Importance Of Risk Management | Singtel Telco Merger Case Example

Announcement

Hi guys, it’s been a while! I realised that I haven’t been posting regularly for quite awhile. I realised the new frequency of posting is not working well especially since my calls are usually fast paced and it would be too late to inform you guys when the tides have changed. Hence I will decide to post much more frequently throughout the week and sacrifice slightly more time.

Let’s get down to the case study

In this case study, we see my previous call telling you guys not to buy Singtel due to the downward trajectory that it is headed in. However, as seen in the chart below, it definitely did not turn out the way I intended it to because of a potential telco merger in Australia.

Explanation

There was this huge green candle which destroyed all the shorts during the day. Why was that so? It was because of this news that there would be a potential telco merger between it’s Australian rivals, which essentially means less competition and more profit for all. After all, Australia (Optus) accounts for a larger percentage of revenue earned by Singtel relative to Singapore, which I have covered in my fundamental analysis post.

So what is there to be learnt?

Technical Analysis really only works during “normal” times of the economy and fares very poorly when there are huge market-wide or firm-specific shocks such as the telco merger in this case or the recent announcement of the Additional Buyers Stamp Duty (ABSD).

What do we do with the information learnt?

Please learn to position size properly so that these shocks wouldn’t destroy your account. I personally only take risks of 1-2% of total capital on any single position that I open. i.e. For a $10,000 account, each position risks $100-200 bucks. While this limits returns, this reduces the downside and the huge unforgiving risk of blowing your account from drawdowns or these kind of events.

Cheers & Good Luck

-JC

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