Tuesday, 12 August 2014

A lesson in risk control

On April 28, there were four listed stocks on Bursa Malaysia that fell dramatically and devalued by 50 to 80 per cent in during two market days.

They were; Vis, Mnc, Itronic and Solution companies. This incident was similar to Singapore’s stocks such as LionGold, Asiason, Bluemont companies that plunged more than 80 per cent in markets values during October last year.

Sad to say, many investors still fell into the trap and incurred huge losses! After the ‘Black Monday’, many remisers, stock brokers, account executives, retail traders and even proprietary trading groups reported their losses from each party ranging from few tens of thousands to few millions of ringgit. Following that, some salaried staffs in the industry lost their jobs while some self-employed remisers lost their careers.

Amid the rout, many losers began to look for loan draft; some are ready to file bankruptcies while a minority have disappeared! Honestly, I have seen this situation in late 80s when I first entered the industry.

I saw that again in mid 90s when Singapore and Malaysia equities plunged, then followed by 1997 Asian financial crises.

In late 2001, the same situation occurred after the September 11 terrorist attack that rattled the global stock markets.

In 2008, the subprime crisis again dragged down global equities while everyone still enjoyed the high inflation growth.

Somehow, people always regretted when the worst things had happened. Prior to this situation, those who made handsome profits during ‘peaceful time’ would say I have been too ‘naggy’ and persistent about emphasising on risk management.

Perhaps, they felt like being cautious on risk control would hamper their trading growth! Nevertheless, it is true that the inefficiency of risk management is always the prime factor that brought these people down to their knees whenever there is a ‘Black Swan’ day! In my opinion, the easiest protocol is to cut losses like a robot whenever your stock falls by 10 per cent in value from your entry price.

If you want to be stubborn, then let the final 15 per cent value be your last gateway to remove your losses! For financial brokers, use this as a benchmark to check your clients on a daily basis.

Otherwise, the risk is too high to take on clients’ ignorant losses onto your back and erase your trading limits in the business.

Once, a senior had told me: If you think education from an experienced mentor is expensive, then try ignorance! To end this message, of course I totally agree with this statement! ~

DAR Wong is an approved Fund Manager in Singapore with 25 years of trading experiences in global financial markets. The expressions are solely his own.


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