Impatience! And more on why traders lose out to investors...

Impatience! And more on why traders lose out to investors

@Armyne, I know your comment was light-hearted and we'd all like the share price to go up to at least $A5 in a straight line, we can't discount people acting like people! ie taking profits, getting scared, or slapping themselves on the back for short-term trading (a notion that is dangerous to your wealth) when the trading is actually costing them money (even if their biases won't let them recognise that).

Instead of the odd individual crowing that he made a short-term trading profit, the statistics show it is usually best to invest for the long-term. Stocks go up and down every day, many of them move far more than MSB - don't feel bad you didn't sell at the high of $2.23 and buy back at the low of $1.955 in the past few days - there's no reliable way to predict those sort of moves and when they'll happen. Even if you can pick these moves, you'll end up paying huge transaction fees and be taxed as a trader (ie you won't get the 50% reduction in the capital gains tax as you will be holding less than 12 months and profits for systematic traders will be taxed as income not capital - and if you haven't declared yourself as a trader, you run the risk the tax dept will work this out in a few years and then hit you with massive back taxes!)

If you go down this trading track, you shouldn't even be looking at MSB now as it has already had its first big one-day jump post the Grünenfeld announcement (and as we know at least one of the genius traders sold out the day before the big jump). You should be looking for the next big one! AQX was up 42% today (high today was up 58%) and there are plenty of other opportunities out there for traders. MSB is likely to now have steady progress (with some variations of a few percent from day to day) but should reward longer term investors more than traders.

MSB should have less volatility in the share price going forward. I say this because the Grunenfeld deal gives stability to the balance sheet and means no capital raising until 2022 at the earliest, and probably none at all envisaged from current products - so unless they decide to go into a big new growth area which adds significantly to the valuation, I can't see more share price plunges related to cash burn and capital raising fears. That takes out a lot of share price volatility.


So, what about the volatility since the Grunenfeld announcement?

It may be hard to believe, but MSB has outperformed the initial phase (first two weeks) of the share price rise after the Cephalon deal in 2010:



Remember, the Grunenfeld deal is almost as big in $A terms as the Cephalon deal, but Cephalon covered the whole world rights for Cardiovascular and Central Nervous System product candidates and Grunenfeld only covers Back Pain in Europe and LatAm.

The Cephalon deal eventually saw the share price rise to $10 in less than a year. Currently there are twice the number of shares on issue, though the Grunenfeld deal could ultimately be just one part of several technology licences, each of a similar or bigger size for heart indications and other geographical areas - mainly the US. So, pick a price - if all these deals get done (who knows??) the share price can be justified over $A20.

So, we already have the first two weeks outperforming trading post the Cephalon deal, and I expect a lot more action to follow, though it won't go up in a straight line.

After the Cephalon deal, and the first pullback of 20% in December 2010, there was a second pullback of 15.5% in Feb 2011 ($5.92 to $5.00) and another of 11% later in Feb 2011 of 11% ($5.63 to $5.00).
So, there may be further pullbacks from higher levels in the next couple of months, but ultimately moving much higher - that's the market!

So far, so good!!

Current temptation to sell - "MSB never stays up for long" - Wrong!​

Some people have commented that the share price must fall after the recent rise. They note that every time there's an announcement the price rises and then the shorts come in after the peak and it gets forced back down again.

I disagree and I believe that it is more instructive to look at why the price rose and whether it fundamentally changes the outlook. For instance, after the 2010 deal with Cephalon, the price went higher for 12 months with only a few minor pullbacks and certainly went nowhere near the preannouncement price during that period.

That contrasts with other rises to $3.50 and $2.43 in the past 3 years which revesed within a few months of peaking. As I noted in the last note, they reversed because of the requirement for discounted capital raisings and a misinterpretation of the NIH Phase LVAD trial - ie there were still doubts over the cash burn, balance sheet and technology. The discounted capital raisings allowed shorters to cover shorts at a profitable discount and basically encouraged more shorting.

This Grünenthal deal is therefore causing a share price rise which is completely different to those runs of the past 3 years.
It validates the technology, shores up the balance sheet, means cash runway will last out til 2022 and means there won't be discounted rights issues which will push the share price down and give profits to shorts.

So, this one is different to anything we've seen since the Cephalon deal in 2010, which was the catalyst for the share price rise to $10.

