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Sunday, 7 June 2020

(Tradeview 2020) Kudos Retailers, You Have Officially Outdone Fund Managers, So What’s Next?

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Dear Tradeview, 

Should I continue to hold my stocks, esp my glove counters which has gone up 250%? I am v happy with my paper profit now. I never made so much money from the mkt. My colleagues told me this is bull mkt and KLCI will go higher, don’t be stupid to sell, esp glove stocks. Glove is Gold, apparently. It’s a dilemma for me. I do not know what to do anymore. Please advise me if you have time. TQVM


Confused but happy investor.

I receive this email recently and this is amongst the many questions that have came through. Most emails would be asking me to comment on this stock, whether can enter or whether to sell. I thought this is an interesting topic, hence would like to share my humble view. As always, lets look at the facts & figures. Data don’t lie. 

As of May 2020 : Total Trade Volume 119 billion & Total Value RM 69 billion

The above is self explanatory. In summary, retailers are the :

1. largest market participant by volume - 45.33% (equivalent to 53.7 billion units)
2. largest by value - 32.44% (equivalent to RM 22.22 billion)
3. largest net buyers by volume - +3.1 billion units
4. Second largest net by buyers by value - + RM 1.1 billion

Foreigners are net sellers, smallest market participants by value and volume. Local institution still plays the supporting role. This leads to only 1 conclusion : Retailers are the one who is actively investing as net buyers, pushing up the index up along the way, outpacing both foreign and local institutional funds. 

If you look at the chart above, the KLCI appear to have rebounded close to 29% from the low of 1210 in March to 1556 as of last Friday (4th June). This V shape rebound has caught most seasoned investors and professional fund managers by surprise as it truly a divergent from the realities of economy and situation on the ground. I would be the first to admit publicly I did not have much faith in the market rebounding so viciously in such a short timespan. There are many reasons for this rally in hindsight which I have covered previously, so I wont elaborate further. For those who missed it, you can read it here.

Whilst I caught the bottom of the market successfully in March advocating publicly to deploy cash and enter stocks,  I did not hold much conviction towards this V- shape rebound. I remained invested along the way but sold on strength upwards. Last week, I also informed the public I am holding 62% cash in anticipation for a reversal. The fact is, Bursa KLCI chart shows it has broken the 200 days SMA which is a key indicator. Even if I refused to be convinced, stubbornly holding on to my view, there is no doubt, retailers have outdo fund managers and professional investors with their unbelievable push upwards. 

This as an interesting title of the article I read over the weekend. A clear oxymoron. Tiny investors / retail investors who were deemed irrational and dumb for chasing this rally turned out to be smarter than professionals. I must take my hats off to all retail investors. Now that all congratulatory and pleasantries have been said, what should retail investors do next? 

I hope “dumb money” which did right can remain “smart” and outdo professionals. Hence, a few suggestions for all as below :

1. When you are unsure what to do, sell 50% and hold 50%

It is extremely hard for investors to take profit only to see the share price keep going up further. Sometimes, the irony of playing safe is losing greater upside. So I suggest one can sell 50% of profit making stock, hold the balance and let it ride. 

Ex : Currently Supermax is RM 8.88, assuming your entry price is RM 3 @ 2000 shares, your profit is up 196% (RM 17,760 -  Cost RM 6,000 = Profit RM 11,760) . So if you sell 50% of your holdings (RM 8,880), you actually preserve your initial capital (RM 6,000 + Profit of RM 2,880 which is 48% return). Balance 50% holdings which you ride is RM 8,800. Assuming the worst case Supermax disappoints, you still have your capital + 48% profit in your pocket already. Your downside is 48% return and upside is boundless.

2. Sell all and move the funds back to FD at 2.5% or other shares with high consistent dividend yield 

Taking your chips off the table entirely is another extremely difficult thing to do. It’s interesting how when someone is losing money in a casino, they can go all in (showhand) to the last chip but when they are in the money, they refuse to cash in all their winnings. Fundamentally, this is greed and human nature. Hence what I am proposing now is something I know very few would do.

