"You have to understand accounting and you have to understand the nuances of accounting. It's the language of business and it's an imperfect language, but unless you are willing to put in the effort to learn accounting - how to read and interpret financial statements - you really shouldn't select stocks yourself."
Warren Buffett
History of investment analysis
Benjamin Graham
Benjamin Graham had adopted early bond analysis techniques to common stocks analysis.
He focused primarily on determining a company's solvency and earning power for the purposes of bond analysis.
Graham never made the distinction between a company that held a long-term competitive advantage over its competitors and one that didn't.
He was only interested in whether or not the company had sufficient earning power to get it out of the economic trouble that sent its stock price spiraling downward.
He wasn't interested in owning a position in a company for ten or twenty years. If it didn't move after two years, he was out of it.
Warren Buffett
Warren Buffett discovered, after starting his career with Graham, the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.
He realized that the longer you held one of these fantastic businesses, the richer it made you.
While Graham would have argued that these super businesses were overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.
Warren developed a unique set of analytical tools to help identify these special kinds of businesses.
His new ways of looking at things enabled him to determine whether the company could survive its current problems (recall Washington Post at the time when he first bought into this company).
Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.
Warren's two simple and stunning revelations:
(1) How to identify an exceptional company with a durable competitive advantage?
(2) How to value a company with a durable competitive advantage?
What we must also have is a plan for HOW MUCH to invest n the stock market in the first place.
It makes sense for almost everyone to have a significant portion of their assets in stocks. Just as important, few people should put all their money in stocks. Whether you choose to invest 80% of your savings in stocks, or 40% in stocks depends in part on individual circumstances and in part on how human you really are.
An investment strategy where 100% of your assets are invested in the stock market can result in a drop of 30%, 40% or even more in your net worth in any given year (of course, many people learned this the hard way in recent years). Since most of us are only human, we cannot take a drop of this size without opting for survival. That means either panicking out or being forced to sell at just the wrong time
In fact, if we start with the premise that we cannot handle a 40% drop, then putting 100% of our money in the stock market is a strategy that is almost guaranteed to fail at some inopportune time down the road.
Obviously, if we invest only 50% of our assets in stocks, a market drop of 40% would result in losing "only" 20% of our net worth. As painful as this still might be, if we maintain the proper long-term perspective, some of us might be better able to withstand a drop of this size without running for our lives.
Whether you choose to place 80% of your assets in stocks or 40%, that percentage should be based largely on how much pain you can take on the downside and still hang in there.
Pick a number. What percentage of your assets do you feel comfortable investing in stocks?
The important thing is to choose a portion of your assets to invest in the stock market—and stick with it! For most people, this number could be between 40 percent and 80 percent of investable assets, but each case is too individual to give a range that works for everyone.
Whatever number you do choose, though, I can guarantee one thing: at some point you will regret your decision. Being only human, when the market goes down you will regret putting so much into stocks. If the market goes up, the opposite will happen—you’ll wonder why you were such a chicken in the first place. That’s just the way it is. (Actually, according to behavioral finance theory, that’s just the way you is!)
So here’s what we’re going to do. Against my better judgment, we’re going to give you some rope to play with. Once you pick your number, let’s say 60 percent in stocks, you can adjust your exposure up or down by 10 percent whenever you want. So you can go down to 50 percent invested in stocks and up to 70 percent, but that’s it. You can’t sell everything when things go against you, and you can’t jump in with both feet and invest 100 percent when everything is rocking and rolling your way. It’s not allowed! (In any event, doing this would put you in serious violation of our plan!)
Small investors will have a huge advantage over professionals
And here’s the big secret: if you actually follow our plan, small investors will have a huge advantage over professionals—an advantage that has only been growing larger every year. Of course, you would think that with all the newly minted MBAs heading to Wall Street each year, the proliferation of giant hedge funds over the last few decades, the growth of professionally managed mutual funds and ETFs, the increasingly widespread availability of instant news and timely company information, and the mushrooming ability to crunch massive amounts of company and economic data at an affordable price, the competition to beat the market would actually be growing fiercer with each passing year. And in some ways it is. But in one important way, perhaps the most important, the competition is actually getting easier.