This Grunenfeld partnership will give some funds the green light to invest. There has been high turnover in the past 2 weeks, since the deal was announced, of 27.2m shares in the 9 trading days since the announcement (or over 3m shares per day), although that was mainly in the first week, with trading volumes averaging 1.9m per day in the second week (and only 1.7m today) - these all include Chi-X. This compares with only 3.1m shares traded IN TOTAL in the previous 10 trading days! ​

SO,

trading since the announcement has been 9x the daily volume of the two weeks prior to the announcement. ​

That tells you there's something going on and somebody big is buying. Sure there's selling, but you'll always get a lot people taking profits after such a big price rise, fearful they'll miss out and see the price fall just like it has after the other big rises of the past 3 years. Anthony Pratt is meeting with President Trump at his paper mill in the US today - Anthony recently tweeted "I have one word for you - plastics ? No - Mesoblast !" - let's hope AP gives MSB's technology a push as a way to solve the opioid crisis!​

The market will eventually digest the profit taking selling, and as @otherperspective notes, the Prof is going to be promoting the Grunenfeld story to new potential insto investors and it may put pressure on big pharma to do the other big deals we are expecting. ​

One myth has been dispelled, and that is that big pharma will wait for results of phase 3 trials before they move on a deal. Now that one has broken ranks, it makes it much more likely that another will follow suit. Now that MSB have the luxury of certainty of cash flows, it means that they can hold out for the best deal possible, with no short term pressure. We now know these deals are possible before the trials end later this year and in the first half of next year. They really could happen any time!​

Some clarification on the Grunenfeld upfront payment​

Another interesting point to clear up is the upfront payment. Some have said it is only $US15m, however the announcement said it was $US150m of upfront and milestone payments prior to product launch. These payments include commitments up to US$45 million within the first year comprising US$15 million on signing, US$20 million on receiving regulatory approval to begin a confirmatory Phase III trial in Europe, and US$10 million on certain clinical and manufacturing outcomes. That $US45 million will be paid in the first 12 months BEFORE the trial starts. Once the trial starts, MSB will start to access the next $US105 million of the milestone payments, and this will more than pay for the expected (my guess) $US30-40 million cost of the trial.​

Don't be confused that this just means $US15 million up front. In my view it is a way for MSB to stagger the cash flow and revenue recognition to spread over 2019/20 and 2020/21 and into 2021/22 and beyond, building up every year. The payment of $US45 million in the first 12 months guarantees staggering the first lot of payments over 2 financial years (even if the second $US30 million is paid in the Sep or Dec quarters next year, ie only one year away), recognised as revenue as the milestones are met. Brilliant! If they didn't include the milestones, the auditors would want to recognise the whole $US45 million immediately, and then it would be more difficult to report increased profits in the second year. It means there won't be one big bulky payment this year, followed by an apparent profit downturn the following year. They will probably book $US15 million of revenue this financial year, $US30 million in 2020/21 and $US65 million in 2021/22 (after allowing for $US40 million of trial costs. After that, the sky's the limit, with up to $US1 billion in milestones and years of double digit royalties (I'm guessing up to 20% - though note some of the US brokers assume 25%).

​

Bottom line

The bulk of this note is to try to point out to people the pitfalls of being induced to sell after a big rise in the share price. It's a natural tendency, and falls in the price after big runs may unnerve some people who would otherwise be long-term holders and who may have stayed in if the price had risen more slowly.

I think it is good discipline to be able to work out what you are trying to achieve and to stick with the plan. Humans are apt to make many mistakes trading markets - it's not a natural evolutionary thing to do - we are programmed to generally flee from risk and even if we develop a plan to avoid the pitfalls, we often scrap the plan in the excitement of the moment. Kahneman's Thinking Fast and Slow gives some stunning insights into this and many other human thinking failures, it's a must read for traders and investors alike.​

At present, I think there's still far more upside in most analysts' valuations versus the current share price - with some analysts recently upgrading their 12-month price targets to $A5 per share, and others likely to follow suit.

Also, I've described why I think this Grunenfeld deal is much closer to the 2010 Cephalon deal which propelled the share price up to nearly $A10 without going back down to revisit the lows for several years (after Cephalon was taken over and the boneheads at Teva scrapped all their research projects).

This current deal is also currently outperforming the Cephalon deal in terms of the percentage gain in the share price in the first 2 weeks post announcement - with the price currently up 34.4% vs 29.3% after the first 2 weeks of the Cephalon deal. Of course, within a year, Cephalon's backing gave MSB a rise of a "3-bagger" and a market cap of $US2.9 billion (280.5m shares on issue, US ADRs high price $US51.50, $US1 = $A1.045). That's the equivalent of $A4.27 billion today, or $A8.55 per share today with nearly 500m shares on issue. And remember, the current Grünenthal deal is nearly as big in upfront payment and milestone payments converted into $A, and Grünenthal only covers back pain in Europe and LatAm, leaving the way clear to do more similar sized deals in US back pain, US heart and Europe heart as well as other global markets like Japan and China.

