This is the third article of the three articles I have written within a week using Sendai as an example to show how to avoid losing big in the stock market. There are indeed many good lessons to be learned from this stock Sendai. The first two articles in the link below are to demonstrate to readers that in investing in the stock market, it pays very well indeed to be a Doubting Thomas, and not blindly following any simplistic rule.
The evidences provided in the above articles using Sendai have shown that it is at your own peril if you ignore them. I can tell you Sendai is not an isolated example. There were numerous. This third article, to me, is the most important lesson from Sendai; that is the use of margin finance in stock investment.
Frankly, I have nothing against anyone who uses margin finance and makes tons of money in the stock market. Congratulation for those who have done it. It is a democratic and capitalist country here and everyone is entitled to be rich. But please, please do not encourage the general public to do so. Here are all the reasons why. James, although he has lost a lot of money using GRIS on Sendai, he was grateful to have read a couple of articles written by KC Chong on the pitfalls of using margin finance, and luckily, he took note of he did not do it, even after so many shouts of sailing and margin then .
The Pros and cons of leverage
Many people do use leverage, or margin finance 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.
Figure 1 below and 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%.
Figure 1: Share price movement of Sendai
Referring to Table 1 and Figure 1, if one had bought Sendai at 65 sen sometime at end of year 2016 before the various articles appeared in public forums would have madeRM100000, or 100% when the share price went up near its peak at RM1.3 half year later in June 2017. With 50% margin, he would have made an amplified return of 192% as shown in Column 1. Even if he had taken profit at 97.5 sen, or 50% above his cost of 65 sen, he would have made 93% return with the margin as shown in Column 2. How wonderful, the beauty of margin finance.
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 manipulators have bought in and the share price has gone way up. Being human, they are greedy and wish to obtain exaggerated return from Other People’s Money (OPM).
But what happens if you have followed the calls and bouught Sendai near its peak at RM1.30 in June 2017 and the share price drop 30% to 91 sen in September 2017 as shown in Figure 1 above?
Without the margin finance, you would have lost RM30000, or 30% as shown in Scenario 6 in Table 1 in the Appendix. With the margin finance of 50%, you would have lost a whopping RM67000, or 67%. By then, the equity of your investment will be left with only 33%, and you would likely have encountered the dreaded margin calls, and the investment banks would sell you shares relentlessly if you are unable to top up your margin account. That was what happened to the stock price of Sendai which continued to drop sharply to 80 sen as shown in Figure 1 above. With the forced selling of all shares under the margin account, investors lost the opportunity to recoup some of their losses when the share price went up to a high of RM1.08 at the end of June 2018.
But forced selling of Sendai then was still not that bad, compared to if you still cling on the simplistic GRIS and bought in more shares to average down your average buying price.
Sendai’s share price plummeted from RM1.08 to close at 37.5 sen 15 months later on 4th October 2019, for a loss of whopping 65%! And that is without using any margin finance.
EverSendai is just one good example to illustrate the peril of using OPM. You can get killed too using leverage even in many stocks in the last two years. There are numerous other examples I can cite now, tens of them, some are even seemingly good shares, and even during this time when the overall market is nothing close to a financial crisis.
“The most dramatic way we protect ourselves is we don’t use leverage. We believe almost anything can happen in financial markets… [so] even smart people can get clobbered with leverage. It’s the one thing that can prevent you from playing out your hand.” Warren Buffett
Haven’t we seen the above in the last couple of years?
Leverage can magnify your gains in the stock market, but do not forget the other part of the story. Some people do make a lot of money using SMF, but many more, especially the newbies, without proper investment knowledge, and the inexperienced, and even some who claimed they are super investors, had lost hugely in the stock market too.
There is a dark side of using SMF. Using an over simplistic rule of GRIS combined with leverage can become a dynamiteand can blow you to pieces when it explodes.
James has learned a valuable lesson. There will be more good lessons to be learned in investing from Sendai, plenty.
I declare again that I have nothing against anyone using SMF, nor the company Eversendai. My interest is to write and educate as a way to contribute to the society and hope to make a difference to the investing community.
You are welcomed to provide your criticisms based on the subject matter, always.
Incidentally, I have written an eBook in personal finance and investment. Anyone interested in it can email me at
It is free.
Table 1: Returns with leverage