kcchongnz blog
Jaks, the Best Lesson on Margin Finance: The Dark Side kcchongnz
“The bad news is nothing lasts forever,
The good news is nothing lasts forever.”
― J. Cole
The Bright Side
In my previous article on “Unimaginable Magic on Margin Finance on Jaks Resources” in the link below,
https://klse.i3investor.com/blogs/kcchongnz/233107.jsp
I have shown how Jesse has invested $1m of his own money and utilized share margin finance (SMF) to the maximum each time the share price rose up from $1 to $1.80, he would have a total of 3.07m shares of Jaks worth $5.52m in market value (MV) as shown in Scenario 4 in Table 1 in the Appendix. With a total borrowing of $2.61m, his total cost was $3.61m. The average cost of his share is $1.176 as shown below,
Own money = $1m
Borrowing = $2.61m
Total cost = $3.61m
No. of shares = 3.07m
Cost per share = 3.61/3.07 = $1.176
If Jesse sold all his shares when it rose up to $1.80, he would have made $1.91m as shown below, or a whopping 191% within a year!
Share price = $1.80
MV = 1.8* 3.07m = 5.52m
Total Profit = 5.52m – 3.61m = 1.91m
Percent profit = 1.91 / 1 = 191%
Ben, a friend of Jesse, who also invested $1m in Jaks initially at $1.00 at the same time as Jesse, made only 800k, or just 80%. Jesse often ridiculed him as stupid for not using SMF to make more profit.
What if Jesse has invested $50m initially, and uses SMF to the max instead?
He would have made a killing of about $100m, all within a year!
That was undoubtedly the “Unimaginable Magic” of margin finance!
However, if you were Jesse, one who knows Jaks’ power plant will provide hundreds of millions of profit during its 4-year construction period and subsequently hundreds of millions of profit/cash flows every year for 25 years after it is completed, and with a minimum target share price of $3, would you sell your shares at $1.80?
Obviously not. I won’t. Paul (the octopus) would borrow more and buy more shares in Jaks using the additional SMF facility due to the rise of its share price. And that was exactly what Jesse did.
At $1.80 during February 2018, Jesse utilized the additional buying facility available and borrowed another $307k and bought additional 171k shares. His shareholding increased to 3.24m, and his total borrowing increased to $2.92m as shown in Scenario 4 in Table 1 in the Appendix. Jesse’s average cost for the share has increased to $1.21 per share as shown below,
|
Investment |
1000000 |
|
Total borrowing |
2915668 |
|
Total cost |
3915668 |
|
No. of shares |
3239631 |
|
Cost per share |
1.21 |
Jesse was so happy and told the whole world how savvy he was in investing, and of course, the “Unimaginable Magic” of his SMF.
The Breather
“The magic fades too fast the scent of summer never lasts the nights turn hollow and vast but nothing remains...nothing lasts.”― Sanober Khan
Nothing lasts forever, including the rise of share price. After buying more shares in Jaks at $1.80 with the additional facility, there were some hiccups in Jaks’ local construction business. There was a huge delay in handling of a project to a client resulting the client calling the contract bond of $50m. Furthermore, there was a cash call by the company to subscribe for some warrants in order to fund its local and overseas operations.
The share price of Jaks took a breather and did not go up anymore as there was no more buying support. Instead, its share price started to drop. Within a short period of two months, the share price dropped to $1.40 in April 2018 as shown in Figure 1 below, or a decrease in value of 22%.
Figure 1: Share price movement of Jaks
The share price lingered around this level for more than a month and went up again above $1.50 in May 2018 as shown n Figure 1 above. Jesse’s remisier suggested to him to take profit at this level. If he had done so, Jesse would still have made about $940k, or 94% of his own investment if he had done so as shown below.
Market Price = 1.50
Average buying price = 1.21
Profit per share = 1.50 – 1.21 = 0.29
No of shares = 3.24m
Profit = 3.24 * 0.29 = 940k
This 94% return of Jesse was still much higher than that of Ben of just 50%.
However, who wants to sell at $1.50 to make just 940k if he thinks that the power plant is so great, and the target price of Jaks is at least $3.00 to make $6m, or even a lot more if the share price continue to go up and SMF increases and use it to the max?
