Posted by kcchongnz at Dec 25, 2013 08:49 AM 

Pitfalls in the stock market: A reflection of the year 2013 

“We do not learn from experience; we learn from reflecting on experience.” — John Dewey 

In the stock market, we always hear about success stories. They are glorifying and morale boasting. Seldom do we hear people telling us they have lost money investing/speculating in the market. It is demoralizing and not good for the self esteem. People would look down on you (I don’t care much). However, the fact remains that most people lost money in the stock market. You don’t have to agree with me, but this is what the research has shown: 

In their 2009 paper on “option trading and individual investor performance” , Rob Bauer, Mathijs Casemans and Piet Eichholtz examine the performance and persistence of individual investors trading at a Dutch online broker. Using a database consisting of more than 68,000 accounts and eight million trades in stocks during January 2000 to March 2006, they find that: During 2000-2006, the average investor has negative alphas, meaning the return is below the market return. Not even the top tenth of performance manages to beat the market consistently. Those in the bottom tenth of performance lose more than 90% of value. 

So with the above, I always wary about the lemons in the stock market. My basic principle in investing is always to be prudent; focus on the downside and the upside will take care of itself (Mark Seller). So what are some of the things to look for to avoid the downside? 

Let us look at some of the hot Bursa stocks which some people in i3 forums asked me about in the past one year as shown in Table 1 below in the appendix. 

First I must clarify that I really didn’t know those stocks well except from their past performance as shown in their financial reports and their business models. My comments were strictly about what I think about their fundamentals. I have most of the time qualified that I would not know about their future price performance. Yet very often, people ridiculed me for being “wrong” as some of those stocks I opined that one should avoid, went up in price subsequently. However, I must also say that when I put forward a strong negative opinion of certain stocks, which I seldom do because of the unpredictability of the market, they often come out to be quite true. 

Hibiscus 
For example I have very strong and negative opinion on SPACs, Special-Purpose Acquisition Companies (See link below). 

http://wealthmanagement.com/investment/staying-out-murder-holes  

I cannot figure out how an investment process can be based on hope; hope of the opportunity to strike oil big while other bigger international companies are denied of that opportunity. Hibiscus share price was chased up by 80% from RM1.50 to RM2.70 in just four months from August to December 2013. This was just because it has acquired a stake in a drilling company, presumably somebody admired this Dr Kenneth so much and sold him this wonderful top-notched technology cheaply. Its share price just jumped because they were given some licenses to explore oil in some countries, presumably they are more deserving than many international oil exploration companies. Its share price can also jumped just because of rumours that when or when the drilling machine would reach the destination, and when start drilling, as if oil would definitely ooze out as soon as the drill rig is lowered. Well, it is still early to know how many investors/punters will make money, but already many retail punters are spilling blood everywhere as its share price has dropped by 32% to RM1.84 in just three days and suspended in trading for two days. We don’t know what would happen when it resumes its trading tomorrow on Boxing Day. In investing, sometimes too much positive feelings can be detrimental to your ioutcome. 

Smartag and Asia Media Group 
There is a group of “investors” who are closely knitted and I was asked about two stocks; Smartag and Asia Media Group and I did not give positive comments about them as they expected and hence I was not welcomed. Well, that was not my problem. 

Again investing in these two companies are also based on hope, and positive feelings; Smartag has been hoping, and still hoping after so many years, that the Royal Customs Department would give them the ultra lucrative contracts of RFID tracking the containers (?). There were also plenty of positive feelings among the group and practical holding each other’s hand. At the mean time, it has no business, and burning cash from the IPO money every year. There is not much cash to burn any more. Its share price has dropped by 45% from 18 sen a year ago to just 8 sen at the close on Christmas Eve, not a good Christmas present. Its share price was actually more than 40 sen 2-3 years ago. A good read about Smartag here for smart people. 

http://whereiszemoola.blogspot.co.nz/2013/03/smartag-sinks-deeper.html  

To be continued

http://klse.i3investor.com/servlets/forum/900591594.jsp

Posted by kcchongnz > Dec 25, 2013 08:52 AM X

AMedia is a stock which is very dangerous for retail investors. It appears to have reasonably good earnings, and its PE ratio at 13.5 sen one year ago was a low single digit too. It even has good cash flows from operations. Its balance sheet is also nothing to fault about. But why is that Amedia required to exercise cash calls in right issues and private placements so often? A thorough screening through its financial statements show something is not right, a financial shenanigan? 

http://www.intellecpoint.com/search?q=asia+media  

AMedia’s share price has since fell from the adjusted price of 13.5 sen a year ago to 8 sen now, for a drop of 41%. It was even much higher than 13.5sen before that. There appeared to be a lot of share price manipulation, pumped and dumped, by insiders too. Plenty of blood is spilling everywhere for these two stocks. 

KNM 
Another of my “favourite” lemon which I was frequently asked is KNM. There are many loyalists for KNM, despite all the deceits, spinning from the major shareholder and management. I don’t know why but I guess it is hope again. KNM was the darling of the market. It had big plans; foraying and making its foot prints all over the world with big acquisitions. It reminds me of Enron. Each time I was asked about it, I gave bad comments. 

KNM has been losing money almost every year in his operations. Cash ran out and many cash calls were made. Even when it said it made money I have doubt about it because it often did not reflect in its cash flows and balance sheet. Some may say. “don’t worry, it has a lot of assets”, but its assets are of very low quality; PPE of which not sure what is the realizable value, doubtful receivables and work in progress, inventories, goodwill and intangibles. Its debts and liabilities are huge. It may end up the only value KNM has is just an option value, minimum of zero and something questionable. 

