How to get rich quick in stock market: kcchongnz

kcchongnz

Publish date: Sat, 17 Mar 2018, 02:24 PM

In the public forums, we often read about “inspiring” get-rich-quick stories on some individuals who have hundreds of millions of margins accounts from different banks; Maybank, CIMB, Hong Leong Bank, UOB bank, OCBC Bank, RHB Bank etc. It is electrifying to hear that they always make many times the interest they pay for the cost of the margin finance. Yes, “Always” is the word, and the phrase “many times the cost of borrowings”.

Strangely, I have never heard of the phrase, “I have lost quite a lot of money in ? stock using margin account”.

Frankly, I have nothing against anyone who has had the above success, and it appears to be so as they have been boasting about their wealth all over the place. Congratulation to them. It is a democratic and capitalist country here and everyone is entitled to be rich, provided he obtain it by the legitimate way, and best if it is achieved through not immorally, although the latter is a tall order in our society.

However, I always like to present an alternative view, for those who are newbies and youngsters. Otherwise, I would not have done my social service in this respect.

Those who have been reading my articles would have noticed I have been a little “loso”, or repetitive in this topic of margin finance. For those who feel so, you may stop reading now.

“The side of fairy tales I don't like is that they always have happy endings, that there's just good and evil, and things are perfect. But life is a little more complicated, and that's what I try to teach my kids.” Angelina Jolie

If you have read my article on the sharp drop in the share price of Hengyuan due to the margin calls and the damage it caused to those using leverage, as well as to those long-term investors, would understand what I mean and my intention.

In my last article published in i3investor in September 2017, “Margin Finance, EverSendai: A real time case study” below,

https://klse.i3investor.com/blogs/kcchongnz/133708.jsp

I have shown that punters using 50% share margin finance (SMF) would have lost 85% if they followed the clarion call of “sailang” Eversendai by the commentator below at RM1.37 when the share price dropped to 80 sen later.

[stockmanmy has left a new comment on your post "Margin Finance, Ever-Sendai: A real time case study kcchongnz":

sendai from 80 sen to 95 sen now...................
KC lousy timing, lousy business sense and lousy analysis.]

And if you follow him to “sailing” again at 90 sen then, would again lose another 43% at today’s price of 71 sen.

The Pros and cons of leverage

Many people do use leverage with the intention to enhance their return from investing in the stock market. For example, they can use RM100,000 of their own money and borrow RM100,000. The leverage ratio would be 2 to 1.

Table 1 in the Appendix shows the returns of your investment with different scenarios of total returns with a leverage ratio of 2 to 1. The interest rate is assumed to be 4.85%. The setup facility fee is assumed to be 1% and the two-way transaction cost of 0.8%.

Referring to Table 1, if one had bought Sendai at 65 sen one year ago before the various publicities appeared in public forums would have made 110% when the share price went up to its peak at RM1.37 half year later in June 2017. With 50% margin, he would have made 220%. Even if he had taken profit at 98 sen, or 50% above his cost of 65 sen, he would have made 96% return with the margin as shown in Column 1. How wonderful.

However, most punters are followers of the Greater Fool’s Theory and many would have bought the share at higher price, enticed by the numerous promotions in the public forums, only when the share price has gone up. Being human, they are greedy and wish to mimic the success of super investor of obtaining exaggerated return from Other People’s Money (OPM).

But what happens if you have followed the call to buy Sendai at its peak at RM1.37 and hold the shares until now?

Referring again to Table 1 in the Appendix, you would have lost 48.2% with the closing price of 71 sen now. But with 50% margin, your capital is totally wiped out and becomes zero.

What if some financial crisis happens and Sendai’s share price fell back to 40 sen like 10 years ago? Besides all your capital of RM100000 being wiped out, you still have to find about RM45000 to pay the bank.

The above examples are simplistic, as things like margin calls will come in, but it does show the peril or horror of using OPM. I know some have claimed that margin calls are great thing to happen to them.

You can’t blame anybody for you losses as usual. It is your own decision to buy and sell.

EverSendai is just one good example to illustrate the peril of using OPM. You can get killed too using leverage even in a seemingly good stock like Hengyuan recently. There are numerous other examples I can cite now, tens of them, even during this time when the overall market is nothing close to a financial crisis.

It’s great to borrow a cow and selling the milk, but not until the cow runs off. Now you’re stuck. You owe a cow and don’t have one to return, and no milk. The risk of leverage is investing that debt and losing what you borrowed, which can wipe out any profits, or even your entire capital.

I personally would never suggest to anyone to borrow and use margin to invest. I think it is a very irresponsible act.

Is the future knowable or unknowable? I feel I don’t know what the future holds and hence I will do differently; diversifying, not levering, staying high in the capital structure, and generally girding for a variety of possible outcomes.

Please be reminded that you will never get rich quick following my conservative approach in investing in the stock market. Do at your peril.

I would also like to reiterate that I have nothing against people making so much money using OPM. It is the prerogative of individuals. But I think one has to be more responsible when propagating it in the public forums to the naïve and uninformed, especially for those who are well respected in the society. It is none of my business too, but just like to kepo a bit.

““Borrowing money is a way of trying to get rich a little faster, but there are plenty of good ways to get rich slowly,” Buffett said. “And – you can – you can have a lot of fun while you’re getting rich as well. My partner, Charlie, says that there’s only three ways that a smart person can go broke. He says, ‘liquor, ladies, and leverage.” Warren Buffett

Getting rich quick using OPM only happen to a few percent of the players, mainly those syndicates, big time players and manipulators. The majority has to get-broke-fast to feed those few who get-rich quick. There is no such thing as everyone will get-rich-quick in this game. Make sure you are the earlier and not the later.

