When you open up i3investor website nowadays, you always find Dayang as one of the top ten articles there. Sometimes half of the top articles are related to Dayang. Dayang has become a darling stock in i3investor nowadays.

One particular subject appears repeatedly in all the articles above was that there is “a famous chartist and fund manager”, let’s call him FCFM, who sold his Dayang shares and recommended his clients and subscribers to do so at RM1.50, was wrong and stupid, and many people are misled by him. The accusations were made repeatedly because the share price rose to close to high RM2.20 last month, and he continued to be a punching bag after the share price dropped and stayed stagnant at around RM1.90 for some time. In the last two days, there seemed to be some upward movement of the share price of Dayang and it closed at RM1.94 on 8^th November 2019 as shown in the price chart below.

Many people I believe, initially wondering who this FCFM is until finally that person was named by the most recent article on Dayang. Although the article was a proposal by the writer to the management of Dayang to give some freebies, the FCFM was bashed again, with no way to run as his name was then mentioned. It made my jaws dropped too.

In the recent article, another investment bank, PublicInvest, also kena hantam kau kau too from the writer for making a sell call on Dayang at around RM1.90 using technical charts and with a target price of RM1.72, and then RM1.62.

Do this FCFM and the investment bank deserve that kind of constant bashing, just like the same FCFM did not recommend to buy Jaks and three investment banks issued sell calls on Jaks when it was trading at about RM1.70 two to three years ago, and then plunged to just 40 sen a few months later?

Well, there have been numerous times analysts, professional as well as amateur, issued buy or sell calls and the share price, instead of going up or coming down, goes the other ways. It is so common. It is an occupation hazard as an analyst as there are too many uncertainties about the future of the company, as well as macro factors, as well as the emotion of the crowd. No need to keep on harping on it lah. What for? Are they destroying your plan?

Sorry for a little side tracking. Now, let us go straight to the point and discuss a topic on “When to sell stocks”, and we will use Dayang as an example, ok?

Disclosure

I should first declare that Dayang has been one of the stocks picked for my stock pick services; one time when it was trading at 82 sen on January 11, 2018 and the other time when it was trading at RM1.41 on 30^th April 2019. I must also tell the truth that each time I issued the investment thesis to my participants, the share price of Dayang dropped, the first time to a low of 50 sen for a loss of 39%, and the second time to a low of 70 sen for a low of 50%, on paper, not too long after I sent the thesis to my participants. I should also declare that I have sold all my Dayang shares, the last bit was at RM2.14 on October 15, 2019.

When to sell?

There are many reasons why an investor/trader sells a stock like Dayang. It depends on his way of investing; is he a follower of technical chart or a fundamental investor? How is his personal risk profile, etc. In investing, like life in general, there is no one size fits all.

The Chartist

In PublicInvest’s recommendation, they made the sell call based on technical chart. It says,

[DAYANG’s share price is showing signs of pullback amid persistent profit taking activities, signifying possible halt in prior surging rally. Weakening RSI and fast-paced MACD indicators currently signal an exit to sell into strength, anticipating performance in momentum and trend to remain weak in near term. Should support level of RM1.85 be broken, it may continue to drive price lower to subsequent support levels of RM1.75 and 1.65.

Note that the potential halt in uptrend presents an opportunity for profit taking instead of intraday short selling.]

I am not a follower of chart, but I fully understand what they are talking about and agreed fully as I think the reasons given are logical, and with facts. Chart won’t lie as the chartists will tell you. In fact, I do not need to see the chart to know that the share price has some problems of going up as buyers who are willing to buy at a certain price are obviously less than sellers who are willing to sell at that price. The share price has obviously lost its upside momentum recently and the share price has no strength to go up. If a share can’t go up in price, it is likely to come down.

Since I have made enough for this share, I think it is a good decision to sell to realize the profit. Without selling, your gain is only a number and you won’t realize the “real” profits.  In fact, for most stocks, if you don't sell at the appropriate time, the benefits of proper buying disappear.

