Volume 3 Issue 22: Intelligent Investing

Buy High, Sell Low?

Even though I hate quoting the Star, but it does have the most convenient example of why IPOs suck. Just from the following paragraphs, it is already clear:

One company that comes to mind is Malaysian hard disk-drive component maker JCY International Bhd, which was listed on the Main Market over a year ago. The company promised a good growth story and was touted at one point during its fund raising exercise as potentially being South-East Asia's largest technology IPO exercise since 2000.

Based on previous news report, YKY Investment Ltd, controlled by Malaysian businessman Y.K. Yong, had originally wanted to sell some 530.2 million existing shares, or 25.9%, of the company to institutional and non-institutional investors at RM1.60 to RM2.20 per share.

Since listing in late February 2010, the company has seen its share price take a beating, losing 62% of its listing price value and ending at 61 sen as at last Friday. The lacklustre appeal in the stock has been mainly due to declining profits although analysts had said then that the company was likely to do well on the back of the technology industry having a bright future.

Can you imagine losing 60% of your money in one year? It is mind-blowing. If you had RM10,000 invested in JCY, you would be left with about RM4,000. That's not the worst part. The worst part is, to get from RM4,000 back to RM10,000, you would have to make a total return of 150%. But but but.... all you lost was 60%. Why do you now have to make 150% to break even? That is the unfairness that is life. That is why it pays to be prudent, and to have a huge margin of safety.

To rub it in, check out that last paragraph above:

...The lacklustre appeal in the stock has been mainly due to declining profits although analysts had said then that the company was likely to do well on the back of the technology industry having a bright future.

ANALYSTS had said that the company was likely to do well. So, it is all the analysts' fault then? So what happens next? Can we claim our money back from those analysts? Well, here's the kicker:

Many of the “buy” calls recommended by research houses covering the stock have been switched as of late last year to a “sell” or “hold” due to the company's poor earnings. From the six quarterly results announced by the company after its listing in February last year, two quarters reported growth in revenue and earnings, one quarter saw revenue and net profit somewhat plateau while the last three quarters recorded a decline in revenue and earnings.

Hey, that's easy. Once the company has already tanked, let us all switch our calls to "SELL". We often here all the analysts telling us, "BUY LOW, SELL HIGH". But what? Wait... did I hear wrongly? What happened with JCY was, they asked you to BUY AT RM1.60, but then now, they ask you to SELL AT AROUND RM0.60. Isn't that "BUY HIGH, SELL LOW"?

So, there are two lessons to take away from this:

1. I hate IPOs. They may be good on paper, and may promise a lot, but at the same time, it could be a lot of hot air. My take is, if the company is a good one, it will still be around five to ten years from now, and it would not be too late to buy then.

2. Many analysts do not have accountability. One one hand, they preach a "Buy Low, Sell High" mantra, but what they are essentially doing is to get you to "Buy High, Sell Low". Some stockbrokers are even worse. They will tell you to "Buy High, Sell Higher"!!!!! And when the stock tanks, they don't even have the guts to tell you that they are sorry. They are not accountable. You will hear reasons like:

a) Oh, no one can predict the market. (Then why the hell did you tell me that it will go up when you asked me to buy? Were you not trying to predict it?)


b) Oh, the information has changed, so it changes our analysis. (No shit. You change your advice AFTER the fact of the price drop (change in information?). My boss would say that that person is not an analyst. He/She is a historian.)

Because of nonsense analysts like the ones mentioned above, us Main Streeters have to analyze the analysts. We need to analyze which analysts can be trusted, and which can't. And the easiest way to do that, is to look at long-term results. Who gives you the most consistent performance, through the longest time period?