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Author: kcchongnz   |   Latest post: Fri, 11 Oct 2019, 7:50 PM

 

Sendai, a third lesson. “All-in” Poker Player kcchongnz

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So far, from speculating in Sendai a couple of years ago, James has learned a couple of valuable lessons in order to avoid losing big in the stock market, they are;

  1. It pays to be a Doubting Thomas when investing, instead of being a sucker following blindly a simplistic golden rule.
  2. Beware of the dark side of margin finance and avoid it as much as possible.

 Here is the fourth of a series of articles on more lesson learned from Sendai. This article discusses an important maxim in investing;

Don’t put all your eggs in one basket”.

James have read many comments in i3investor from two to three years ago in i3investor as below,

[Posted by stockmanmy > Jul 6, 2017 09:51 AM | Report Abuse
and of course, I am very impressed by anyone who can put substantial portion of their wealth into Jaks and Sendai, don't blink, no fear, ......
You want the stock market to make a real difference? develop such qualities first.
There are not many who can do it, ....and that is why there are not many super investors.]

[Posted by stockmanmy > Jul 6, 2017 10:51 AM | Report Abuse

like playing poker.....don't all in....how to be a good poker player]

Posted by stockmanmy > Jul 7, 2017 11:25 AM | Report Abuse

Jaks and Sendai are for super investors...These super investors intend to make multiple baggers from Jaks and Sendai and already half way there.
 

The above three comments, out of hundreds of similar calls enticing readers to were made by in July 2017 when kcchongnz posted an article on “Stop being a patsy in the stock market” in the link below,

https://klse.i3investor.com/blogs/kcchongnz/127246.jsp

Basically, the pitch by the commentator was asking everyone to put all their money in the two stocks, Jaks and Sendai. In poker, it is putting all the chips in the pot. Note the share price of Jaks and Sendai were at RM1.50 and RM1.20 respectively.

Jaks share price went down to 40 sen one and a half year later at the end of year 2018, for a whopping loss of 73%. It has recovered somewhat and close at 85.5 sen today on 9th October 2019, still at a substantial loss of 43%, as shown in the chart below.

Sendai’s share price, on the other hand, dropped relentlessly, non-stop and close at 39 sen today, for a loss of whopping 68% in two years. James felt a little relieved when he cut loss Sendai at 50 sen. Note the broad KLCI Index has lost about 10% during the same period.

 

With all money put into two stocks, Jaks and Sendai in equal weighting, the average loss in the last two years was 55%. And that was the problem; a focussed portfolio of only two stocks, exaggerated by the stocks being in the same industry, the Construction Industry. In 2018, there was a change in Government, resulting in some uncertainties political situation, and the Construction Industry was the hardest hit and the share price of many of the construction companies went into a tailspin.

 

Stocks Portfolio Diversification

Investing in the stock market is a very risky endeavour. Even though you understand well and have done thorough analysis on a stock, you may have missed something which you may not know, and as a result, lose money and can even have your investment down by 30%, 50% or even more.

Every investment is subject to the influence of fear and greed in the marketplace. The duration, intensity and frequency of the unexpected changes of the macroeconomic, sectors and political situations are very difficult to predict. Some sectors of the market will do well while others falter. For example, export stocks seem to be doing very well in 2017 and their share prices have risen to all-time highs, while property, plantation and oil stocks are lagging. However, this could just reverse suddenly. The once-strong sector could fall, and the once-poor sector could gain.

Focus investing in just a handful stocks in one or two sectors with all your wealth can provide you with outsized return if your analysis is right and continues to be correct with no change in macro or microeconomic factors. However, these factors are unknowable, unpredictable, and they are filled with uncertainties.

Stock Diversification: Academic Approach

Many academicians believe there is a kind of free lunch in the market, i.e. in portfolio diversification. In academic, risk is measured by the standard deviation of return, the higher the variance, the riskier is the portfolio. So, to reduce risk, more stocks are included in the portfolio.

Figure 2: Reduction of idiosyncratic risk

As the number of stocks in the portfolio increases, the variation of return reduces sharply initially as shown in Figure 2 below. Studies and mathematical models have shown that maintaining a well-diversified portfolio of about 20 stocks will yield the most cost-effective level of risk reduction as shown in the figure 2 above, beyond that, there is negligible additional benefit for more stocks.

Stocks diversification won’t ensure gains or guarantee against losses but strives to smooth out unsystematic risks of companies in a portfolio which are not perfectly correlated so that the positive performance of some companies will neutralize the negative performance of others.

 

Stock Diversifications: Recommendation in Practice

The popular adage of "Don't put all your eggs in one basket" is very much suited for investing in the stock market for individual investors. It advocates diversification, a technique that reduces risk by allocating investments in a number of stocks in the portfolio. Ideally the stocks chosen should be spread come from a diverse range of industries, cover several geographic regions having different and uncorrelated underlying drivers that would each react differently to the same event.

