All Banks are lending out money to reliable people with adequate collateral to generate more business activities and profit. All Investment Banks are also lending out margin loan to reliable investors to enable them to make more profit.
All clever business men should not be afraid to use borrowed money to do more business in order to make more profit. As long as you can make more profit than the interest you have to pay, you should not be afraid to borrow. Ever since I started doing business, I have been borrowing money to make more profit. As a co-founder of IJM Corporation Bhd, I can vouch that the company has been borrowing bank loan to do more business and gain more profit. As a result, IJM has expanded so rapidly. IJM’s market capitalization was more than Rm 12 billion when its share price was at its peak.
Margin Loan is a double edge swords
Ever since I started investing in the stock market, I have been using margin loan to make more profit. It cuts both ways. You can make more money if your selected share price goes up but you can lose more money if your selected share price comes down. I do not encourage investors to use margin loan if you do not have the necessary knowledge and skill to select good profit growth shares.
I have margin accounts with CIMB, TA Securities, Kenanga , RHB and Hong Leong. My remisiers are Wen Cheng, Ricky Kon, Allan Yeoh, Foo Wu Wen and SL Yau respectively. Although I can save some cost if I key in my orders myself instead of using remisiers. I always give direct instructions to my remisiers whenever I want to buy or sell. All of them can vouch that I always use my margin loan to its limit and the truth of this article, especially Ms S L Yau of Hong Leong Investment Bank, Ipoh. Her telephone contact is 05-2559110.
I always use the allowed maximum margin finance which is 50% of the market value of my holdings to buy shares. I am not afraid because margin call is at 60% and I have 3 trading days to sell to regularize my account.
My most expensive mistake
I am not ashamed to admit my most expensive mistake in buying too many Jaks shares with maximum margin loan. I bought Jaks in anticipation of future profit from its power plant in Vietnam. I did not follow my golden rule for share selectionwhich is the company must report 2 consecutive quarters of increasing profit and its projected PE should not be more than 10. When the price of Jaks crashed, the price dropped too fast and created more margin call which was a vicious cycle. The more I sold the more the price dropped. As I result, I lost a huge sum of money.
Fortunately, Jaks is only an isolated case. I have used margin loan to make a lot of profit in so many other stocks such as Lii Hen, Latitude and VS Industry which shot up a few hundred percent within 2 or 3 years.
For the purpose of this investment lesson, I use my current investment in Dayang. The price chart shows that Dayang has gone up from 90 sen to close at Rm 1.76, a gain of 86 sen or 96% within 3.5 months.
Assuming my capital was Rm 1 million cashand I could borrow Rm 1 million margin loan to buy Dayang at Rm 1.00 per share, I would have 2 million Dayang.
When the share price went up to Rm 1.20, the market value of my 2 million Dayang is worth Rm 2.4 million, an increase of Rm 400,000 which I could use to buy an additional Rm 400,000 divided by Rm 1.20 = 333,000 Dayang. I would have a total of 2.333 million Dayang.
When the share price went up to Rm 1.40, market value of my 2.333 million Dayang is worth Rm 3.27 million, an increase of Rm 3.27 million – Rn 2.4 million = Rm 870,000 additional buying facility which I could use to buy Rm870,000 divided by Rm 1.40 = 621 Dayang, making a total of 2.333 + 621 = 2.954 million Dayang with a market value of Rm 4.14 million.
When the price went up to Rm 1.70, market value of my 2.954 million Dayang is worth Rm 5.02 million, an increase of Rm 5.02 – Rm 4.14 million = Rm 880,000 additional buying facility which I could use to buy 518 more Dayang, making a total of 2.954 + 518 = 3.472 million Dayang shares.
You can visualize that my profit would be more if I bought more often or whenever the price went up.
I need to point out that when Dayang tried a few times to cross the Rm 1.69 resistance in vain, I WhatsApp to some of my close friends to sell to take profit. When I started my selling I noticed there were many rich fund managers buying my shares very aggressively and instead of selling I bought back.
If I sold all my 3.472 million Dayang at Rm 1.76 which is the last closing price, I would get Rm 6.11million. My total margin loan is Rm 1.00 million + Rm 400,000 + Rm 870,000 = Rm 2.27 million. My profit would be Rm 6.11 – Rm 2.27 million = Rm 3.84 million with an assumed capital of Rm 1.00 million. I would have made 384% within 3.5 months.
If I did not use margin loan, with my assumed 1 million capital, I would have bought 1 million Dayang shares. When I sold them at Rm 1.76 each, my profit would have been Rm 760,000 or 76% in stead of 384% with margin loan.
As you can see above that for illustration purpose, I only bought Dayang at Rm 1.20, Rm 1.40 and Rm 1.70.
In fact, Ms Yau of Hong Leong investment bank, Ipoh Tel 05 255911 can vouch that my original capital is much more than Rm 1.00 million and I have been buying Dayang almost every day whenever I have additional margin buying facility as the price goes higher and higher.
Based on the aggressive buying and the price gain 8 sen per share to close at Rm 1.76, it looks like many rich fund managers are expecting a much better profit in the next quarter which should be announced before the end of November. The price chart is extremely bullish and I believe the price will shoot above Rm 2.00 in the next few trading days. If you have sold some of your holdings earlier, I suggest you buy back and your average cost is still cheaper than the current price.
The value of an idea lies in the using of it.