The truth is that it is really hard to be a professional stock market investor today.
It’s just that it’s really hard to look at returns every day and every month, to receive analysis every month or every quarter, and still keep a long-term perspective. Most individual and institutional investors can’t do it. They can’t help analyzing the short-term information they do have, even if it’s relatively meaningless over the long term. On the bright side, as the market has become more institutionalized and performance information and statistics have become more ubiquitous, the advantages for those who can maintain a long-term perspective have only grown.
For those investing in individual stocks, the benefits to looking past the next quarter or the next year, to investing in companies that may take several years before they can show good results, to truly taking a long-term perspective when evaluating a stock investment remain as large, if not larger, than they have ever been.
Remember from early in our journey, the value of a business comes from all the cash earnings we expect to collect from that business over its lifetime. Earnings from the next few years are usually only a very small portion of this value. Yet most investment professionals, stuck in an environment where short-term performance is a real concern, often feel forced to focus on short-term business and economic issues rather than on long-term value. This is great news and a growing advantage for individual and professional investors who can truly maintain a long-term investment perspective.
This focus on the short term by professionals is also a huge advantage for individual investors
Luckily, since it’s particularly hard for most nonprofessionals to calculate values for individual stocks, this focus on the short term by professionals is also a huge advantage for individual investors who follow an intelligently and logically designed strategy. Because value strategies often don’t work over shorter time frames, institutional pressures and individual instincts will continue to make it difficult for most investors to stick with them over the long term. For these investors, several years is simply too long to wait.
Hanging in there will be tough for us, too. But as individual investors, we have some major advantages over the large institutions. We don’t have to answer to clients. We don’t have to provide daily or monthly returns. We don’t have to worry about staying in business. We just have to set up rules ahead of time that help us stay with our plan over the long term. We have to choose an allocation to stocks that is appropriate for our individual circumstances and then stick with it. When we feel like panicking after a large market drop or ditching our value strategy after a period of underperformance, we can—but only within our preset limits. When things are going great and we want to buy more, no problem, we can—we just can’t buy too much.
So there it is. We have a strategy that beats the market. We have a plan that will help us hang in there.
And, as individual investors, we have some major advantages over the investment professionals. All we need now is a little more encouragement. Perhaps a final visit with Benjamin Graham will help push us on our way.
In an interview shortly before he passed away, Graham provided us with these words of wisdom:
The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.
After so many years, we still have an opportunity to benefit from Graham’s sage advice today.
We now have a great plan for how to invest in the stock market.
Finally, for the portion of our money that we choose to invest in the stock market, we should have a better idea
Valuing a company you are investing into.
1. We are hardwired from birth to be lousy investors.
Our survival instincts make us fear loss much more than we enjoy gain. We run from danger first and ask questions later. We panic out of our investments when things look bleakest - we are just trying to survive! We have a herd mentality that makes us feel more comfortable staying with the pack. So buying high when everyone else is buying and selling low when everyone else is selling comes quite naturally - it just makes us feel better!
We use our primitive instincts to make quick decisions based on limited data and we weight most heavily what has just happened. We run from managers who performed poorly most recently and into the arms of last year's winners - that just seems like the right thing to do! We all think we are above average! We consistently overestimate our ability to pick good stocks or to find above-average managers. It is also this outsized ego that likely gives us the confidence to keep trading too much. We keep making the same investing mistakes over and over - we just figure this time we will get it right!
We are busy surviving, herding, fixating on what just happened and being overconfident! Maybe it helps explain why Mr. Market acts crazy at times.
2. So, how do we deal with all these primitive emotions and lousy investing instincts?
The answer is really quite simple: we don't!
Let's admit that we will probably keep making the same investing mistakes no matter how many books on behavioural investing we read.
