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Meet Kai Sheng – the guy who borrowed from credit cards to fund a margin account, during the March market crash

Stocks

Written by:

Alvin Chow

Remember this guy who was featured on Bloomberg taking leverage to invest during the worst of times when Covid-19 struck?

Earlier this year, 31-year-old insurance agent Heng Kai Sheng got advances on three separate credit cards to the tune of S$150,000 ($105,000). With the money, he opened a share-financing account at a local bank and pledged the lot as collateral. He was granted leverage of around 3.5 times, a S$500,000 kitty Heng’s plowing into the stock market.

I remember it causing quite a stir in the community with many disagreeing with what he did as it felt extremely risky to them. In hindsight it was a good move as the stock market did a v-shape recovery. Of course, something worse could have happened.

I managed to contact him and he agreed to recount what he did and give an update how things had panned out for him.

I want you to hear from the horse’s mouth so I quoted his replies to my questions in this post with some minor edits on the language.

What went through your mind when you decided to leverage up?

Well.. it wasnt a decision that was made overnight. I have been preparing for this opportunity since my days in university, 5 years ago.

I know market moves in cycle, and the last one lasted quite a while. I have told myself that once the next opportunity comes, like the one in 2007, I will use whatever resources I can get my hands on to take advantage of it.

The pandemic happened and I knew that it was my chance.

I told myself (and some of my friends), its either i get a free BTO at the end of it if I am right, or I’ll start all over again with an expensive lesson learnt and paid for.

What were the general views when others knew about you borrowing from credit cards and taking margin trading in the stock market? What was the nastiest comment you have received?

Hmm.. there were a few concerned individuals, including my own parents. There were also a few supportive ones!

Those who were concerned thought that credit card debts were bad, and very expensive (they thought I was borrowing at 28% per annum lol). Generally, they believe that it is a bad idea to borrow and invest!

I did try to explain to them that I did it for the same reason Apple borrowed to invest, despite having a record pile of cash in their coffers… but you know, its hard to get the concepts behind such ideas to them.

Those who are supportive are generally more financially-savvy and open-minded.

In terms of nasty comments, I dont think there was a nastiest one!

There were talks that my investments would go awry and I might just end my life because of it (I laughed real hard at this, ha). To be fair, that is a real possibility! So the comments were not entirely wrong!

However, I do feel strongly that some comments directed at the insurance industry were a little uncalled for… comments like “insurance agent YOLO” and “proves that insurance agents don’t know finance” etc.

I know of great, hardworking colleagues who provide professional advice, and who would sacrifice their sleep just to rush down to the hospital because their clients got into an accident.

I don’t think that it is fair to hastily generalise that all insurance agents are reckless just because of what i did.

Do you have any dependents?

Yes, I have kids and parents to support!

If you didn’t have dependents, would you have done it differently?

I think that having dependents did restrained me from executing a much riskier strategy.

Though I was ready to start all over again and work even harder to learn and recover, should I fail, I had to make sure that the family doesn’t have to starve!

How has it been for your portfolio performance ever since Bloomberg covered your story?

Haha, if you measure it against the total amount of money I had put in (approx $400k++), I am only up about 27% so far.

But if you measure it against my own capital only, the returns were enhanced due to the use of my leverage. It is up by about 60.54%.

The above returns are measured net of interests payments and includes both realised and unrealised returns!

Are you happy with the results?

Not very happy, I felt that I could have done 3 things better:

A) My strategy involves buying more shares as prices dips (something like dollar cost averaging but can’t really call it so because I don’t put in money at regular timings). When the market was moving furiously down, I’ve got to admit I had doubts about what I was doing, and didn’t follow through to buy in even larger quantities.

B) There were a few counters I sold off prematurely, like MapleTree Industrial. I got it at an average price of $2.10, with the lowest being $1.94. I sold off everything at $2.30, but it has continued to march higher since then.

The really profitable positions are the ones I still hold, since March 2020!

C) My exposure to US techs were limited that time. I had failed to identify trends or anticipate that money would be flowing so aggressively into Tech stocks, early during the crisis.

My bias towards SG shares have resulted in a costly blind spot.

How would you describe your investment strategy? Based on the lessons you have shared, would you be refining your strategy going forward?

The strategy I executed doesn’t come from me, it was mainly from Ben Graham. I adapted and refined to suit my personal investment objectives.

I cherry pick undervalued stocks with strong balance sheet, then buy more as prices goes down.

I have back-tested this strategy frequently since my days in University. I started the back-test in year 1990, it survived the dot com bubble and Asian financial crisis. However, whenever it goes into the markets of 2007, my account would go bankrupt.

I played around with different trade sizes to identify the solution.

Eventually I came to 2 conclusions:

A) Dollar Cost Averaging does work if you have an infinite amount of capital and time, assuming you also pick a consistent performer that wouldn’t go bankrupt.

But having an infinite amount of capital is impossible, hence I have found a way to tackle this obstacle.

B) Market can remain irrational longer than you can remain solvent.

The strategy is simple, but don’t expect supernormal returns because you are probably not going to catch things at the bottom.

As for how I intend to refine it… I think that my strategy had been too conservative. I realised that I had missed out much opportunities in growth stocks back in March, like Tech stocks!

I will be re-looking at how I pick stocks for sure!

Would you do it again if you have the chance?

Certainly, if the conditions are correct!

As a matter of fact, I don’t think that this is the last crisis we are going to see.

And if the opportunity arise again, depending on the nature of crisis and the interest rates environment then, I may do an encore!

I had been very fortunate to be able to access very affordable credit this time, in the middle of a crisis.

My view

You will notice that his decision to leverage during a crisis was not made in a rush. It took many years of preparation for the moment to come. Chance favours the prepared. He backtested, studied and did his homework before he had the courage to pull the trigger.

Many investors want to buy during a crash but they did not do the homework and prepare themselves mentally for it. The crash can happen all of a sudden and if you are not prepared, it is easy to allow the fear overwhelm you and you did not dare to invest anything.

Another lesson to learn is that buy every time the market becomes cheaper / dip / correct / crash (whatever terms you use). You don’t need to leverage like him. Don’t learn the wrong lesson. What you invest is also not important. Most importantly is that you took action to invest.

All the best!

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