KNM’s share price dropped by just a couple of sen a year ago to 43.5 sen now. Actually it has nothing much to drop already. The blood has already spilled years ago. Yet many punters are still hoping that the insiders will fry the shares for them to make money. KNM’s share price did rise up to 60 sen middle of this year, but I am sure who are the people who made money, and who were the ones who lostt. A good place to read about the comedian story about KNM is as appended below: 

http://whereiszemoola.blogspot.co.nz/search?q=knm  

When people asked me if they should keep the stock, I like to cite this Sioux Indian proverb: 

• When you realize that you are riding a dead horse, the best strategy is to dismount. 

China Stationery Limited 
CSL is a typical stock which punters should avoid. There are many more of these kind of companies in Bursa. Its annual report shows they are making tons of money with plenty of cash flows and cash in bank. And yet the major shareholders dumped the share, millions of them. Yes, he is very noble and wants to share and enrich the public with the huge earnings the company made and its cash in banks. So he offers the stock at 75 sen to the public when it has 19 sen earnings, and 70 sen cash per share. I fact now you can buy CSL at 19.5 sen. What a bargain of the century! 

Guan Chong Berhad 
Guan Chong Berhad is recommended by a famous investor a few months ago (I have great respect for this famous investor, I really do, but everybody can make mistakes). It appears to be making profit year in year out. However, few people looked a little deeper; why is it the total debts have been increasing at such a fast pace, and that there is hardly any cash flows from operation, not to mention about free cash flows. Something is definitely not right. Why can’t GCB show us the cash? Are they speculating (not hedging) on Coco future? Finally the straw broke the camel’s back. Its last quarterly financial results finally showed a loss of 12m. Not much but is it the end of the story? I doubt so. I think there are still a lot of skeletons behind the closet. Its share price dropped by 22% from RM1.80 to RM1.40 since then. Interesting stories to read at the same link below about GCB. 

http://whereiszemoola.blogspot.co.nz/search?q=gcb  

Yeah, it is good to practice value investing; buy companies at a good price using PE ratio, dividend yield. We must understand what this “E” means for that particular company, where did the company get the money from paying that good dividend. 

To be continued

Posted by kcchongnz > Dec 25, 2013 08:54 AM

Ivory property was also recommended by the same famous investor. Earnings appears to be good relative to price. However since listing, I see no money from its operations, but more and more debts. Financial report is doggy with one-time revenue as gain and cash flow from ordinary business. Recently it even announced taking over the Plaza Rakyat for redevelopment. Don’t know if it has the financial and technical capability to do so. Its share price has risen from 49 sen at the beginning of the year to 77 sen in May, but dropped back to 58 sen now. For sure there were people making money from the rise, but I think more people, especially retail investors losing money on the share price was on the downward side. 

London Biscuits 
A similar story is about London Biscuits. Made very good earnings also relative to its price. But the plot is the same; no cash flow, increasing debts, management manipulations of PPE etc as shown in the following article here: 

http://klse.i3investor.com/blogs/kianweiaritcles/40683.jsp  

Sometimes a company in a good and durable food business may not be a good investment. 

Malaysian Pacific Corporation Berhad 
MP Corp is another company which investors live with hope; hope that the management sells their land, which they valued the same high value as the neighboring one which was transacted, and distribute the cash to them. The company is doing nothing at the moment except paying for the costs of holding some land and an investment property estimate to worth a lot of money, if sold. I was told off that I was not in their league of making multi-baggers from the market as them and was asked to stick to my Dutch Lady and BAT (Actually I didn’t have any of these stocks) to earn the 10% return a year when the share price of MP Corp spiked to 54 sen . This was what I said: 

• But remember, even though everyone is making money except you, it is ok. 

MP Corp share price has since retreated by 30% to 38 sen now. 


In actual fact,It is always not easy to predict if a company would do well in the future and that its share price would rise. It is much easy to see if a company is likely not to do well. So I like to remember what Charlie Munger says: 

• “You don’t have to pee on an electric fence to learn not to do it.” - Charlie Munger 


KC Chong on Christmas Day in Auckland 2013 


Table 1: Return of some stocks in Bursa 
No. Company Ref Price Price 24/12/13 Gain/loss 
1 Pmetal 2.520 2.320 -7.9% 
2 GCB 1.800 1.400 -22.2% 
3 Ivory 0.550 0.580 5.5% 
4 PW 0.720 0.880 22.2% 
5 Rsawit 0.850 0.785 -7.6% 
6 LonBisc 0.680 0.675 -0.7% 
7 KNM 0.455 0.435 -4.4% 
8 MPCorp 0.450 0.380 -15.6% 
9 MKLand 0.330 0.360 9.1% 
10 Careplus 0.315 0.310 -1.6% 
11 CSL 0.750 0.195 -74.0% 
12 AnComLB 0.185 0.185 0.0% 
13 Smartag 0.180 0.100 -44.4% 
14 Amedia 0.135 0.080 -40.7% 
15 NovaMSC 0.065 0.065 0.0% 
16 Hibiscus 1.900 1.840 -3.2% 

xx Average xxxx xxxx -11.6% 
xx FTSE Mid70 12294 14043 +14.2%