My Share Investment: 2011

Penny Dreadful Stocks

Year 2008, the year of the great downturn in the stock market around the world, has left my stock portfolio halved from the where it started. Looking back of what happened, I guess one of my biggest mistakes before the crisis was to invest on few penny stocks. Penny stocks are stocks that are traded in a low price, usually speculative stocks from very small companies. Penny stocks looks appealing because of the low price and the potential for a rapid growth.

In 2007-2008, you can see many mining stocks in this category on the ASX (Australian Stock Exchange). Mining boom helped the stocks grow like mushrooms in the rainy season. They usually had a great run for a while, make you greedy and want more profit, when it was suddenly experiencing a freefall. Worse thing was, even then, I still hoped that the price would go up again. I was waiting for an announcement that might lift the stock price. You might have guessed that when the long awaited announcement came, the price wasn't even move.I paid dearly for the mistakes, but I guess it's all come down to learn by experiences.

As a new investor who do not subscribed to any paid broker, I relied my research on the chart and story of the fundamentals. What I didn't realise, was that in some speculative cheap stocks, there are so many manipulative actions taking place. Of course not all cheap stocks are bound to be manipulated, but it does not hurt to check everything before we buy. Bad decision could cause a good damage in our investment.

There are risks with any investment. But certain risks are greater with penny stocks. One of them is the risk of manipulation. Because of their nature, penny stock is easy to manipulate. After the brokerage firms acquire a large number of shares at a low price, they can manipulate the stock by creating an artificial demand to drive up the price. When manipulation occurs, the stock's price may not reflect the true value of the company, but rather the artificial demand created by aggressive marketing. The price may then collapse after the broker and other persons involved in the manipulation sell their shares.

Another risk is caused by lack of information about the investment. Unlike most large, well established companies, many companies that issue penny stock do not provide a sound data/ reports to the public. This lack of information about the company's operating history and financial health increases the risk to the investor.

The market price of such stock can be based more on the aggressive marketing of the selling broker than on the real value of the company. This sort of marketing can be found easily on the Internet listings or report on TV -- The fact that a stock is mentioned or even recommended on television or on an Internet Website is no guarantee that the investment opportunity is legitimate. Moreover, some television programs or reports are actually advertisements paid for by brokerage firms.

Books

A quick visit to a local library last week resulted in a winning trade for me. Just by chance I picked this book and reading it really is a time well spent. Very well spent.

To be honest, I have heard about this book from some of my other reading before. A quite famous book for trader, although in my ignorance I was not interested in seriously finding it to read. The book is called 'Trade Your Way to Financial Freedom' by Van K Tharp.

I recently bought, 'Trading in the Zone' and enjoy it very much, but I have to stop reading it temporarily and switch to Van Tharp's book due to the nature of library book. I have to return it in 2 weeks time!!

Alan Joyce

I do not own Qantas shares, and barely know its CEO until this weekend. The industrial action that led to the grounding of Qantas' entire fleet sort of forced people to look at him. Who's Alan Joyce, and do you think he is worth his pay?

I kind of almost like Alan Joyce (..fyi I detest most directors..). I think he's worth every cent they pay him.

Locating the Exit

Everything is rosy on the headlines.. The stock market poised for the biggest monthly gain since 1988, The RBA 'might' cut the interest rate, The authority said that housing prices are not falling in Australia, Euro zone and Greek problems are solved, US GDP increase by a lot and Pharmaxis won positive opinion for their Bronchitol in Europe (this probably only applied to its shareholders).

Then again, things just does not seems 100% right. Close at home unemployment is creeping up, some says that housing price fall are accelerating, and Greek..? Do you think their problem is solved by Euro bailout? US housing and debt problem..?

And China.. how many doubts about their health we have heard lately? Hard landing is coming in China, warned Dr Doom, Nouriel Roubini.

Technically, it's probably we have enough market rally recently. Heading for the exit?