Finally, I've described why the share price fell after announcements in the past 3 years, as doubts were raised over the technology and the cash burn and need for discounted capital raisings. I've shown that this current announcement is different and actually proves up the technology and future-proofs the balance sheet and cash flows, as well as cleverly spreading the payments over 3 financial years.

Well negotiated MSB, it was worth the wait!
​

Appendix - Traders often overestimate how well they are doing

I once had a conversation with a trader who told me his share trading performance was much better than others, mentioning a stock which had doubled in the past year. I asked if he diversified his risk and he said "of course" and mentioned the 3 other stocks he had held that year (one of which had gone broke). When we added up the average performance of the 4 stocks, he had underperformed the ASX200 Index for the year and he was quite stunned - he thought he was far superior to others in the market. I find this quite a common occurrence - it's a bit like forgetting the pain of childbirth because of the joy of having a child - people tend to remember the good stuff and block out the bad stuff!

I mention this because I sense people are getting spooked into trading MSB after a vertical rise and are afraid that if they don't sell, it might go back down to where it started. Indeed some people have said this directly on HC. I hope the notes above show why I don't think that will be the case. I stress yet again that it is far easier to assign a long term value to a stock and then look at whether the current price is cheap or not, then decide if you want to sell. But don't just sell because it has had a good rise lately - that's how markets can be inefficient - people don't look to long term value, but they sell because they're afraid the next guy will sell and they think they'd better get out first before the price falls. This is lemming like thinking. At some stage the share price will start moving well above valuations as everyone starts getting on board - but that day isn't even remotely close. MSB is still hardly covered in the press and I've never met another soul who has heard of it outside of my small group of market mates and some of the 17% of retail shareholders who inhabit HC.

One of the things that spooks people is when they read how smart everyone else is trading the stock. Hardly anyone crows about the losses they make, they tend to try to forget them for all sorts of reasons. So, it looks like everyone else is trading their heads off, shorters are winning, instos are manipulating the price down to build positions etc etc and yet the average punter feels he is missing out - and maybe he should take some of that advice that the price always falls back after an announcement and TRADE IT this time - book a profit for once - no one goes broke taking a profit - leave some for the next guy, etc etc. That's why people end up cutting profits and letting losses run - and it's inefficient from a cost tax point of view for most people - and you tend to be out of the market for the most powerful rises if you jump off the run early. That's why 80% of traders go broke!

Yet most traders think they are winning and drum up all sorts of one-off positive examples to prove you should be doing it too. Get them to actually show you their long term performance on their entire portfolio, and make sure you deduct all taxes and costs - that will show if they are long term beating the market. I think you'll find that the statistics are correct and that these trading exploits are a bit like watching people's lives play out on Facebook - you only see the good bits - it looks like everyone is always on holidays, relaxing, looking great and hanging out with beautiful people.

The overestimation effect is also evident when you ask people all sorts of questions regarding their ability - eg driving skills:

“Despite the fact that more than 90% of crashes involve human error, three-quarters (73 per cent) of US drivers consider themselves better-than-average drivers​

. ​

Men, in particular, are confident in their driving skills with 8 in 10 considering their driving skills better than average.”...​

January 2018 study from AAA. Even ignoring the fact that 90% of crashes involve human error, it's mathematically impossible to have 73% of drivers better than average! It's like turning your amplifier up to 11 for Spinal Tap fans!
The same thing is going on with share traders, but it is often harder to pin down.

This might get me into trouble and I don't want it to be taken the wrong way, but I'm going to use some reasonably objective comments on HC to illustrate this point on why someone is trading, why he thinks he's doing well, but objectively he's way behind the investors who are just waiting for the big pay-off.

There has been a lot of comment from @Cato on his trading exploits of late, and maybe he's some kind of genius, but I think it is part of the over-estimation of trading ability that people have - look up Kahneman's work or "overestimation effect" on Wikipedia.

It is instructive to look at Cato's claims, as it teaches us all something about this effect and how we might be tricked by it ourselves.