It is the same for the “famous chartist”. He is obviously a chartist and he always say his chart comes first. Since he had made enough money from it and the chart showed weakness, why couldn’t he sell to realize the profit?

Price versus Value

For a value investor like me, a stock should be sold to realize profit if the share price has risen rapidly above its perceived intrinsic value. This is especially true for cyclical stocks like Dayang which has risen too much too fast in price during their up cycles. If we don’t sell at their high prices, we may not see the profit later when the down cycle comes as the good time may not be sustainable. The question is, what is Dayang’s intrinsic value (IV)? What is the margin of safety (MOS) we want to have?

IV and MOS are subjective matters. It can take up a whole chapter, or even a few chapters in a book to discuss about it. Let us just do a simple market valuation of Dayang using the simplistic PE ratio which most people understand, though it is not my favourite valuation method.

Dayang made about 20 sen per share for the last twelve months. Let us use the famous PE ratio of 10 as a valuation criterion. The share price of Dayang should hence worth RM2.00. At RM2.00, it is a fair value and there is no longer a MOS as usually demanded by value investor, and he sells. Or he sells at RM1.50 as he demands a minimum MOS of 30%, say because of the higher debt level of Dayang.

Is there anything seriously wrong with it?

Sell when making a mistake in analysis

A stock should also be sold if we discover that we have made a serious mistake in our investment thesis for the stock. In this case, it doesn’t apply as I do not see a mistake in my original thesis yet. My emphasis is that it will continue to get jobs in his niche market so some more years to come, its good management and the excellent cash flows it has, and still is, etc.

Sell when fundamentals change

We should also sell a stock we have bought if later, there is a fundamental change for the worse of the business, something we did not see or anticipated in our previous analysis. In other words, the story has changed. I do not see this also. In fact, I expect it will do better when the next quarterly report comes out, but don’t know by how much, and for the coming years. However, I am not a fan of the Golden Rule. I sell, even though it is a good stock, mainly because I find something better to invest.

Sell when I think I find something better

As a retail investor, our investment capitals are limited. If we have found a better stock at a price which may provide better return, we may have to sell the existing stock for some proceeds to invest in the better stock with better future. It is the opportunity cost we are weighing on.

Let us assume that he had found a stock like Jaks which he thinks has a better potential for price appreciation in the near future and bought himself and replaced a buy recommendation on Jaks which was at about 75 sen then.

Three months have passed. What has happened?

At the close of RM1.16 on 8^th November 2019 of the share price of Jaks, RM1 of the FCFM’s capital has grown to RM1.41m, or 41% gain. With his subscription of his rights in warrant of 500k shares at 25 sen, and at the warrant price of 92.5 sen now, he has made another RM338k on paper for the warrants. His total profit is RM748k, or 66.4% with his total cost of RM1.125m of buying Jaks and subscribing for its 500k entitlement of warrants at 25 sen.

Compared to if the FCFM had held on to Dayang's share until today, he would have only made 29.3%, or 293k. Not bad but far below the 66.4% return he got from Jaks during the same period.

So, what had FCFM done wrong selling Dayang at RM1.50 and bought Jaks at 75 sen three months ago? Who made better gain? Who is laughing and who is sulking now?

Conclusions

No, I am not telling you that you must sell Dayang if you have the shares now. Everyone buys or sells his shares with all kinds of different reasons, all according to his own personal circumstances and risk profiles. I have discussed that one may sell to realize profit when the he has made a mistake buying it, when the fundamentals have changed, that the price has risen above its intrinsic value, or when he has something better to buy, or simply needs money to do something. But how to determine all these?

It is not easy. However, you can make much better decisions if you are armed with some fundamental knowledge in investing, to know the language of business in order to understand it. Otherwise, whatever you do, you only depend on luck. That will not be a good and predictable way to build long term wealth investing in the stock market.

I have written a eBook to provide some guidelines on the above. If you are interested on obtaining the eBook, you may email me at,

ckc13invest@gmail.com

The eBook is free.

KC