3. How to invest in the stock market?
Traditionally, stocks have provided high returns and have been a mainstay of most investors’ portfolios. Since a share of stock merely represents an ownership interest in an actual business, owning a portfolio of stocks just means we’re entitled to a share in the future income of all those businesses. If we can buy good businesses that grow over time and we can buy them at bargain prices, this should continue to be a good way to invest a portion of our savings over the long term. Following a similar strategy with international stocks (companies based outside of the United States) for some of our savings would also seem to make sense (in this way, we could own businesses whose profits might not be as dependent on the U.S. economy or the U.S. currency)
4. These words of wisdom from Benjamin Graham
In an interview shortly before he passed away, Graham provided us with these words of wisdom:
The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.
That interview took place thirty-five years ago. Yet we still have an opportunity to benefit from Graham’s sage advice today.
I wish you all—the patience to succeed and the time to enjoy it. Good luck.
Book: Joel Greenblatt: The Big Secret for the Small Investor (2001)
This is the third book by Joel Greenblatt. It is well worth reading. He shares many good investing points in a short and easy to read book. It was published in 2011, 1st edition.
What have I gathered from this book.
It is important to know how to value an asset. Equally, it is important to pay much less than its fair value to own it. Those are the fundamentals of investing safely.
He spent many good paragraphs on how valuation is indeed difficult, both for the professionals and the novice. After spending a great deal explaining the many ways to value stocks (discount cash flow value, acquisition value, liquidation value and relative value), he concludes that these are difficult and not easy. He gives many good reasons of how small changes in your judgements of various factors can lead to big changes in the valuation. Also, one is often faced with a lot of uncertainties in many of your assumptions.
I particularly like his section on earnings yield. Buy using the earnings yield. A company with a higher earnings yield is a better one than the other, assuming all else being equal. He asks his readers to compare this with the risk free investment return, using the bond rate of the 10 years treasury bond. Stick to a minimum of 6%, even if the present rate is much lower. If the 10 years treasury bond rate is higher than 6%, for example, 8%, you should use the higher rate in your comparison. He advises investors to aim for returns higher than the 6% in their investments. Search for a company, a good company with a good business, that is available at a bargain and from your analysis can give a return of greater than 6%. Find a second company using similar criteria. Now you have 2 companies which you think are better than the treasury bond. Compare the two companies to each other and invest into the better one. This method is simple and practical; and it rhymes with the earnings yield method of Buffett where he treats his stocks as bond equity equivalents.
Another chapter on how much money to invest was particularly useful too. How much money do you wish to have in stocks? If you have 100% of your assets in stocks, will you be able to "stomach' a 40% decline in your portfolio value? Perhaps, you should only have 50% of your assets in stocks and the rest in other different assets. Then a 50% decline in your stock portfolio value will only caused a 20% decline in your overall total asset value, assuming your other assets were not similarly affected. Maybe you can "stomach" this 20% decline without selling out of the stock market in panic. The author advise each investor to decide on the percentage of their total asset to be in stocks, perhaps 40% to 80%. For example, an investor may have 60% of his total asset in stock; at certain times he may increase this to 70% and at other times reduce this to 50%. He caution that this adjustment should infrequent, preferably occur not more than once a year. Also, no one should be completely out of the stock market at any time, as in the long run, stocks offer the best returns of all investable assets.
Joel Greenblatt shares a good chapter on Behavioural Finance, another very important topic indeed. All investors are wired poorly for investing, he mentioned. They tend to panic and they tend to follow the herd for comfort. Reading this chapter will certainly benefit many readers in their investing.
There are also many sections on investing in mutual funds, ETF, index funds and others. Also, he has described well the different types of indexes which are market weighted, equal weighted and value weighted, giving their advantages and disadvantages. Those who invest in funds will find this segment useful.
There are many valuable lessons I have learned from this book and hope you will find it likewise. It is a small readable book. It can be completed a few hours for a fast reader with some basic understanding of investing.
