“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,
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,
No. of shares
Cost per share
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 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.
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.
Disclaimer: I am not touting anyone to buy Jaks and I personally have no position of it now.