More Drama for Sundance Resources Shareholders

Sundance Resources has been placed in a trading halt again this morning.
The company requested the trading halt in response to media speculation that Hanlong Mining's takeover offer is being held up by Australian FRIB due to investigation into Hanlong's executives insider trading.
More drama to come?
Meanwhile, a stock forum that actively discussing this takeover offer and market manipulation of SDL stock prices at this time of writing is also down, with only error message displayed.

What is Happening with Sundance Resources Share Price?

Sundance Resources was on the news quite often lately. Most of the news are related to the takeover bid by China's Hanlong. A few months ago, Sundance was approach by Hanlong (who's already one of its biggest shareholder) of a takeover. Hanlong offered $AUD 0.50 per share and was declined by Sundance's management.

About three weeks ago, Sundance was on the news again. This time was about insider trading. Top executive of Hanlong Mining in Australia was alleged of trading Sundance's stocks with the possession of material information. While ASIC is doing its investigation, Sundance and Hanlong said that they still doing negotiation regarding the takeover.

Few days ago, Hanlong increased its original $0.50 per share offer to $0.57 per share. This offer wins the board approval. Sundance Resources board has endorsed an improved $1.65 billion takeover from the Chinese.

Hurray..NOT.

I do not know what happen, but despite $0.57 on the table and over 600 points rally in the Dow (and probably 5% rally in ASX), Sundance Resources' share price continue to slide on a depressing $0.445. No rally, and definitely no jump. When the whole ASX market up by 3.5%, Sundance down 2%. To make matter worse, the sell side of the depth always over 100 millions more than the buy side.

Market manipulation perhaps?

And what about the chinese media that already published the takeover price of $0.57 one day before it announced officially in Australia? Is that why the share price climbed up quickly to $0.43 few days before it announced?

Obviously a lot of shareholders are not very happy with the offer. But over 120 millions of shares are offered for sale is a bit ridiculous to say the least. I wonder if Hanlong is permitted to buy from the market at this level. This will give them a chance to mop huge chunks of the company for a lot less than what they are offering. But if they are not allowed, are they allowed to buy through proxy and using their long arm related companies to buy..?

With this (sort of) market manipulation theory, can anybody do something about it..?
Or should we buy more of Sundance shares and hold it tight until next year for $0.57 per share cash?

Tips from Market Falls

These are tips from Wespac Financial Planner David Simon and HLB Mann Judd partner in wealth management Jonathan Philpot on how to weather the market during volatile times:

Block out the noise
Make tweaks, no wholesale changes
Keep an eye for your income
Look out for dollar cost averaging
Difersity

Billabong (BBG.AX)

I took a small dip on Billabong today at $3.22. Feels a bit gingery already :)
Nobody knows what is going to happen in the near future. Billabong share price has been hammered by many events lately. Negative sentiments on retail, euro debt crisis, broader economic slowdown, etc..etc.. to name a few. My aim in owning BBG shares is mainly for dividend purpose. It will go ex dividend on the 19th September, with dividend payout of 13 cents per share. It will make a nice 4% return.. IF the share price is not going to tumble.

According to an article in Sydney Morning Herald, Analyst at Macquarie have an outperform recommendation on Billabong with a 12 month target price of $7.50. This means, that if they are correct, I will double my money in a year time. That sounds good, but then again.. How little we know.. Those analysts are too often making mistakes.

Job Cut

Strong Australian dollar and poor business environment keeps creating a havoc in many Australian companies. Apart from the mining industry, many businesses in Australia are suffering. Manufacturing sectors has shrunk dramatically and continue in the struggle street. Most recently, this has been accompanied by job loses.
Last week, Australian employment rate increased to 5.1% from 4.9%. While the number is still very low, this has just shown that things are not as good as what Wayne Swan wants us to believe.