In practice, the decision about how many stocks to own is the balance between risk and return. The more concentrated your holdings, the greater the chances of exceptional returns if you are right, but there is also a higher risk of a substantial decline if you stock picking is poor.

Another factor is your tolerance for volatility. If you are heavily concentrated in just a few fast-moving names or small-caps issues, it won't be uncommon to have swings of 5% daily. Many retail investors cannot handle that sort of movement and probably lose sleep at night.

Time frames also influence the number of stocks you hold. Some traders take the approach of high concentration for short periods of time. They can handle the lack of diversification because they are willing to move quickly at the first sign of trouble.

Another factor that will influence how many stocks you own is the amount of capital with which you are working. If it a very small account, it isn't possible to be highly diversified because of the high costs of transaction. On the other hand, there are large funds that will hold many hundreds of stocks because there isn't any other way to put their capital to work.

My take as a guide of number of stocks to own from different industries,

Less than RM100k capital: 5-8 stocks

RM500k: 10-15 stocks

RM1m: 15-20 stocks

More than RM10m: more than 30 stocks

For those who have more than RM1m for stock investment, it is advisable to diversify into the regional and world markets. With a diversified number of properly selected stocks in the portfolio, it is expected that some of them may not do well but won’t lose much, but more of them will earn satisfactory returns over the long term. Hopefully, a few of them become multi-baggers.

The above are discussed in more detail in an eBook which I have written. Anyone who is interested to obtain a copy of it may contact me at

ckc13invest@gmail.com

It is free.

Happy investing.

KC Chong

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Chart Stock Name Last Change Volume 
SENDAI 0.395 +0.01 (2.60%) 345,900 

  2 people like this.
 
john doe The hatred is real. lol.. Keep bashing.
10/10/2019 8:14 AM
speakup James cut loss Sendai at 50 sen?
Now 90sen, he must be crying!
10/10/2019 9:18 AM
kcchongnz Posted by speakup > Oct 10, 2019 9:18 AM | Report Abuse
James cut loss Sendai at 50 sen?
Now 90sen, he must be crying!

No, James was a little lucky to cut loss on Sendai at 50 sen, because the share price of Sendai continues to fall. It closed at 38.5 sen today.

On the other hand, the other construction stock, Jaks, fell to 40 sen at the mid December last year. Those people who encountered margin calls and forced selling have missed the recovery of the share price of Jaks. It has more than double its share price since its trough and closed at 91.5 sen today, in less than a year.

That is the peril of leverage in investing. In Jaks case, lost big and missed the chance of recovery.
10/10/2019 8:49 PM
qqq3 kc....no share in Bursa besides Sendai and Jaks?

whatever happened, happened already....

before it happened, there was no certainty it will happen the way it happened.,

After it has happened, only then it becomes a 100% certainty event...........

Its like quantum theory and until you open the box, the cat is both dead and alive..........

and....the future is not going to be exactly like the past............as for Jaks/ Sendai and KYY, the issue is simpler than u think.............

for KYY, whatever shares he has are the best in the world, whatever shares he has already sold are the worse shares Bursa ever produced.....it says more about KYY than about Jaks/ Sendai.............
10/10/2019 10:50 PM
qqq3 I woke up and found kc now actually wrote about shares besides jaks and sendai..............
11/10/2019 8:28 AM
Sslee Hahahaha,
qqq3, KCChong is talking about the peril of leverage in investing. May I ask you since you are now very chun-chun on your stocks than Calvintaneng, then why not you leverage to the max like Mr. Koon and be as rich as Mr. Koon?
11/10/2019 8:36 AM
CharlesT KYY is a big gambler...he bet big n sailang...either win big or lose big...

Not everybody is having such a high risk appetite
11/10/2019 8:45 AM
7300 strategic hero banker,never look ownself do thing cant see,must be loser
11/10/2019 8:53 AM
7300 only a winner knows a hero banker KYY way of fight
11/10/2019 8:55 AM
CharlesT Kyy is lucky that OTB saved his ass for 2 times
11/10/2019 8:57 AM
CharlesT Or else he has to sell his lands piece by piece
11/10/2019 8:57 AM
Sslee Good Morning CharlesT
Philip’s QL finally breakthrough the RM 7 again
Your MNRB when will breakthrough RM1.15 again
My INSAS still waiting for breakthrough 90 cent.

Thank you
11/10/2019 8:57 AM
CharlesT MNRB likely to declare div in next Q...stay tune
11/10/2019 8:58 AM
CharlesT Not goreng type of shares...
11/10/2019 8:59 AM
7300 atleast KYY stabilised market not those 2 legs buaya 's so called valuations
11/10/2019 9:01 AM
hollandking Yes, I'm the doubting type. If even there's 1 red flag, you are in my bad book forever. If you have more than 1 flag, I'll ban you for life. That's my style
11/10/2019 9:06 AM
qqq3 sslee....today is magni last day of cum........u want play big, play Magni.......this share will make u a lot of money or lose u a lot of money within a short time..................
11/10/2019 9:06 AM


 

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