The Dark Side
There is this saying that “Man Proposes but God Disposes”, or in Chinese, 人算不如天算.
From then on, the local construction business of Jaks continued to face difficulties in completion and the project was further delayed. Coupled with the unexpected election outcome in GE14, and the continuous US-China trade war etc., Jaks share price dropped sharply to $1.20, or 20%, in just two months in July 2018.
By then, the MV of the shares fell to $3.89m as shown in Scenario 6, Table 1. At this MV, the equity of Jesse in Jaks was $972k with a debt of $2.8m. This means its equity is only 25% of the value of shares. A margin call kicked in.
Jesse had been maxing his SMF account and he had no more ability to top up when his investment bankers called him to do so. Jesse’s investment banker started to sell his shares, starting from $1.15, and all the way down to 90 cents.
If Jesse sit quietly, did nothing, and let his remisier continued to sell all his shares to about 90 cents, and assuming average selling price of $1.00, he would had lost a total of $676k, or 68% of his initial capital, as shown below,
No. of shares = 3.07m
Av. Price of selling = $1.00
Av. Buying price = $1.21
Loss per share = 1.21 – 1.00 = 0.21
Total loss = 3.24 * 0.21 = 676k
Instead, after encountering the first round of margin call and sell-out, he was unsatisfied, and he put in more money to buy more shares in jaks at 90 cents, with the hope of recouping some of his losses. Jaks share price in fact had gone up again to $1.10 as shown in Figure 1. But unfortunately, that was it and jaks share price started to drop again and continued to drop to the lowest of just 40 cents three months later as shown in Figure 1 above. There was another round of unabated margin call. Jesse’s shares in Jaks were all sold off by the investment bank.
With this round of margin calls, Jesse had lost what he had gained when the share price rose from $1.00 to $1.80. In fact, it was estimated that all his initial investment of his own money of $1.0m was completely wiped out, or even had to pay additional money to the investment due to the heavy SMF.
For example, if the average selling price of the margin call is 80 cents,
MV = $0.80 * 3.24m = 2.592m
Total loan = $2.92m
Shortfall = 2.920 - 2.592 = 0.328, or 328k
Jesse has to find an additional of 328k to pay bank, on top of the $1.om loss of initial capital.
That was the Dark Side of SMF.
When the share price dropped to its lowest of 40 cents at the end of year 2018, Ben’s paper loss in Jaks was also bad at $600k, or 60%. However, Ben reassessed the viability of investing in Jaks, and opined that the fundamentals of Jaks has in fact improved with the pending completion of the power plant, he held on to his investments. In fact, Ben paid an additional $125k to subscribe his entitlement of 500k of warrants at 25 cents each.
The Recovery
Three years have passed. Nothing worst had happened to Jaks. Instead, its power plant is getting closer to completion. Jaks”s share price has since recovered to close at $1.06 ten months later on 5th November 2019. The value of Ben’s shares in Jaks shares has increased by $60k from his initial investment of $1.0m. Together with the gain in the warrants he had subscribed, and at the price of 85.5 cents on 9th October 2019, his total paper gain now is 333k, or 30% as below.
Gain in mother shares = $60000
Number of warrants subscribed = 500k
Subscription price = 25 cents
Gain in warrant per share = 0 .855 – 0.250 = 0.605
Gain in warrants = 0.605 * 500k = 303k
Total gain = 60 + 303 = 363k.
Total cost = 1000k + 125k = 1125k
Profit = 363/1125 = 32%
That was not bad at all for a gain of 32% in a three-year period, considering the poor market sentiment in the last three years.
The big contrast
Jesse and Ben both invested $1m in Jaks three years ago as both believe in the prospect of Jaks’ power plant in Vietnam, and the cash flows it will bring in during the operation of the plant for the next 25 years. Jesse hoped to make big money using other people’s money, and Ben prefers to invest safely with his own money.
Jesse was laughing to the bank in the first year when his continuous use of SMF made him a lot of money, on paper, but lost it all, including his own initial capital of $1m, and even more in the second year. He could only stare at the price of Jaks when it slowly recovers to $1.06 a year later, as he had lost it all, and left with nothing.
Ben only invest with his own money which he could afford to lose and rode on the up and down of the share price of Jaks. He had a combined market value of $1.49k now in Jaks and its warrants, or a paper gain of $363k, or 32% three years later. He still holds on to his share in Jaks and its warrants as the power plant in Vietnam will soon generate high cash flows, he thinks.
