We Survived Trading ICON (5255) and made RM10,000 Profits - Review & Analysis

 

This post first appeared at The Pelham Blue Fund, the premier day trading blog for Malaysia stocks and warrants.

 

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Outcome

Gross Profits : RM10,086

Return on Investment : 22%

Duration : One hour

We vividly remember an afternoon back in November 2019. Got a call from a friend about a very creative deal structure envisaged by  ICON Offshore Bhd.

The exercise was a share consolidation plus rights issue. We were used to one share subdivided into five parts, but fifty shares transformed into one?

We were out of our depth on this. (Editor's Note : give yourself one brownie point every time you catch an oil and gas/offshore industry pun in this post. We are nerdy like this)

The conversation was about how this deal works. There were many moving parts and confusing permutations. Our friend had trouble understanding it. And while we gamely attempted to explain the different permutations and outcomes of this deal, we had trouble understanding it too.

It's like we had drilled deeply into our minds and found nothing.

At the time, the outcome of our mental maths is:

Cash call + hard-to-understand restructuring plan = not very confident lah

ICON's shareholders back then probably shared this same sentiment. They had already unloaded the stock. It fell to an all time low, perhaps unfairly, as the market disregarded valuations and sold at all costs.

Huh?

You can read this article for a more thorough exploration of the situation.

As for us? We kind of filed that in the cabinet. Our minds drifted offshore. We forgot about it as we went on a short year-end holiday, trying to forget about the trading business.

That was last year. In January 2020, we snapped back to reality.

We were still on a post-holiday stupor, but this was a crude awakening. On 20 January, we saw this message on our trading platform: a kind reminder of the upcoming corporate exercises being undertaken.

"Ah right, ICON, that peculiar thing.... let's see how it does on 22 January..."

ICON's daily price chart looks like this from November to 21 January, the day before the ex-date of the share consolidation exercise.

There was a spike in buying in early January, but it still fell from 6 sen to 3.5 afterwards. What happened next was a lot weirder than any of us had anticipated.


THE TRADE

We made this flippant observation on 22 January 2020, first thing in the morning. We didn't think much of the stock at first; it was just hovering near 20 sen.

Note the timestamp

Now, was the market confused? We did not have a clue; it was merely a theory. But for one reason or another - mainly it was due to how the stock was moving - we decided to trade ICON.

But we needed to trade this thing properly to survive. It's never easy when you have to shell out the capital necessary to commit to a high volatility trade. So we announced our parameters.

The actual yield turned out to be closer to 375% !!

The following five-minute chart shows our positioning in two trades that ultimately yielded RM10,000 in profits.

The general principles are very similar to our previous short term volatility trades; you can read up on this guide, or this one. In some ways, the price movement in the chart tells the whole story; being ready to mentally commit to this trade - we did highlight it at 9:22AM - also really helped.

 

 

This all happened very fast.

 

 

But turns out the trade still has some gas in it. So we committed again.

 

As a general rule, we commit smaller amounts for these kinds of 'second round' trades. We didn't do this out of ego or belief in continuing a hot streak. We had reason to believe the rally can keep going - mostly this is instinctual, but we certainly noticed the lack of time the stock spent on what was supposed to be the obvious support point of 30 sen. 

 

So we made the call.And five minutes later, we escaped.

 

 

It would have been neat if this had been the whole story. Little did we know at the time that this trade would turn out to be much more complicated and perplexing than we could ever have conceived.

THE PSYCHOLOGY

You'd have thought that making ten grand in an hour was crazy. But that was just the start!

As you can see, we got in at around 22 and exited at 27.5-28 sen. We got in again at 31 and then let go at 35.

ICON then went up to a peak of 95 sen in the next two days! Crazy, right?

"You blardy idiot; should've let it run all the way up eh?"

Well, our conservatism had clearly bitten us in the arse. However, that very same conservatism meant we got to keep our profits. And with these kinds of profits, we're happy to be the blardy idiots.

We had some strong debates, within the team and with friends and acquaintances, about the potential upward trajectory of the stock. It ultimately led us to cease looking at ICON on the very first day of this price move. That meant we got out at a peak of 35, and missed out on potential multiples of that RM10,000 in profits.

