Prestariang is a Malaysian based ICT company that has been around since 2003. While the stock reached its peak on 8th January 2018 of RM3.15, the investor who bought at that price and held on until today would have seen his wealth destroyed by more than 85%. In the month of December 2018 alone, Prestariang fell by about 40%. So what happened? What can we learn from this?
The drama starts in early December 2018 when the new government of Malaysia decided to cancel the SKIN (National Immigration Control System) project with Prestariang. That day alone, share price fell by 35%. The SKIN project is the crown jewel of the company. However, the new Home Minister Tan Sri Muhyiddin Yassin cancelled the project to help save the government some desperately needed money and that has spooked many investors.
To make matters worse, due to the rapid plunge in share price, it was discovered that the chief executive officer (CEO) of Prestariang, Dr. Abu Hassan Ismail has put up all his shares in the company as a collateral for a loan. He was then forced to sell his entire shareholding of 117.19 million shares, representing 24.30% stake of the company. This has ceased him to be the major shareholder of the group. The rapid sell down of large quantities of shares caused a downward spiral in the share price thus a loss of 40% in December alone.
What can we learn from this?
1. Be wary when the government is a big part of your stock’s business
In the investment world, this is known a regulatory risk. It is a risk whereby the government can instantly end a stream of income enjoyed by your company or when your company is very dependent on the government to survive. This is obviously very risky because most companies do not have ultimate control over the government. Like in this case, all the Malaysian government needs to do is to simply send a letter confirming the cancellation of the project to cause share prices to tank.
Therefore, in the future, be aware when your company either requires a special license to operate or does business specifically with the government. Only invest when there is a discount to its intrinsic value to accommodate the potential risk. On top of that, never invest a significant stake of your portfolio into companies with such risk present. That way, you are able to protect yourself from potential catastrophe such as this.
2. Beware of Leverage
Margin facilities are a popular investment tool used by investors to improve their investment returns.
What are Margin Facilities?
Margin Trading facilities is a facility provided by the bank to investors which allows them to borrow a certain amount of money to invest in the stock market. This is also known as leveraging.
By leveraging, you can potentially pump up your profit significantly when the market in on an uptrend.
For example; assume you have RM10,000 in your brokerage account. Using margin trading facilities, the bank would loan you an additional RM10,000 to invest. Your capital will then be RM20,000. When the stock price increases by 10%, you should be making only 10% or RM1000. But since you borrowed an additional RM10,000 from the bank, you would be making RM2000 instead of RM1000. Compare the RM2000 profit to you own capital of RM10,000. That is a 20% profit instead of 10%. These margin facilities turn good deals into great deals.
On the flip side of the coin, using this tool comes with very steep risks as leverage cuts both ways. Should the market price of the stock falls drastically, you are forced to sell your stocks at a loss because you will receive a margin call from the financial institution to pay the interest which you borrowed or to top up the losses on losing stock. It may cost you your job and your loved ones around you.
In conclusion, these real-life stories show us that, the risk of using leverage to invest in the stock market is always against our odds because the value of a share in the stock market fluctuates on a daily basis and the obligation to repay the interest and losses are fully rested upon the borrower. Therefore, it is only wise to use financial leverage mechanism when the underlying asset does not fluctuate in value on a daily basis such as real estate.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.