Ex 1: Currently, Topglove is RM 16.38. Assuming you entered Topglove at RM 7 @ 2000 shares, if you sell all now, you would be making a return of 134% (RM 32,760 - RM 14,000 = Profit RM 18,760). Assuming you sell all and put it back in FD at 2.5% FD rate, your wealth after 12 months would be RM33,579. (Profit further grow to RM 19,579)

Ex 2: After selling Topglove, move the funds to steady consistent dividend yields shares which haven’t moved much like Astro (7% yield), Wellcall (5-6%) or REITs (5-6% average)

3. Sell all and switch to another asset class such as Bonds giving yields of 4%, Gold or property with rental income

Similar to point 2, you are now moving you funds to another asset class away from equities that will give a steady yield of 4% or a property for the long term that may give potential returns on capital gain & rental yield. Switching asset class takes the risk of equities entirely whilst keeping your profit in the pocket. The money is also being used for another form of return with a lower risk profile.

4. Take profit in fixed tranches 

This means you set a target for each range where you take your profit and reduce position at phases.

Ex : You entered Hartalega at RM 8 @ 2000 shares, so you sell tranches each time the share price goes up RM 1. Hartalega is now RM 11.78. You can look to sell 500 share each time the share moves up RM1, so for instance you sell 500 shares at RM9 (RM4,500), RM10 (RM 5,000), RM11 (RM 5,500) and RM12 (Rm 6,000). In effect your position is protected gradually whilst your return also maintained rate. Your total profit is RM5,000 (31% return) which is still commendable and less risky compared to holding all the way to  RM 12 to earn RM 8,000 profit which is an additional RM 3,000 (additional 20% return)  

5. Ride all the way but set trailing stop 

This method is used by traders who are good reader of technical charts but some fundamental investors also uses this. Trailing stop means setting your exit point should the share price retrace after going up a certain level. This will allow you to ride in full whilst setting a base price point to exit. The only thing about this method is you will sometimes still get caught in situations where the share price plunges and rebounds immediately within a short time frame due to an extraordinary event. For instance, the recent margin tightening by Maybank and RHB spooked the entire glove sector investors. 

Ex : Comfort plunge from RM 4 to a low RM2.60 before rebounding back up to RM 3.90 within 2 full trading sessions as a result of the news. Those who set trailing stop will be able to protect their position say if they set at RM3.00 but whether they have the nerve to get in again at a lower price foreseeing an overreaction is another story. After all, that is dependent on how confident an investor is on the particular stock.

6. Ride all the way to your Target price / fair value based on your FA calculation of intrinsic value

I adopt this method the most as I am rather confident in my ability to assess the value of a stock. You must be very familiar with the company / share that you invest in order to use this method effectively. In effect, you must be so confident in this stock such that other occasional noises or criticisms cannot throw you off balance or shake your conviction. This is extremely hard as everyone views share price or value of a company differently. Hence, the study of stocks is not an exact science but rather an art.

Ex : When I first call Riverstone Holdings Ltd back in 2019, the share price was around 87 sens. It started moving at one point to $1.28 high only to fall all the way down to 68 sens during the March 2020 plunge. For the time I was holding the stock, there were many contradictory views telling me that Riverstone is too small, no publicity, lack of analyst coverage, lockdown will affect semiconductor industry resulting in plunge of demand for clean room gloves etc. However, I blocked out the noise due to my strong conviction and thorough understanding of the management, company, balance sheet and manufacturing facilities. I further added more shares during the March sell down. My last entry price of Riverstone was 70 sens. Today, Riverstone share price hit a high of $2.47 and it is currently still one the most value buy in the glove sector being a laggard to Malaysian peers listed on KLCI. The only caveat, you must have long term view and willingness to hold the shares over a long duration of time.

Our Advice To Readers :

This is my sincere advice and suggestion. It is not binding and definitely not obligatory.  Everyone is different, with their own investment goals, values and risk appetite. I hope our sharing can help those who are like my reader who emailed us above. We wish everyone the best, and I definitely am rooting for the retail investors to take money off the table. With the profits, hopefully all can cope better with the aftermath of Covid-19 and ongoing economic recession. 

Life is made up of a series of choices, and the outcome depends entirely on our choices. 


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