Not inappropriately, Joel Greenblatt is sometimes referred to as our modern day Benjamin Graham, the Benjamin Graham of the 21st Century.
Very important to know what to do
If you are symptomatic or have been identified to be a close contact to a positive case, please undergo immediate medical screening and testing.
While waiting for the test results, please self-quarantine at home responsibly.
Notify the health ministry through self-notification in the MySejahtera application and the nearby District Health Office or CAC, if you are found to be positive either through the RT-PCR or RTK Antigen test.
Immediately report any "warning signs" and seek treatment at a nearby health facility. Warning signs are symptoms that signal that a Covid-19 patient's condition is getting worse.
Contact your regular doctor too (hopefully you have a regular doctor ) to let him/her know of your condition so that he/she may advise you accordingly also, over this period of your illness.
Vaccinate as soon as this is available.
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KUALA LUMPUR: Malaysia is seeing an exponential rise in brought-in-dead (BID) cases due to Covid-19 complications, particularly in the Klang Valley region involving those aged 50 and above.
Health director-general Tan Sri Dr Noor Hisham Abdullah advised people to be more vigilant in monitoring their health, especially when they have tested Covid-19 positive and are undergoing home quarantine or self-isolation.
He said an analysis by the National Crisis Preparedness and Response Centre (CPRC) found that there has been a sevenfold increase in BID cases from April (35 cases) to June 2021 (246 cases).
"As of July 2, the ministry recorded a total of 5,327 deaths (0.7 per cent) since the Covid-19 pandemic hit our country.
"A total of 4,856 (91.2 per cent) deaths were reported in 2021. Of the total deaths in 2021, 670 (13.8 per cent) deaths were reported before arrival at the hospital (BID)," he said in a statement today.
He said most BID cases involved victims aged 50 to 70 years (76.7 per cent) with at least a comorbidity (64.5 per cent).
"The highest number of BID cases concerned those aged between 60 and 69 (170), followed by the 50 to 59 age group (130), 70 to 79 (106), 80+ (107), 40 to 49 (85), 30 to 39 (46), 20 to 29 (20) and aged below 20 (six cases)."
Selangor, he said clocked the highest number of BID cases this year at 181 (27 per cent), followed by Kuala Lumpur (78 cases or 11.6 per cent) and Sabah (85 cases or 12.7 per cent).
Other states with BID cases this year were Sarawak (45), Labuan (31), Johor (23), Kelantan (18), Melaka (14), Negri Sembilan (14), Penang (13), Pahang (12), Perak (11), and Kedah (four).
Perlis and Putrajaya registered no BID cases from Jan to July 2, this year.
Dr Noor Hisham advised the public to undergo immediate medical screening and testing if they were symptomatic or have been identified to be a close contact to a positive case.
He also reminded people who were waiting for their test results and calls from the District Health Office (PKD) and Covid-19 Assessment Center (CAC) to self-quarantine at home responsibly.
"Notify the health ministry through self-notification in the MySejahtera application and the nearby District Health Office or CAC if they are found to be positive either through the RT-PCR or RTK Antigen test.
"Immediately report any 'warning signs' and seek treatment at a nearby health facility. Warning signs are symptoms that signal that a Covid-19 patient's condition is getting worse."
Among the warning signs that require immediate treatment, he said, are prolonged fever; breathing difficulties; chest pain; lack of appetite to eat or drink; worsening fatigue; lack of consciousness and confusion; coughing, vomiting and worsening diarrhoea; less urination; lips or fingers becoming bluish; and oxygen saturation
"Family members or housemates are advised to be concerned and sensitive to the condition and health of Covid-19 patients by utilising communication technology to monitor the health of patients throughout the home quarantine monitoring period."
Dr Noor Hisham further said the ministry is also working to improve the monitoring process by CACs nationwide to enable a comprehensive initial assessment to be done immediately on positive cases.