The same investment with the same amount of money from own pocket by two persons, but completely opposite outcomes three years later.
As an aspiring investor who wishes to build long-term wealth safely, whom do you want to follow?
This article should provide you with some guidance. I have also written an eBook on personal finance and investing. It may be a good guide for you to make the right investment decision. If you are interested, please email me at,
This eBook is given out for free.
KC
Disclaimer: I am not touting anyone to buy Jaks and I personally have no position of it now.
Appendix
Table 1
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|---|
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Discussions
2 people like this. Showing 50 of 76 comments
If u act like a pondan, u may better off just use cash & buy without use of margin loh....!!
Margin is for u to whacked big when they is big profit opportunity loh..!!
Just like my armada, i could not afford to buy much, if i do not use margin loh....!!
Posted by Icon8888 > Nov 7, 2019 9:39 AM | Report Abuse
I have been using margin for more than 30 years
never once margin call
survive so many black swans white swans grey swans red swans yellow swans, absolutely no problem
it boils down to how you manage it
margin is actually good stuff, very good stuff
those that don't use it don't know what they are missing
Posted by Choivo Capital > Nov 7, 2019 9:41 AM | Report Abuse
Keep margin below 30% of capital/equity, and think about your risk properly in terms of sizing, and you should do fine.
Quite a good tool in that case.
Just not a fan of the higher brokerage fees.
2019-11-07 10:01
margin is not supposed to be used for holding Dutch Lady for 10 years
it is costly
with interest rate of closed to 8%, it eats into your capital gain
(KYY always told people margin interest is only 4% or 5%... that is BS (as it is only partially true). If you use margin to buy Blue Chips, you tend to get low interest rates as per KYY. But if you buy any other stocks, expect closed to 8% rate)
it is not meant for nurturing your investment over long period of time
it is best use for quick money, especially for low risk sure return scenario that is almost arbitrage quality
one good example is CIMB recently I bought at 4.95 using margin
it has since gone up to 5.33
a gain of 8% over few weeks.
without margin, you can only look at it with mouth wide open when an opportunity like this presents itself
2019-11-07 10:04
margin also helped me a lot when I punted Airasia back in 2016 / 2017
when Tony announced he was subscribing for 10% by pumping in RM1 bil (or RM2 bil ? I can't remember), I margin to buy more
like they say, the rest is history
(Ricky, no need to tell me Katrina Hurricane story. I am a pragmatist)
2019-11-07 10:10
This perception is totally wrong loh....if 99% investors lose monies loh......!!
The correct figure is about 55% of the investors lose monies but the ratio is much higher for newbies & uninformed upto 75% loh...!!
WHY leh ?? Bcos they are actually gambling instead of investing loh..!!
Posted by 1Bid > Nov 7, 2019 9:59 AM | Report Abuse
Because you're one of the very few exceptional investors in i3.
KC is right. 99% of stock market players lose money. Margin should be avoided. If you can make money you can make money. Cash account should be alright.
Btw, TSM is a good call. Thanks for sharing.
2019-11-07 10:11
don't be afraid of margin
I some time geared up to the max of my credit limit
that is risky territory
but I won't stay there for extended period of time
most of the time, within the subsequent few weeks or months, some of my stocks will go up, and I sold to take profit
and my margin automatically drops to very very safe level
no sleep lost
2019-11-07 10:14
recently I saw a lot of newbies appeared in i3 (they seemed to come out of no where, strange)
I look at the way they punt, I shake my head
people like that no need margin also will die kow kow
if they use margin, they die even faster
but they are not the majority
the rest of the people in i3 are quite high quality
they are the type that can use margin....
..... very comfortably
Posted by stockraider > Nov 7, 2019 10:11 AM | Report Abuse
This perception is totally wrong loh....if 99% investors lose monies loh......!!
The correct figure is about 55% of the investors lose monies but the ratio is much higher for newbies & uninformed upto 75% loh...!!
WHY leh ?? Bcos they are actually gambling instead of investing loh..!!
2019-11-07 10:18
You also know 75%. 7 of 10 people lose money in stock market no matter what methods they use. KC is teaching new generation how to survive in stock market. You just proved that he is absolutely correct regarding this MARGIN.