In recent weeks, you can hardly read the news without noticing a job cut announcement in the business news section. Here are some of them:

Qantas is planning for 1000 jobs cut.
One steel cuts 400 jobs from manufacturing
BlueScope may cut 300-500 job direct and maybe twice or even thrice indirect from Port Kembla.
SPC Ardmona will cut 150 jobs in the Goulburn Valley over the next 12 months
Penrice Soda announced it would axe 25 of its 265 workers
Channel Ten (TV) cuts 170 jobs from its news and sales division.
ABC Television, job cuts number unknown.
Tasmanian government announced 25 middle management position in Health job will go
Heinz Factory at nearby Girgarre - 140 job loses
ACL Bearing, car part manufacturer from Launceston is sacking up to 35 workers over the next two weeks after more than 100 redundancies in 2009
Brisbane City Council to cut 50 development jobs
How many from construction industry?
How many from retail?
And the list going on and on.

The Big Falls

This post has little thing to do with my ASX investment, but I've just read an article about housing in Australia and love the image they put on it.
Here's the link to the article:
http://www.news.com.au/money/david-and-libby-koch/koch-beware-of-property-porkies/story-fn7kicty-1226065440533

Pharmaxis Run

Pharmaxis - What can You Make from this?

Honestly, it surprised me. To a great degree. There are so much money to make these few days and I am in the middle of it, petrified. Pharmaxis shareholder, woke up on the 26 of May in a bloodbath. Pharmaxis reported that the European Union officials indicated that they would refuse the company's application to market its Bronchitol treatment for Cystic fibrosis. The European Committee for Medicinal Products for Human Use (CMPH) informally voted down Bronchitol in a meeting with Pharmaxis last week. Note, this announcement came a day after Pharmaxis CEO sold 500,000 shares for $2.95 each (do you think SEC should look at this?)

Share price went down from 2.81 to as low as $0.76. I know nothing much about Pharmaxis, but I could not resist to nibble a small bite of the company. I bought a few on low $0.80, which got me nervous as the stock closed the day at $0.76. Yes, I should have had a stop loss, and to be honest I do have (an imaginary) stop loss. But I did not touch the sell button, partly because I don't like being wrong and losing money at the same time (sounds like a Mark Douglas' line from his book - Trading in the Zone, doesn't it?)

Anyway, the next morning, in the first hour, the stock price went back up to $0.845. I was feeling a bit better, until an hour later, the selling was very intensive, and saw the price reached $0.71. That was 15% swing in one and half hour. Somebody making heaps of money there.

And then this morning, 27 May, PXS went back up again to as high as $0.93 or 30%. The depth look quite healthy too. A director of the company also bought a nice chunk this morning at $0.80..
Now, big question...should I sell it or keep it.. I can't count on my luck too many times, can I..

Do you have the Ability to Ruthlessly Cut Your Loss?

There are few large losing trades that I did not cut, and it just too painful to watch. I know the drill, let your profit run and cut short your loss, BUT..for me it's easier to say than to do it. Luckily, I am also lucky enough to make up from other trades, which at the end left me with no loss, but also not too much of a gain or profit. Things have to change.
According to Mark Douglas, the pain of losing money (by cutting short your loss) is intensify by the fact that you are making a mistake.

Trading in the Zone by Mark Douglas

I am currently reading a book by Mark Douglas, Trading in the Zone. It's a trading book dedicated to review psychological sides of a stock trader.
I think it's a great read!!

Hastie Ltd (and my trading mistake)

I made another trading mistake few days ago by buying Hastie Ltd (HST.AX). I am not sure why I did it, other than a prove that my emotion still get in the mids of my trading. I started watching Hastie few weeks ago, when I searched for a high dividend yield stocks. Hastie caught my attention as it supposedly yields 7.5% fully franked, with payout ratio of 54%. When I checked on the stock, it was in a state of trading halt/suspension. You guess it right, debt, without the mean to service it.

The watching continued, and fast forward, it dropped to 24.5 cents just after the suspension. I thought it worth a punt, I mean how much more can you loose? So I bought a small amount of Hasty at the (dead cat) bounce, and the minutes after the transaction went through, I had these feelings of (uneasy and guilty) for not following my trading principal. NO RUSH, the stock market will still be there tomorrow!! And I didn't do a proper check of the company before I bought, to realise that most assets are in the form of goodwill. Nothing much real except the debt.

