Often in the internet space, we have read about some general classifications of equity investors;

1. The “low-class investor” who did not buy a certain stock which its stock price has gone up, and more stupid because they did not buy when its share price continued to climb up.
2. The average investors who have bought the shares at low price but have sold off to take profit when the share price has doubled, say.
3. The “super investor” who “continued to buy using margin finance. As the price goes higher, they can borrow more to buy”.

When this type of article appeared in the public forum, especially the classification was made by well-known and respectable person in the society, again and again, what would the general public think, and what would be their choice?

The answer, of course is very clear. Who wants to be a “low-class” investor, or just an “average investor”? Everyone will want to be a “super investor”, won’t you?

Given the choices above, I would prefer to be an “average investor”. If I cannot be an “average investor”, I would take the “low-class investor” in precedence of the “super investor”.

Why do I take this stand? The answer is risk. When a share is being hyped up and touted relentlessly, and its share price gone up too fast too soon, without very strong justifications, it becomes risky.

“Wonderful companies become risky when people overpay for them.” Peter Lynch

Let us use the share price movement of Hengyuan as an example.

Case Study: Hengyuan

Hengyuan is without doubt, the hottest stock in i3investor now. There are numerous articles written on it and published in i3investors, and a thread with the most comments. Some articles and comments are brilliant and filled with facts and detailed analysis, which investors should pay more attention to, but most are just pure hypes and touting of stock with little substance. Below is a typical one,

[Posted by John Lu 《 HIBISCUS 》 TP RM2 > Dec 29, 2017 06:42 AM | Report Abuse

Hengyuan haha...counting money everyday]

Figure 1 below shows the price movement of Hengyuan in the last few months. Its share price has gone up from about RM3.00 a year ago to more than RM19 three weeks ago. That was when the above comment was made. The share price stayed around RM17, before plunging below RM12 just a couple of days ago, and rising to close at RM14.30 yesterday on 19^th January 2018.

Figure 1:

What an exciting ride! Some people do enjoy this type of thrill. Some got “frightened the shit out of” them.

An ordinary investor, or even a super investor would not have discovered Hengyuan a year ago when it was trading at RM3.00 as there was no positive results to show yet. Some might have discovered and started to invest say three months ago when it was trading at about RM8.00 and reported a good set of quarterly results. But does he who did not buy Hengyuan deserve to be classified as “low-class investor”?

I don’t think so. There are close to a thousand companies listed in Bursa. One really doesn’t need to know every stock in the stock exchange, and he just can’t spot every gem. There are also some other stocks which have gone up reasonably during the same period, and investors would have obtained reasonable return. Some shares might have gone up even more than Hengyuan during the same period.

For those “average investor” who have bought Hengyuan and sold off at about RM17 should be very happy to be an “average investor” too by making such a great return in such a short time. Why not? I would.

What about the “super investors” as categorised above?

Margin financing (for super investors)

There were indeed many new “super investors’ about a month ago when Hengyuan’s share price continues to rise to about RM14. They started buying at around that price, and “continued to buy using margin finance. As the price goes higher, they can borrow more to buy”.

Looking at the share price movement of Hengyuan recently as shown in Figure 1 above, the average price of buying may be around RM17.00. The volume of trading spiked, with the above “good” advice of using other people’s money (OPM). This was also evidenced from the sources in the market that there was huge increase in margin financing for Hengyuan during that period.

About three weeks ago, the share price of Hengyuan started to fall from RM17.00 and plunged to less than RM12.00 a couple of days ago, with heavy volume. Those who bought Hengyuan during the peak of RM19.00 when it was hyped up and relentlessly touted, would have lost a whopping 37%. Even those who bought at an average of RM17 would have lost 30%, in less than three weeks. If one “continued to buy using margin finance. As the price goes higher, they can borrow more to buy”, say using 50% margin, they would have lost about 70%.

Did margin calls happen during the plunge? I am not sure, the volume was heavy during that period and my remisier told me “that kind of dumping is typical of margin calls or voluntary selling.” In a margin call, the investment banks will just dump your shares at whatever price, without getting approval, or even without informing you, to mitigate their potential losses.

Hengyuan share price recovered strongly yesterday in the latter part of the day. Those who were forced to sell due to margin calls, or forced to cut-loss have lost the opportunity to recover in this, maybe (and maybe not) a good share, for long-term investing.

Hengyuan’s recent case is just one example. I could give you scores of other examples in the past. That is why I never like to be the third category of investor, the “super investor” given above. Will you?

Conclusions

Investing is for building long-term wealth slowly but surely, with little risk. Chasing stocks which have gone up in price too fast too soon is one of the biggest risks in investing. What this gentleman below says is often true,

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 OPM, but many more, especially the newbies, without proper investment knowledge, the inexperienced, and try to get rich quick by mimicking the super investor, had lost hugely in the stock market too.

There are many people in the internet boasting their success in using OPM. However, you my not know what they had gone through, and you may not replicate their “success” following them.

 “The world is not dangerous because of those who do harm, but because of those who look at it without doing anything”. Albert Einstein

That is the motivation of this article

Happy investing.

KC Chong (ckc13invest@gmail.com)