These cases, he said will then be determined whether they can undergo isolation and self-monitoring at home, need to be admitted to the Covid-19 Low-Risk Treatment Center (PRKC) or referred to a hospital.
"With the strengthening of the CAC, better case monitoring can be carried out and immediate referrals can be made if necessary."
Additionally, he said the ministry is working with various parties to increase the capacity of daily SARS-CoV-2 virus detection tests which consist of RT-PCR and RTK-Ag tests.
To increase the capacity of RT-PCR testing, the ministry, he said is collaborating with laboratories from various ministries - Higher Education; Science, Technology and Innovation; Defense - and private laboratories.
RTK-Ag testing is conducted by private clinics and hospitals either individually or by mass screening, he said.
"Cooperation between these agencies and sectors has enabled case detection activities and other public health actions to be implemented promptly."
Dr Noor Hisham added that the ministry would implement a smart device initiative at several CACs including by issuing pulse oxymeters to monitor the current condition of Covid-19 patients while at home.
"As announced by the health ministry, this initiative aims to strengthen the management of Covid-19 patients. With this initiative, the health of patients tested positive, especially those who are undergoing isolation at home, can be better monitored so that any deterioration of symptoms can be detected more quickly."
Bees for the honey
Cows for the milk
And, stocks for the dividends!
KUALA LUMPUR (March 18): Eight of Malaysia's top 10 richest tycoons — based on Forbes' 2020 billionaires list — earned a whopping RM1.99 billion worth of dividends from the recently announced financial results for the quarter ended Dec 31, 2020, based on their known shareholdings in Bursa Malaysia-listed firms.
Among them, Public Bank Bhd founder Tan Sri Dr Teh Hong Piow is expected to receive the biggest dividend payout totalling RM668.18 million from his shareholdings in the bank and insurer LPI Capital Bhd.
Public Bank, the third largest banking group in the country by asset size, declared an interim dividend of 13 sen (payable on March 22) for its fourth quarter of financial year 2020 (4QFY20) ended Dec 31, 2020. Public Bank also undertook a four-for-one bonus share issue to reward shareholders last year, which enlarged the number of Public Bank's outstanding shares to 4.2 billion.
Teh holds a 22.78% stake in Public Bank through his private investment vehicle — Consolidated Teh Holdings Sdn Bhd. He has another direct stake of 0.64%.
LPI Capital, meanwhile, announced a second interim dividend of 44 sen per share for its 4QFY20, which amounted to a payout of RM175.3 million. Based on Teh's 44.15% stake in the company, his share of the dividend payout will be about RM77.39 million.
After Teh is Hong Leong Group's Tan Sri Quek Leng Chan, who is estimated to get RM296.05 million worth of dividends through his holdings in Hong Leong Financial Group Bhd (HLFG) and Hong Leong Bank Bhd (HLB).
HLFG declared an interim dividend of 10.8 sen per share while HLB announced an interim single-tier dividend of 14.78 sen per share. Quek holds a direct interest of 0.47% and an indirect interest of 77.88% in HLFG, while he controls an indirect interest of 64.51% in HLB.
Next is telecommunications tycoon T Ananda Krishnan, who will receive RM276.04 million from his stake in Maxis Bhd and Astro Malaysia Holdings Bhd. Ananda is the largest shareholder in Maxis with an indirectly held 62.34% stake. In Astro, he holds an indirect stake of 41.29%.
Maxis declared a fourth interim dividend of five sen per share in its 4QFY20 ended Dec 31, 2020, while Astro announced a payout of 1.5 sen per share in its 3QFY20 ended Oct 31, 2020.
Ananda also holds a 34.86% stake in Bumi Armada Bhd, Asia's biggest offshore supporting vessel operator. The company, however, did not declare any dividends in 2020.
Robert Kuok's dividend cheque from PPB Group Bhd for the final quarter of last year is estimated to be RM274.65 million — the fourth highest sum among the ultra-rich.
