4 shares held.
V.S share price ran up by 40% from the adjusted price of 76.5 sen to RM1.072 within 2 months from mid- May 2015 to mid-July 2015 before the announcement of the share split of 1 to 5 shares. Insiders must have been accumulating the stocks prior to its announcement on 14th July 2015. Its share price continued to go up to RM1.36 at the ex-date of the split on 9th September 2015, and continued to go up again to RM1.52 when another freebie of free warrant of one for four shares held was announced on 19th October 2016. It peaked at RM1.68, one month before the ex-date of this free warrants, and subsequently closed at RM1.58 on the ex-date of the free warrant.
Who says these freebies do not maximize shareholder value, even though theoretically it doesn’t create additional value for the company? If someone who is privileged to the insider information, he would be able to make tons of money from these exercises, as he would be able to buy when its share price is low, and sell close to its peak when new investors chased the share price way up due to these exercises.
The beneficiaries of these exercises were the insiders, the existing major shareholders and some lucky short-term speculators. They could sell their existing shares at higher adjusted prices of around RM1.60, before it retreated to RM1.16 in just about 5 weeks.
My hunch is, however, many new investors chasing those freebies and bought the shares at high prices of above RM1.60 would have lost a bundle, even until now.
Again there are gainers and losers.
Figure 2 below shows the price movement of Hevea before, at the time, and after the ex-date of the corporate exercise of one share split to 4 shares.
The event study of the corporate exercise of Hevea exhibit similar behavior. In Hevea’s case, its share price continued to go up by a whopping 78% to RM1.70 after the ex-date of its one to four split three a half months later. That was because Hevea continued to show excellent quarterly results. However, it still suffered a heavy loss of 32% in just over one month when its share price retreated to RM1.16 on 12th February 2016.
Lii Hen’s share price movement before, at the time and after the corporate exercise also exhibit the same behaviiour as Hevea as shown in Figure 3 below. Its share price ran up three folds from the adjusted price of less than RM1.00 to RM3.00. I believe the good performance of Lii Hen’s share price was because of its excellent financial performance and generous dividends distributions. The one share for two shares held bonus issues and the one share splits to two shares exercises only acted as “catalyst” in unlocking its value. In this case, the insiders and existing shareholders, and those who invested with their own money and have holding power, benefitted greatly from the corporate exercise. However, those late entrance who chased the shares when it was selling high, but forced to sell because of margin calls due to margin finance when its share price dropped from RM3.00 to RM2.00 would have lost a bundle.
What about George Kent?
In George Kent’s case, the corporate exercise concluded recently was just a modest bonus issues of one share for four shares held. Its share price continued to go up after the ex-date of the bonus issues, mainly because of positive news flows of additional major contracts. I look at the bonus issue as a “catalyst” in unlocking its true new intrinsic value. Anyway, it is still too early to tell.
Conclusions
Corporate exercises for some good companies with better future prospects do seem to maximize existing shareholders value, especially for those insiders who have advance information, by increasing the share price suing corporate exercises.
Smart investors who have the knowledge of the business and some market psychology can benefit from these corporate exercises too by playing their own game in their own field. However, for those new investors who chased the share price at its high due to the exercise by “playing” the “game” of the market, often lose money in doing so.
Corporate exercise may act as a catalyst in unlocking value, rather than creating value for the company out of thin air.
KC Chong at ckc14training@gmail.com
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Discussions
2 people like this. Showing 21 of 21 comments
Agree. Condemning is his motive. KC also a lot of Holland counters. Pls refer to my past posts. If he is really good he must be very rich and no need to beg people "joining his course for a fee" in his numerous blogs.
Posted by John Chang > Oct 15, 2016 10:01 PM | Report Abuse
Vivocom example of stone? ^ haha
2016-10-15 22:16
vivocom is pariah! all the construction companies up >10% before budget 2017, but vivocom DOWN! Really pariah counter.