2019-11-07 10:18
Pragmatist or not, there is a fine line between experience helping and deceiving you. If that is valuable for a non-margin person, then it is live or death for a margin person.
2019-11-07 10:19
Ricky too academic
every of his sentence I need to read at least twice in order to understand
most of the time I never understand
2019-11-07 10:22
U need to understand & differentiate between investing & financing loh.......!!
1. U need to get your investing technique right, that i suggest u can learn from KC loh.....!!
2.If u has master the investment technique successful, the next thing u can consider whether u should use margin loh...!! Using margin is neutral & not an evil thing...it just like any businessman who is contemplating expanding their business using bank loan loh...!!
If u r young, based my experience, u better jump right in earlier to use margin, do not wait until u r 40 to 55 years old, b4 u use margin, if u make a mistake at this age, it may be disasterous and take along time for u to recover loh...!!
Just can start small while u r young, it is ok to master the art of margin given time loh....!!
2019-11-07 10:38
No matter what kind of black swans , if you stick to proper margin principle (mine is one), you will be safe
First of all, This has been proven empirically over past 30 years I used it
Secondly, logic dictates that I will be safe - I will only get forced selling if black swan is so big until my entire portfolio plunged 30% or more in a day. If that happens, that means the market has been hit by something catastrophic. Under that kind of scenario, a seasoned investor will be able to benefit immensely from the following up bargain hunting (maybe over next six months, one year or two years). I always say that don’t be afraid of net worth shrinkage when market plunge , you should only be afraid of net worth shrinkage during normal market (meaning you made terribly wrong investment decisions) , because there is no bearish sentiment for you to capitalise on to recover
2019-11-07 10:38
Posted by stockraider > Nov 7, 2019 10:38 AM | Report Abuse
If u r young, based my experience, u better jump right in earlier to use margin, do not wait until u r 40 to 55 years old, b4 u use margin, if u make a mistake at this age, it may be disasterous and take along time for u to recover loh...!!
Totally understand this part. I believe we have gone through this stage. I once lost everything. It was only few thousands back in the days. But I have learnt the crucial mentality and knowledge to not to repeat the same mistake today.
2019-11-07 10:45
Yes, if you are young, and you know how to punt properly, you should do as raider said “jump into margin”
When I was young, I have no capital. I only have a job. So I cash advance using my credit card, and then use the cash to buy shares, and then use the shares to margin
That is what I did to kick start my investment portfolio
Was I being reckless ? Of course not. I knew I have a stable job that generates recurrent free cash flow at month end. So I know I can service the credit card interest rate and principal repayment
Anyway, the credit card debt didn’t last very long time. By end of year I also got bonus from boss, and it went into repayment
To sum it all up, don’t be afraid of debts, manage your cash flow properly and debt can be a productive instrument
(Btw, The above is only useful for gearing up to skilfully invest. If you withdraw credit card cash advance to buy TV buy holidays, you are not acting wise)
2019-11-07 10:51
All the sifus are here, I learnt a lot from all the experience & knowledge shared here.
Thank you so much.
2019-11-07 10:52
usually margin facility has two critical levels to watch out for
if your portfolio shrinks by lets say 20%, it will trigger "no more buying"
then you know your portfolio is heading in wrong direction, and you need to start paying attention, or even start trimming exposure
if portfolio drops further to lets say shrinks by 30%, it will trigger margin call, that is when you really need to trim to avoid force selling
from No Buy level to Force Selling level will usually take days or weeks, so you will have ample time to think and react
it is not as scary as what you think
2019-11-07 11:37
Margin of financing is like borrowing money for business, ie gearing. No one will dispute whether business should or should not borrow.
The key questions are whether:
1) the business is profitable (your share selection)
2) how you manage the cashflow/ margin
3) whether are you over gear (margin again)
2019-11-07 12:26
If you are really scare of getting margin call, you may wait until your origin portfolio is profiting. Let said your existing portfolio raise 30%, you buy extra using margin base on this 30%. By protecting your capital in many ways, managing your portfolio well, cutting loss on shares that bought using margin can minimize your fear on getting margin call. People I have seen struggling with using margin usually lost money in share investing without using leverage too. Over optimistic sailang and go beyond own financial capability is the real problem kc had illustrated, leverage itself is never the problem don’t you agree?