PPB Group announced a dividend of 38 sen, comprising a final dividend of 22 sen and a special payout of 16 sen, in its 4QFY20 ended Dec 31, 2020. Kuok holds a 50.81% stake in the diversified conglomerate through his private investment vehicle, Kuok Brothers Sdn Bhd. He also holds a stake in Shangri-La Hotels (Malaysia) Bhd, though the latter did not declare any dividends for its FY20.
The fifth largest dividend gainer among the top 10 Malaysian billionaires is the founder and chairman of Hartalega Holdings Bhd, Kuan Kam Hon, who received RM162.47 million from the rubber glove maker, which recently announced a record high net profit of RM1 billion, and a second interim dividend of 9.65 sen for its 3QFY21 ended Dec 31, 2020, which was paid in February.
Based on the latest bourse filings, Kuan holds a direct interest of 0.795% in the group and a 48.32% indirect interest via Hartalega Industries Sdn Bhd. The glove manufacturer recently announced a record high net profit of RM1 billion for its 3QFY21 ended Dec 31, 2020 and declared a second interim dividend of 9.65 sen.
Next comes gaming tycoon Tan Sri Lim Kok Thay, who likely earned RM148.73 million in dividends from his shareholdings in the Genting group of companies listed on Bursa, despite the group facing challenges in operating its casino and resorts amid the pandemic.
This is based on the RM146.54 million Genting Bhd paid to Kok Thay's private investment company, Kien Huat Realty Sdn Bhd, and the dividends declared by Genting Plantations Bhd and Genting Malaysia Bhd.
Genting Malaysia declared a dividend payout of 8.5 sen per share for its 4QFY20 ended Dec 31, 2020, while Genting Plantations announced a 15 sen dividend — comprising a final dividend of four sen per share and a special dividend of 11 sen per share.
Kok Thay holds a direct interest of 0.44% in Genting Malaysia and a direct interest of 0.05% in Genting Plantations.
After Kok Thay is Datuk Lee Yeow Chor, who earned RM141.28 million in dividends from his holding in IOI Corp Bhd. Lee holds a direct interest of 0.16% and an indirect interest of 49.94% in the group.
Meanwhile, Press Metal Aluminium Holdings Bhd's Tan Sri Koon Poh Keong garnered RM20.22 million through his holdings in Press Metal and PMB Technology Bhd. Press Metal declared a fourth interim single-tier dividend of 1.25 sen per share in its 4QFY20 ended Dec 31, 2020 while PMB Technology declared a one sen dividend to its shareholders.
Two of the top 10 tycoons, however, did not appear to have gained any dividend payments from their shareholdings in Bursa-listed companies. They are gaming tycoon Tan Sri Chen Lip Keong and Tan Sri Lau Cho Kun, the largest shareholder in Hap Seng Consolidated Bhd.
Though not on the list of Malaysia's top 10 richest tycoons based on Forbes 2020 list — which was published in March 2020 — Top Glove Corp Bhd's founder and executive chairman Tan Sri Dr Lim Wee Chai earned about RM460.45 million in dividend in end-2020, thanks to the interim dividend of 16.5 sen that the world's largest rubber glove maker declared in its 1QFY21 ended Nov 30, 2020.
The group also announced an interim dividend payment of 25.2 sen per share for its 2QFY21 ended Feb 28, 2021, payable on April 6 this year. Based on the announcement, Wee Chai stands to gain another dividend payout of RM710.12 million before mid-2021.
That means just for the first two quarters of Top Glove's FY21, Wee Chai has accumulated a total of RM1.17 billion in dividends, based on his total shareholdings of 35.22% in Top Glove, comprising a direct stake of 26.56% and an indirectly held stake of 8.65%.
Datuk Seri Stanley Thai of Supermax Corp Bhd, on the other hand, accumulated dividends of RM38.17 million, while Tan Sri Lim Kuang Sia of Kossan Rubber Industries Bhd earned RM132.99 million.