I don't mean this to be a criticism of Cato, merely to show how overestimation can creep in, and he gave us a detail set of comments on his trading, so it's a great study. We can all learn something from it:

On Monday 9 Sep, when MSB was $1.45, and the afternoon before the Grunenfeld partnership, he said: "

I'm out now and lets follow for a while... I have no problems at all to buy back all again even paying 2-3-4 cents up (but chances I will pay 2-3-4 cents less)"​

Note that his Sentiment and Disclosure at that time were Hold and Held - however I don't think he updates these every time he makes a change in direction. So, this trade was only ever trying to save 2-3-4 cents. In a stock of MSB's volatility, it seems like over confidence that you could predict price moves that small. It was soon to go horribly wrong...

The next day, Tues 10 Sep, after MSB's partnership announcement with

Grunenfeld​

, he claimed at 10:11am: "

uowwww I manage buy half of yesterday holds...happy !!!" and at 10:12 he said: "1.53 and 1.55... maybe I can manage buy other half in 1.60's", when the price was already $1.63.​

Well, the opening trade that day was at 10:04:40am at $1.53 and by 10:05:19 it was trading over $1.55 - and it never traded that low again that day. So, even though he claims to stick to his rules, and had "no problem at all paying 2-3-4 cents up, he claims that he was straight back on the opening of trade, paying 8, 10 cents above where he sold out, for only half of his previous holding, and that he was hoping to buy the rest at least 15c above his exit price (while it was already trading 18c above).​

At 4:19pm that day, he then said:​

"Well today was pretty crazy for me ... after big mistakes selling yesterday (because some sellers presuuring down) i manage buy 60% of my holding yesterday in early stages.​

yes i made a orofit and sold between 1.65 and 1.68 .​

my final result was 1/3 of what i could do if i just hold and no transactions...​

well.. but im not greedy ... better 0.10 in pocket than 0.10 out. ​

Curious to see tomorrow , really will give clear indication ofvwhat major analists recomended to some brokers.​

im highly positive with the share ( in spite im today not holding)​

but ready to jump in again"​

​

So, according to those statements, he made 10c trading 60% of his initial position and had sold out totally again by the end of the day. That implies he actually bought most of his stock around $1.55 and sold most round $1.65 (to tally with the 10c profit comment). That is, he made a pre-tax and pre-costs return of 4.13% on his original position from the day before (10 / 145 *.6). If he had held and not traded, he would have been holding 100% of the position and been up 22.76% by the close of the day at $1.78.
So, the comment that the final result was 1/3 of just holding is an over-estimation claim - the 10c profit was only 18% of what he could've made by holding (and that doesn't take transaction costs and tax into account) - half of that 10c profit may well be taxable, and brokerage etc would also take a cut. So, let's say after costs, the profit for a full taxpayer could be less than 10% of just holding (that's a long way below 1/3).

So, now he's out completely again.

At 218pm the next day (Wed 11 Sep) after no mention of buying back in, and with the price at $2.01, he said:​

"The main question today is... we ran too far too quick ?

If so the shorters will come and adjust (to 1.70/1.80 ?)​

But easy the answer... watch the next 5 days and u will have your answer,.(go to www.shortman every day and search)"​

​

So, no comment re buying back in and why would he, with an expectation it could fall back to $1.70/1.80 from the current price of $2.01.

On Thurs 12 Sep, at 8:48am he said, when talking about shorters...

"​

Now, this exactly same guys are reassessing the share. If they feel 2.10 was the top they will start short (maybe targeting buy back at 1.60-1.80.​

​

​

Today sounds so low 1.80 but MSB is a small cap company and so easy in one single day drop 5% the price and next 3%... Voila !!​

​

...Well... I feel that today + Friday pluys Monday will be the "D" day...

If we hold calmly 1.90/2.00 very good.​

If we slip towards 1.85 bad news... probably no more buyers and yes, some short selling action will take place."​

​

​

It traded on open that day at $2.08, went to $2.10 and fell to $1.955 before closing at $2.01. So, no slip back to $1.85.​

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He added at 9:04am that Thursday 12th that he still didn't believe the size of the rise in the share price from $1.40 to $1.80 (even though it was now over $2) based on the Grunenfeld announcement, So, he's gone from being a trader who just watches the screen for his indications, to trying to do some fundamental analysis - this is a classic when people start to doubt their system, they seek confirmation elsewhere trying to justify their position:​

​

"by the way... people when excited loose sometimes the dimension of events..​

The raise of 1.4 to 1.8 is huge...its amazing. We are talking 500M shares. Means we talk about 200million .This is more than full year (150m?) income expected if all goes good.​

(sorry post that comment on top)"​

​

​

He obviously doesn't think MSB is worth $1.80 based on the partnership deal which was announced - again letting fundamentals stray into his screen-based trading strategy. I don't agree with him, but my point is that if you say you just trade by looking at the screens, you are going to confuse yourself by going off on a different strategy and starting to look at fundamentals - stick to your strategy!​