2019-11-07 12:50
Icon, i think you're overpaying for your margin.
Mine is only 4.8% interest.
2019-11-07 13:32
Having said that, there are three ways for a smart guy to screw up his life.
1) Ladies
2) Leverage
3) Liquor
I keep margin mainly for the optionality, and keep it way below 30% of portfolio most of the time. Its currently like 3-4% only. Its only for me to leverage up in downturns or interesting opportunities, with salary going in next month to pay it off.
2019-11-07 13:39
same, you need to get the Maybank one, not the Maybank IB one.
but can't buy structured warrants lah
2019-11-07 13:49
provided you don't get into margin call and need extra money to put in loh....
2019-11-07 13:53
This Choivo...smh...wonder how is his portfolio doing while at here lecturing other ppl...so as this Ricky Mudafucker...go and become University professor
2019-11-07 16:37
both choivo and ricky full of warrren buffet shit, but cant perform...crazy
2019-11-07 16:58
ricky say tguan how la how la...ended up tguan moved today....choivo say mbmr hw la hw la i can find 10 co selling cheaper than mbmr la blablabla...yet mbmr share price been sustaines at above RM4 for so long....if you guys really wanna show off hw knowledgable u are...go to the uni and become lecturer.
2019-11-07 17:00
so as this kc....the more he use jaks as scenario the more i feel like puking....jaks already come bck frm 0.40 last time keep talk bull shit cashflow this that....nw that it bck to 1.1 he come out advice ppl this that...once i see...ah diu jaks again....yau hai this kcchong....wahlan.....instant turn off my cpu...u knw why? i duwan sit my electric bill on this bull shit
2019-11-07 17:03
haha. good discussion around here as all sifu gather here. good discussion.
Well, my advise still use margin wisely. its not that bad, else in offshore mkt nowadays, ppl wont be launching margin x2, x3 kinda unit trust funds.
You know how unit trusts evolved nowadays? there was unit trust use x2,x3 leverage to get extra income. as overall unit trust price is stable by investing in broad market overall, they add in margin to make it looks attractive, with traditional unit trust stable, its kinda a good strategy to look at investment. And I think it could be a trend for future.
2019-11-07 17:03
the margin charges actually depends on your size, and perhaps how u negotiate with respective bankers etc. sometimes i think the head or SVP could have some privilege to give certain clients cheaper rates.
and for dutch lady kind of cases, if you have enough power to hold( use lower margin), actually in longrun you are still a great winner.
2019-11-07 17:06
next yr GOLD would be a good thing to look at. and IM using some MARGIN x30.....though small, still if Gold hit 2000, my return would be near 1000%. is the risk worth taking, i think so. Thts how you use margin
2019-11-07 17:09
Some pro traders in HK use margin x50, YTD they earned 2 Ferraris....is ferrari a risk you can take? Stop loss is always the disciplines to have for traders and investors.
2019-11-07 17:10
make my day -> ricky say tguan how la how la...ended up tguan moved today
Please prepare me a report of 'how tguan move everyday' thank you
2019-11-07 18:06
ha...ha...ha...
ve...ry...funny...
reminds me bck in the days those nerds that study day and night...
2019-11-07 18:48
Share margin financing is very cheap. Pledged FD can get interest income around 3.8%p.a. Brokerage charge interest 4.5%p.a Simple net effect is 0.7%p.a chargeable upon drawdown only. Effective interest will abit higher because of the leverage mechanism. Find 1Malaysia also cannot find cheap financing 0.7%p.a. I am using Maybank. Brokerage commission is abit higher la...at least rm30 or so. But its ok la. Profit 1 time 4-5 digit. Let brokerage earn abit lah. We must be thankful to them for providing such facilities.
2019-11-07 21:35
Posted by Connie555 > Nov 7, 2019 5:03 PM | Report Abuse
so as this kc....the more he use jaks as scenario the more i feel like puking....jaks already come bck frm 0.40 last time keep talk bull shit cashflow this that....nw that it bck to 1.1 he come out advice ppl this that...once i see...ah diu jaks again....yau hai this kcchong....wahlan.....instant turn off my cpu...u knw why? i duwan sit my electric bill on this bull shit
After reading other article boasting and propagating margin finance, I wrote this article to provide an opposite view, in fact on both advantages and disadvantages of SMF for readers who are interested to read and perhaps learn something.