2016-10-15 22:37
Ask yourself a simple question
If the stock that you have invested based on FA is giving bonus, splitting and free warrant , do you feel happy and expect the price will rise tomorrow ?
(I am talking about tomorrow not 10 years later )
If your answer is "YES" , then 1+1 = 3
If your answer is "NO" , then 1 + 1 = 2
In any market play , muture or not mature, other than TA , FA and luck , there is also some element of market sentiment or psychology
Remember
I am talking about the immediate effect ofrom the exercise , not 10 years later that everybody would have forgotten the exercise long ago .
2016-10-16 09:41
What is the general public reaction ?
Happy or not happy
If happy , then it is a goodie
If not happy , then it is not a goodie
So simple
Why make it so difficult
Anything to do with 1+1=2 ?
Are you not aware it is psychology not mathematics?
Why talking long term or short term ?
What can not happen many days after tomorrow ?
2016-10-16 09:55
I share pisanggoreng's opinion, share split, bonus issue and free warrants will benefit shareholders in short term due to market psychology and human psychology of the market.
I know very well that in term of FA, there is no increase of value.
Stock market is not 1+1=2, market psychology and human psychology comes into play. A person will think that buying Gadang at 3.00 is expensive, buying Gadang at 1.20 after corporate exercise of share split, bonus and free warrant is very cheap. Most investors are not so knowledgeable about fundamental of the stock.
Good examples like VS, Hevea and Gkent.
Thank you.
2016-10-16 10:17
Actually u need to view the freebies in 3 perspective;
1. academic; thereotical No different like most university professors said.
2. Practical View bonus as positive....if your counter is undervalue, having bonus will bring up and sustain a higher value in your stock, even short and long run.
Bcos this bonus call for rerate the valuation of your stocks.
3. Practical View bonus as negative...if your counter is overvalue, having bonus, give u is chance and opportunity to sell....as usually short term it will bring up the value, thus u should take the opportunity to run fast. Bcos long run, it will come down bcos of overvalue
Raider see bonus are use as a publicity campaign tools use by companies, u need to make use of it intelligently in order to profit from it
2016-10-16 10:37
Not all what he wrote is 100% correct. For short term holder , when the share price not go according to expectation, you will mention is pariah stock. But when it go up at 0.370, you mention a darling stock. If a greed blind u not profits taking, pls don't blame the stock. Blame yourself. Many company has history. The most important the company need to amend his mistake and start reconstruct urging and generate revenue. If Vivocom share price stand at 0.200 is not attractive enough, when it's go up 0.400 you will say it expensive enough.
2016-10-16 10:45
Conman will use bonus issue to manipulate naive investors thru bonus mah.....!!
Usually if the stock is ovevalue with not that good prospect and the company announce a bonus issue....it is better to take the opportunity to sale loh....!!
2016-10-16 10:52
Agree with donfollowblindly, try read the last sentence, the motive is to promote himself rather than provide facts
2016-10-16 10:54
When Vivocom reach target revenue rm500mil after q3 and q4, then I want to see what he will write later.
2016-10-16 10:58
Posted by John Chang > Oct 15, 2016 10:01 PM | Report Abuse
Vivocom example of stone? ^ haha
Posted by CKNYAM79 > Oct 16, 2016 10:58 AM | Report Abuse
When Vivocom reach target revenue rm500mil after q3 and q4, then I want to see what he will write later.
Go back to the link below and see how all those corporate exercises carried out by Vivocom in the event study graph made many investors lost tons of money, and also the historical share price movement of Vivocom in the link below.
http://klse.i3investor.com/blogs/kcchongnz/106438.jsp
Then come back here and tell me if Vivocom a gem or a charcoal..
2016-10-16 16:39
Posted by pisanggoreng > Oct 16, 2016 09:41 AM | Report Abuse
Ask yourself a simple question
If the stock that you have invested based on FA is giving bonus, splitting and free warrant , do you feel happy and expect the price will rise tomorrow ?