Happy investing.

ckc13invest@gmail.com

Appendix

Table 1: Returns with leverage

Discussions

8 people like this. Showing 50 of 102 comments

stockraider

I always argue with Kc on this margin thing loh...!!

If u r good in investment and find good stock with margin safety to buy, it is okay to use margin loh...!!
Just like if u r a good businessman & u have good project, it is ok to borrow mah...!!

Yes borrowing increase ur risk a little bit, but if u have a good project or stock and u have the right skill...u can offset this minor disadvantage of margin mah....!!

Those people who lose monies using margin in the long run, are basically not good investors loh....!!
Basically these people will lose monies, whether using margin or not using margin at all loh....!!

They lose bcos, their investment skill not good enough mah...not bcos using margin mah....!!

U need to be reasonable good in investment b4 u even consider margin loh....!!

ALWAYS REMEMBER TO USE MARGIN WHEN U R YOUNG AND NOT WHEN U R OLD LIKE, UNLIKE what KC SAYS LOH....!!
IF U USE MARGIN YOUNG...U LEARN THE ROBES OF TRADE EARLIER AND U have time to recover from any failure AND MAKE U A GOOD INVESTOR FASTER LOH....!!

CONCLUSION IF U LOSE MONIES DON BLAME IT ON MARGIN...JUST BLAME YOURSELF WHETHER U R GOOD ENOUGH LOH ??

LOOK AT YOURSELF & ASK WILL U STILL LOSE MONIES, IF U JUST USE CASH to invest LEH ??

2018-03-19 11:27

kcchongnz

Raider,

Good to discuss with you again in this issue.

I got your point but I don't think you got mine.

Let me ask you this questions,if a youngster follows the persistence peddling of somebody to buy Sendai at its peak at about RM1.40 6 months ago, with say RM100000.

1) How much he would have left now?
2) How much he would have left with 50% margin, say RM100k of your own money, and another RM100k in margin.

You know lah. This stock was heavily promoted as having billions of contracts and sure make multi-million profit one. Sure win, so sailang. Make more money use margin.

Please do a calculation and show us the answer.

2018-03-19 11:42

stockraider

Post removed.Why?

2018-03-19 12:03

kcchongnz

Raider, thanks for your response.

Let me ask you another question, a similar one.

If a young man was convinced the use of margin by someone on the "stock on the century" in Hengyuan, and he was convinced to sailang with his saying of RM100000, and with another RM100000 from the bank, at the peak of euphoria a few months ago when HY was trading between RM17 to RM19.

How much is the leftover now,

1) with his own money
2) with the margin?

I am sure you agree this was a sure make-big-one-stock a few months ago.

2018-03-19 12:15

Jon Choivo

stockraider,

I do use leverage, but not margin.

Mine consist of essentially 3-5 year loans from investors. With maximum personal leverage of 50%. Ensuring that i can pay them back without ever having to sell my stocks.

When you use margin, you allow others to dictate when you sell the stock and at what price. Not a good idea imho.

And if you look at 2008 crisis, even berkshire lose 50%. Anyone with a margin of just 1X (can go up to 3x). Die already, it they cannot meet the margin calls.

2018-03-19 12:18

Jon Choivo

Just because the expected value is positive. Does not mean you should buy it.

Russian roulette have a EV of 83%! but if you die one time, means gone.

Just avoid points of ruin. And Margin is one of them.

You can diversify all you want. But in crisis, correlation goes to 1. Everything drop for you to see. All the industries etc. At that time, only question is this.

Can you hold or top up? If cannot. Gone case.

2018-03-19 12:22

Ricky Yeo

There's no point talking to him. He is overconfident, doesn't understand complexity and nonlinearity and have no appreciation for the unknown. Those that normally gets killed in Black Swan.

2018-03-19 13:47

stockraider

KCHONG....U R BARKING ON THE WRONG TREE LOH....!!

NOTICE UR EXAMPLE IS THAT THE YOUNG MAN IS "CONVINCE BY THAT SOMEBODY" TO USE MARGIN TO BUY SHARE LOH....!! BUT IF I SUBSTITUTE THAT YOUNGMAN IS CONVINCE BY SOMEONE TO BUY SHARE USING " CASH"....THE END OUTCOME THAT YOUNG MAN WILL LOSE MONIES WHETHER HE BUY USING CASH OR MARGIN LOH..!!

YES I WILL AGREE THAT YOUNGMAN WILL LOSE MORE, IF HE USE MARGIN TO BUY LOH...!!
BUT THE KEY IS THAT YOUNG LOSE MONIES BCOS LACK OF FINANCIAL SAVVY & NOT BCOS OF USING CASH OR MARGIN TO BUY MAH...!!

AS I SAY U NEED TO TARGET FINANCIAL SAVVY & NOT BAD MOUTH MARGIN MAH..!!
MARGIN IS JUST A FINANCIAL TOOL LOH....!!

THE KEY IS THAT YOUNG GOT CON TOWARDS BUYING A STOCK LACK FUNDAMENTAL LOH....!!

SO DO NOT PAINT MARGIN SUCH A BAD LIGHT LOH....!!

2018-03-19 15:34

stockraider

Post removed.Why?

2018-03-19 15:54

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