Regrets much? Sure, yet this realisation was purely in hindsight. We traded regrets for peace of mind and a sizeable five-figure profit. For you see, there were incredible risks abound. It's like a small island that turned out to be the top of a gigantic underwater volcano. You don't mess with those.

The higher ICON's share price runs up, the more detached from reality investors' expectations become. In short, it's a micro marketmania. It helps that we have seen run ups like this before. We are totally unfazed by this move.

We also strongly considered the other side of the argument, which was to keep ICON's shares:

1) From a valuations perspective, this move from 20 sen to 90 sen is justifiable. The rights issue is perfectly priced. Convert the rights and get the extra exposure and free warrants.

2) ICON has strong fundamentals and is poised for a very strong recovery. It's a great company.

Our retort is simple: "So, were these your convictions on 21 January 2020, just before all this stuff exploded?". The reply is invariably the same : um, not really. No matter what you hear on investment forums or people suspiciously promoting the stock to you, the risks inherent in this trade is exactly the same.

We quickly sensed that a lot of the current arguments are basically faulty post-event justifications. This is where we start out with a preconceived bias (ICON shares must keep going up! to RM1.50 even!) and subsequently scramble to find any plausible, reasonable points to back up the bias (see (1) and (2)).

Let's say you have one person with the above thought. Multiply it by, let's say, 500 people. We think that's good enough for a few million lots bought into ICON, thus bringing the price up, and thus perpetuating this mania. In some message boards and forums, the message is the same : go buy, buy, buy. The FOMO was strong.

This is the main problem: when we are seduced by mania, we end up doing two things: we become married to those biases, and we suddenly become world-class risk takers.

THE RISK

There's a lot of arcane documents and academic research out there about risky behaviour. There have been quantitative and qualitative analyses over excessive risk taking, and why we occasionally do them. These acts are manifested in daily life, in spurts: high-speed driving, drug use, gun use, and also in daily stock trading.

Without boring you to death, let us simplify it in the context of this trade: the higher and faster ICON's stock moves, the riskier it becomes for your deployed capital.

In a bull market, everybody becomes a genius. We would fail to disassociate the effort and the outcome. In fact, we correlate capital gains ("I tripled my money! Wohoo") with genius. It's just basic human error.

All sorts of things can happen after a stock has tripled within three days. The main concerns are either the stock drops back (30% fall, 50% fall, limit down, who knows?) or that the rug would be pulled under unsuspecting retail investors (let's say, a regulator comes in and takes action).

And the last part about market manias : we love the ups so much that we forget the downs. But the downs will eventually come.

THE COMEDOWN

On 24 January 2020 (Lunar New Year's Eve!), the regulator declared ICON as a designated counter due to excessive speculation. It did not mince its words; the designation was meant to be a red flag.

In our private chats, we articulated some concerns which are expressly not contra trader-related.

It goes back to one of our central beliefs : one of the least desirable things that can happen to a decent, upstanding, public listed company, is for the stocks to become a speculative tool. Public markets is an avenue for fundraising. Excess speculation can erode public trust. Why did you think the regulator came out with that announcement?

On 24 January 2020, the stock closed at 81.5 sen, having hit a peak of 95 sen earlier. The stock had more than quadrupled since we traded it just two days earlier.

All that's left to do is see what happens next.

When markets resumed trading on 28 January 2020, ICON hit its limit down price of 51.5 sen. Its tradeable rights, ICON-OR, hit limit down for two days running.

On 29 January 2020, ICON falls just as hard.

By 30 January 2020, well, let's stop here...

In other words, a complete collapse. We saw it from a mile away. So should you.

The lessons here are obvious:

1) Don't take risks you can't afford

2) Beware of dangerous biases and assumptions

3) Just because a stock quadrupled in price doesn't mean it's a good investment proposition

4) WHAT GOES UP CAN COME DOWN JUST AS EASILY

https://klse.i3investor.com/blogs/pelhambluefund/2020-02-02-story-h1483014975-We_Survived_Trading_ICON_and_made_RM10_000_Profits_Review_Analysis.jsp