(I am talking about tomorrow not 10 years later )
If your answer is "YES" , then 1+1 = 3
If your answer is "NO" , then 1 + 1 = 2
In any market play , muture or not mature, other than TA , FA and luck , there is also some element of market sentiment or psychology
Remember
I am talking about the immediate effect ofrom the exercise , not 10 years later that everybody would have forgotten the exercise long ago .
Hi Pisanggoreng my good friend, how are you?
If your answer is "YES" , then 1+1 = 3
If your answer is "NO" , then 1 + 1 = 2
Well, look at my previous post as appended below
http://klse.i3investor.com/blogs/kcchongnz/106438.jsp
EAH and Vivocom's management wanted the general public to believe that 1+1=3, and true enough, many of them believed. The insiders, and also the minor shareholders if they have sold at the high, certainly benefited enormously because they were able to convince that 1+1=3. What happen then?
The poor new shareholders who believed that 1+1 =3 chased the share price up while the insiders and major shareholders dumped them in drove. Finally the truth prevail. 1+1 is not equal to 2, but 1+1 actually equaled to minus one.
The truth exposed was not after 10 years, not 5 years, but one month, or just a few months.
Please go and read what I have written there and my event studies.
For good companies 1+1 sometimes does equal to 3, or 10, but sadly most of the time, 1+1 is indeed equal to 2, and even equal to -1, or -5 very often.
2016-10-16 17:02
Bonus, share split and free warrant are all 'gimmicky' exercises carried out by companies, typically in Malaysian stock markets. Technically it does not create any extra value to the share price. However, like what most commentators says, psychologically, investors 'think' that they have 'gained' extra shares.
In the longer term, any short term movement after the bonus, split or free warrant will return to its original equivalent price if there is no additional positive/negative factors occurring to affect the movement in the price.
Directors should concentrate on running the business instead of carrying out all these unnecessary, useless and costly corporate exercises to artificially inflate the company's share price.
If the fundamentals of the company are so good then they should increase or declare special dividend payout to all shareholders.
2016-10-16 17:10
The danger of labeling and having an inflexable mindset may deprive us of opportunities.
2016-10-16 18:32
fundamentally it can also be argued that these corporate exercises actually increase value by improving the liquidity of the counter. In valuation, a discount can be ascribed for lack of liquidity so improved liquidity actually improves valuation of illiquid counters.
that said, most companies that have these corporate exercises actually already have pretty good liquidity. so I agree with the views above that it is more of a market psychology thing, good counters will still shine with or without these exercises, the opposite is true for lousy counters.
one also cannot ignore the forces of traders who will buy up the shares when such exercises are announced and sell at a high. it is nothing more than another technical indicator for them. such traders will increase the price volatility and if the company has poor fundamentals, it will crash hard when it's under selling pressure
2016-10-17 11:51
It is a double edged sword
For a great undervalue company , it is definitely a goodie
For a pariah overvalued company, it is definitely not a goodie
What KC wants to tell you is you must have the knowledge to identify whether it is a goodie or non goodie
So join his online course if you want such skill
Honestly speaking to me and most of the people here including KC himself, it is a goodie .
Because we buy great companies, not vivacom or Egh so fond of corporate exercise
2016-10-17 18:44
Posted by apini > Oct 17, 2016 06:44 PM | Report Abuse
It is a double edged sword
For a great undervalue company , it is definitely a goodie
For a pariah overvalued company, it is definitely not a goodie
What KC wants to tell you is you must have the knowledge to identify whether it is a goodie or non goodie
So join his online course if you want such skill
Honestly speaking to me and most of the people here including KC himself, it is a goodie .
Because we buy great companies, not vivacom or Egh so fond of corporate exercise
Thank you very much my friend apini.
I absolutely agree with your last paragraph.
2016-10-18 14:10
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
ronnietan
As this is a forum, I respect your views, especially as you're a skilled investor.
For this post, I share your conclusion as my view is bonus/split can produce a higher market cap for companies with good earnings, but it can't turn stone to gold.
2016-10-15 21:44