Seriously I did not expect anyone to become vulgar and started to personally attack others. I wish the society here is more civilized than that. Most of us were educated to be as such. Anyway, can't expect everyone to be the same.
But serious, if you start to puke seeing my name in the article, just get away from it and don't read. Don't have to get upset. Life is short.
2019-11-07 21:50
RE: kcchongnz
Think about the 10 or more persons who are giving positive feedback on your article and forget that 1 person who is criticizing you. :)
2019-11-07 22:16
Posted by ChoCho > Nov 7, 2019 10:16 PM | Report Abuse
RE: kcchongnz
Think about the 10 or more persons who are giving positive feedback on your article and forget that 1 person who is criticizing you. :)
You are one of the 10. Thank you.
It is ok for me to receive negative feedback, or opposing views, or criticisms. There are indeed more opposing views than those agreeing with me in this issue of SNF. I have no problem that, as everybody is different.
But some comments involving personal attack, and it is always involve the same people is way overboard.
I guess can't expect there is no weird people around. That is ok with me too.
2019-11-08 00:21
I am often very perplexed by this statement and always want to make a fair comment,
"Our famous chartist and fund manager also sold all his and his clients’ shares at about Rm 1.50 so that he can buy back at cheaper prices. In fact, he has circulated his sell recommendation to all his clients because he believes the right issues will dampen the price. Obviously, he is also wrong. Unfortunately, many shareholders have been misled and they sold their holdings too early."
Why you have to do that in all your articles on Dayang? Why you always hit on this "famous chartist and fund manager" every time you write Dayang?
You know "Our famous chartist and fund manager" sold all his Dayang 3 months ago at RM1.50 and circulated the same sell recommendation, bought and replaced a buy recommendation on Jaks which was at about 75 sen then.
Dayang's share price has been lingering at about RM1.90 and only the last few minutes today rose by 7 sen, of for a gain of 40 sen, or about 26%, whereas Jaks has risen to RM1.11 today, for a gain of 36 sen during the same period, or about 52%, double the gain of Dayang.
What is wrong with selling Dayang and bought Jaks?
Who made better gain?
Why do you have to keep on repeating your criticisms?
2019-11-08 00:48
its a good discussion here. NO right or wrong. still, use margin wisely.
2019-11-08 10:03
For margin financing, you can also pledged your asset play/ long term shares as collateral for additional financing, eg MAA or Kbunai, for your other short term high profit growth stocks.
You don’t need to dispose your current shares. Margin financing now is in a way ‘monetise’ your asset that you intend to hold long term.
2019-11-08 11:48
you must be good in selecting stock to use SFM, check my tread I have been holding uptrending Naim(70 cents) MBMR (2.80), UWC 1.95, MI(1.95),ROHAS(0.58),lately all during the last 3 month (only one stock then jump to the next one)
SFM increase profit... its all about probability sometimes you lose but not much but the gain are much higher with higher probability.
2019-11-08 22:13
Good simple explanation. Summary is if you find that you behave like Jesse, better start learning from Ben.
i would love to listen to Icon8888 method of balancing his portfolio.
2019-11-11 19:21
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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....
Ricky Yeo
@Icon8888 there is alot of nuance in your "depends how you manage it" which most likely ruled out 99% of people from using margin.
Remember, those that refused to evacuate before Hurricane Katrina hits New Orleans are those that have survived all the previous hurricanes, and their experience betrays them.
Not saying something bad will happen to your way of using margin, but what is important is not 'I have survived so many black swans before using margin", rather it is "will I survive the next black swan?". Remember you only need to get it once. It is like playing Russian roulette. Will you play it once to make $10 million? Sure but you're still dumb. But no one would play it 6 times in a row, because that is just beyond dumb.
And then there is the problem of "I have survived so many black swans before using margin". If Titanic never sank, you'll be pretty sure human will continue to build bigger and bigger ships until one eventually sinks (to learn the lesson). Similarly, if one never ever get caught in irreversible losses for using margin, that person is going to keep increase his leverage (risk) until he hits one. So be careful with that.
2019-11-07 10:01