Including Kwan, the billionaires from the big four glove makers on Bursa earned RM794.07 million worth of dividends in end-2020, as their companies' earnings continued to scale new highs following the surge in glove demand amid the Covid-19 outbreak.
https://www.theedgemarkets.com/article/malaysias-richest-tycoons-and-billions-dividends-they-earned-final-quarter-2020
(Feb 2): Any pullback in GameStop Corp’s shares potentially exposes some investors to losses. Those at risk could include people who
Shares of GameStop, which had seen a spectacular rally, fell 31% on Monday to close at $225, 53% lower than their Jan 28 peak of $483.
Analysts worry some new or inexperienced investors could face losses if they bought in as the stock was peaking.
Particularly vulnerable would be those who bought “on margin,” using money borrowed from brokers to buy extra shares.
The strategy can boost gains when share prices are on the way up, but magnify losses on the way down especially if brokers issue “margin calls” requiring clients to add money or face forced sales to bring an account’s equity back to required levels.
Brokers are not required to notify clients when they sell shares in a margin call, "although most do so as a courtesy," according to the Financial Industry Regulatory Authority here, the industry's self-policing body.
Riley Adams, a 31-year-old financial analyst who runs youngandtheinvested.com, a financial blog aimed at millennials, said if investors bought on margin late to the party “you’re definitely exposed right now.”
Thomas Peterffy, chairman of Interactive Brokers, estimated about half the platform’s 1.2 million accounts are margin accounts. Thousands of margin calls occur on a typical day and the rate increased last week, he said. Peterffy said about 27,000 accounts had some sort of position in GameStock, and many positions liquidated were owned by traders who had shorted GameStock.
Representatives for brokerages TD Ameritrade and Robinhood declined to share details about how many clients may have traded GameStop shares on margin. A Schwab representative did not respond to questions.
However, Robinhood has restricted here buying shares, which limits investor exposure on its platform.
Options bets on GameStop shares helped fuel the stock’s breathtaking rally. Investors are gauging to what extent they could exacerbate a decline.
Some market watchers say a “gamma squeeze” - where market makers who have sold large numbers of calls to investors balance out their positions by buying the underlying stock - was a key driver of GameStop’s sharp rally.
In theory, a sharp drop in the stock could prompt those same market makers to unload their shares, potentially speeding up a plunge. That’s what happened last September, after investors piled into call options on tech-related companies such as Amazon.com Inc and Alphabet Inc. The unwind of those positions helped fuel a sharp decline in the Nasdaq.
For now, however, it appears that open interest in GameStop calls has not accumulated significantly, as many buyers of those contracts have traded them the same day, according to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
More contracts have remained open among GameStop puts, according to data from Trade Alert. Another key risk would be to market participants who sold those puts, wagering that GameStop shares would not fall below a certain level, if the stock were to tumble significantly below their targets.
But because options prices already account for gigantic swings in the stock, “people who are short options might not lose as much as you think,” Murphy said. Overall, GameStop options are now pricing in daily moves of about 27% over the next month, versus around 8.5% at the start of January, according to Trade Alert.
On the other hand, investors who have held onto calls to position for further gains in GameStop shares could lose their entire investment should the stock not hit their targeted price before the options expire.
A slide in GameStop shares would see short sellers looking to capitalize by finding “attractive exit points,” said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. Short sellers sell borrowed shares in a bet that prices will fall and the shares can be bought back at a lower level.
At the same time, a slide could draw new shorts looking to jump on any downward price momentum, Dusaniwsky said. The number of GameStop shares shorted has fallen by more than half in the past week, as shorts have covered their bets, Dusaniwsky said.
If new shorts join in as the stock slides, it would exacerbate the selling, as long holders try to exit their positions to realize profits, Dusaniwsky said.
Reference:
How a GameStop share pullback could hurt some investors | The Edge Markets
https://www.theedgemarkets.com/article/how-gamestop-share-pullback-could-hurt-some-investors