Ok, that's a mistake, but worse than that, when the price started to go down, I ignore it and did not follow my stop. I basically let the lose running. It was just a pure bad trading.

Moly Mines ltd

Little did I know that when I sold my Moly holding on the 17th January 2011, a day later the company issued a company update regarding (partly and most importantly) the financing of the Spinifex Ridge Project.

Essentially there would be a delay in the financing, hence raised doubts about the future of Moly's molybdenum project. The announcement resulted in a drop of Moly's share price by 22% to $1.10 by the time the ASX close. What a near miss, as I am not in the habit to put a stop loss on my share holding.

Looking back at the chart, I should have bought back in at $1.02-1.03, and then sold again around $1.20 for a quick profit, but unfortunately I did not. The uncertainty was putting me off a little bit, and while I still believe that the future still might be great for MOL, I would just sit back and wait for the cloud to clear out.

Charting wise, MOL is in the downtrend at this moment, sliding back to $1.14 yesterday. With the uncertainty and lack of good news, I expect it still drifting down from here. Another issue to consider is the amount of funding that Moly need. The company needs around $1.2 billion to build the whole mine. Hanlong funding of $500 million is not enough, so we should expect another right issue to top it up.

Oz Mineral Reward?

I stuck with Oz Mineral through the dark days of the GFC, and it was a nerve breaking experience. It followed by the class action (which turned out that I am not eligible, as I bought before their timeline) and a great recovery, if I may say so.

Yesterday, Oz announced a $587 millions of profit and cash on hand of approximately $1.33 billion. No debt!. It is followed by the news about rewarding the shareholders with a fat payout of higher dividend, capital return, consolidation of shares and a buyback.

It's all good, I suppose, but when Oz concern, there's always a question in my mind about the action of Australian Government at the height of the GFC. I am not an expert in public finance, so my question is why the Aussie government did not help those mining companies that had trouble with their finance then? Instead, many of those companies are forced to sell their assets at very cheap price to Chinese companies which were backed by the Chinese Government. I realise that mining companies are private entity, but the Government could still help them by buying their assets, or shares in their companies. That would be a great investment, and if they would have done that, they will sit in a very nice profit, and saving Australian mining assets at the same time.

But apparently, everyone's a winner from Oz Minerals' Chinese transaction. Minmetals (chinese) got a good deal, so did Oz

Anyway, back to Oz results:

Final dividend of 4c a share (7c for the full year)
Subject to shareholders approvals:
a capital return of 12c per share
a share consolidation in the ratio of 10 to 1
On market buyback of up to $200m

Those would see a return of more than $600m to shareholders for the next 12 months.

Picking Up Pennies in front of a Steamroller

Finally, I've got the hold of Nassem Taleb's book, The Black Swan: The Impact of the Highly Improbable, and read it.

There were a lot of expectations associated with this book for me. This book is quoted so much in the wake of the GFC, that I thought it's a purely stock market or investment book. Well, I was wrong. While I think 'The Black Swan' is a good read for financial people, it's also a good read for every curious mind.

The book is well written, with some humor in it, but to be truthful, I sort of got lost in the middle of my reading. I found the book a bit repetitive, rather tedious and taking a long time to make a point.

The main point of this book is:

We can not possibly know everything
The future is uncertain and dynamic and has many possibilities.
Aftermath, there are many who tell you "I told you so", they actually had not.

Quote I like from the book:

Nobody knows what's going on
What we don't know can be more important than what we think we know.
Most financial traders are 'picking pennies in front of steamroller' exposing themselves to the high impact rare event yet sleeping like babies, unaware of it.
Information is BAD for knowledge
Don't ask the barber whether you need a haircut, and don't ask academic if what he does is relevant.
Financial analysts, experts, strategists, portfolio managers generally don't posses much knowledge about the market, but general public listens to their opinion
Many "experts", like economists, are no better at predicting than regular people.