Monday 16 April 2012

Failures and Side Effects

Sometimes taking a few steps back can be very interesting to get a perspective of things.
Things are not always what it seems, and if we are not careful, we may even throw the baby out with the bath water!


Have you ever used the 3M’s Post-it note pads? 

When it was first invented, it was considered a “failure” as what do you do with a “weak” glue that don’t stick? It took 6 years later before a colleague of the inventor found a use for it by anchoring a bookmark to his hymnbook. The rest as they say is history…

Does a Rights Issue sound like the 3M Post-it note?

Most shareholders will moan and groan whenever a rights issue is declared (me included).
I guess most minority shareholders are only fair-weather friends. We will stick around when the company is giving away dividends or rewarding us with capital gains. But when the company has fallen on hard times and need our support with a rights issue, you should read the vitriol we hurl on the management… Ah! Take is easy. Give? Wait long long!

For savvy investors, some rights issue can be an opportunity to increase your percentage share of the company by buying over the rights from other shareholders who are dumping them in dismay. 

The catch word is why you are invested in this company in the first place? If a company you have conviction in is being offered to you at a discount, shouldn’t you be happy? No?

Of course it’s another story if the reasons you invested are no longer valid.

For traders, sometimes there’s a window of arbitrage to make a quick buck off “newbies” who have no clue what are rights offer and how to calculate the Theoretical Ex-Rights Price (TERP). 

It’s weird, but we do see cases where the rights (rights market price plus conversion price) being sold below the mother shares’ price!? A quick fingered trader can sell the mother share and buy the rights and arbitrage on the difference. This is the closest thing next to picking money off the floor…   

It brings to mind the Chinese word for “danger” - 危机. Opportunity in adversity!

Side Effect

I guess the most famous unintended side effect for a drug must go that little blue pill – Viagra!

Originally, Viagra was developed as a cardiovascular drug and for its ability to lower blood pressure. But during the medical trials, the researchers found that the men guinea pigs didn't want to give the medication back because of the side effect of having erections that were harder, firmer and lasted longer. I wouldn’t too! (Did I just say it out loud?)

I made the mistake of focusing at it as a pure yield play. But the pleasant side effect was very evident during the market correction during 2nd half of 2011. 

While Hyflux mother shares fell from SGD $2.19, together with most of the rest of SGX stocks, the Hyflux preference held its ground.

Savvy investors who parked their funds with Hyflux preference shares can leisurely rotate out of the preference shares and buy-in to the Hyflux mother shares at a great discounted price from SGD $1.00 to $1.50.   

I now have another “vehicle” to ride besides going to money market funds or short term treasuries – if I do see rain clouds over the horizon.

Hey! Past performance is no guarantee of future performance! 

Unless you have Viagra (snigger, snigger). What? I’m middle-aged, so it’s probably downhill from here onwards…


  1. Hi SMOL,
    Ha! Ha! Hah!
    Nobody can write something about so serious as investment in such a hilarious manner. i think you should keep inventory of all your writings. One day, a publisher may approach you. Don't forget my coffee money then. Cheers!

    "Most shareholders will moan and groan whenever a rights issue is declared (me included)."
    Seriously, i was like that too. Though i have benefited more than losing out in rights issue.
    "It’s weird, but we do see cases where the rights (rights market price plus conversion price) being sold below the mother shares’ price!? A quick fingered trader can sell the mother share and buy the rights and arbitrage on the difference. This is the closest thing next to picking money off the floor…"

    Ya lol! it's really weird. i think it happened not long ago with LIPPOMALL rights issue; especially at the end of the last few days to ex- rights. i don't know what really happened but people seemed to be dumping the Nil-Paid- Rights. There seemed to be an over-hang of supply.
    Me i thought i were a sucker at that time (i took the risk) and i were fortunate to be abled to average down 8 times buying the NIL-Paid-Rights. The 9th time i didn't get any and it was the cheapest because it was ex-right tomorrow. It was really scary for me because no investment is 100% guaranteed. And i had to average down 8 times. Terrible frightening isn't it after it's over then you will realise?
    From this experience, i change my outlook on rights issue forever.
    Of course, in the first place i have been eyeing on this company for a right price to enter. Not any other company O. K. Still it's a "gamble or speculation" to me.

    1. Temperament,

      What is life without "exceptions"?

      Normally I would not advocate averaging down (having got burnt myself); but in this case, all we need is primary school math ;)

      I suspect those who "owned" these nil-paid rights dilly-dallied and panic sell when they realise they will expire worthless soon...

      There are retail investors; and then there are "retail investors"! Same same but different ;)

      Hmm... I think I better don't talk about it more. Wait future "kang tao" broken you kick me! Not every day Sunday you know!


  2. There is no failures in the stock market. Only hopeful or hopeless.

    1. CW8888,

      That's true and very frank!

      As a cheerleader, I can't say it like that... I would prefer something softer and a bit cryptic like:

      There are no failures in the stock market. Like in insurance, the majority contribute for the greater good of the minority ;)

      I still got salesman bullshit in my blood!?


  3. don't talk (to me), i'm still trying to stop blogging!

    good post, want to trade you need to go more in details locate price discripencies. i know, where got time?

  4. Talking to myself,

    1) Blogging is a hobby.

    2) Speculation is for kopi money and building funds for future back-packing trips.

    3) Protecting networth is for securing my "sabbatical from work".

    All the above activities should not interfere with my main focus today - time with family.

    To all my readers,

    Please do not let reading my blog disrupt your main focus.

    Use my posts as a time-killer when you have some idle pockets of time.

    Stay safe; stay healthy ;)

    1. Hi SMOL,
      No worry, no sweat. No one can go to court and complain, "He make me do it", Ya? Not when you are more than 18+ or 21. i always remind my son something like that when he starts to blame every thing, everyone except taking responsibility for what he has done.

    2. Temperament,

      I guess everything in moderation is the key.

  5. No fairy tale!

    There is Money tree that can grow money as fruits

    Sometime in life, we will reap what we have sowed. In the stock market, if we can do the Right Clicks! it is more than enough to generate passive income for a long time.

    I realized that passive income from stock dividends is fantastic once you got damn right. You don't even need to lift a finger to receive it. Really wonderful!

    Read? One Right Click!!!


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