​

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Then at 9:30am on Thursday12th he said:​

​

"mate...please IM NOT SUGGESTING change anything. To be honest I never suggest anything. Each one do what they wants. I'm holding my shares(not selling), means I'm not advocating something and doing something else...I was just traying explain the problem of the short action. Just that..."​

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So, now I'm actually a bit confused. Despite no mention of buying back in after he told us he sold out completely on Tuesday, and that he was expecting the price could fall to $1.70/$1.80 - he now claims he's holding his shares (not selling). I don't know how to read that one, possibly it's another example of investors wanting to feel good about their trading and ignoring bad decisions? I'm sorry if I misread this one, but it doesn't seem to add up.​

​

Then on Friday 13 Sep at 6:11pm after the MSB price closed at $2.12, and still no comment of buying back in, he wrote:​

​

"I wrote 2 days ago we should wait2-3 days to confirm the strength of the trend.​

today sounds so strong break of 1-90/2.0 that if on Monday no retracement happen the share go ahead to 3 in short term . ​

good week end and the main reason is ... holders start to trust share to long term, meaning if with good price they prefer hold for future gains.​

​

this is what makes the share flight"​

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So, that sounds like he's getting ready to recommend MSB as both a short-term and long term investment as long as it stays above $1.90/2.00 up to the following Monday?​

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On Saturday 14 Sep at 7:57pm, he wrote:​

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​

"​

​

​

1. In spite i read and agree with so amazing analisis I personally cant cope with “ diversification” ,( for the reason i prefer depend years breaking my head until i find be that worth the risk.

[COLOR=#222222][LEFT]i explain ( and not encouraging anybody to follow me)if u have 500k honestly whats the point to buy just 10k-20k of msb ?[/LEFT][/COLOR]
[COLOR=#222222][LEFT]if they make a huge performance in the next months and goes to 4 , what u get 20 ? Means your entire portfolio is 510.means not relevant gain at all.[/LEFT][/COLOR]
[COLOR=#222222][LEFT]i prefer Study and run a risk and invest 33-50-66% in one share.if[/LEFT][/COLOR]
[COLOR=#222222][LEFT]in case of Msb im investing 66% (and this agreements can help to sustain in case not as good news comes)[/LEFT][/COLOR]
[COLOR=#222222][LEFT]im confident now the share can flight comfortable inclusive with short action in trend down."[/LEFT][/COLOR]​

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So, now he's decided he's not going to wait to see the price next Monday to see if there's a retracement, but He's "confident now the share can flight comfortable inclusive with short action in trend down" - I honestly don't know if that means he's thinking it's going up or down, but it sounds like up.​

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On Thursday 19 Sep at 7:12pm he said:​

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[COLOR=#222222][LEFT]"...in MSB share i could make hips because i fully loaded at 1.20-1.40.[/LEFT][/COLOR]
[COLOR=#222222][LEFT]but small sign of weakness i follow my rules and sold exactly 1 day b4 the ann.[/LEFT][/COLOR]
[COLOR=#222222][LEFT]But by pure luck (i dont claim smartness) i still manage to buy 60% of my previous holdings [/LEFT][/COLOR]
[COLOR=#222222][LEFT]at 1.55-1.65-1.85 ( and i was saying during the acquisition in this forum making public my purchases)[/LEFT][/COLOR]
[COLOR=#222222][LEFT]not as good as 1.40 but still a very good buy.[/LEFT][/COLOR]
[COLOR=#222222][LEFT]i sold all lots between 2.08-2.10[/LEFT][/COLOR]
[COLOR=#222222][LEFT]40 cents over 1.70 ... 20% positive carrying zero losses.[/LEFT][/COLOR]
[COLOR=#222222][LEFT]how many of your mates can beat such position ?"[/LEFT][/COLOR]​

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This is pretty amazing, considering he said he had sold around $1.65 for a 10c profit and no mention of buying back in, but now it appears he may have bought some at $1.85 at some stage and sold at $2.08 to $2.10 (or there's a bit of fantasy going on) - there were no comments on 16, 17 and 18 Sep, but the LOW price on those 3 days was $2.10, so I don't see how he could've bought back in at $1.85! And if he sold out at $2.10, he managed to nail the low of the 3 days (and it didn't trade as low as $2.08 over those days) - this is how trading leads to losses!!

Please note, I'm trying to use this as a learning exercise, and show how trading is a mug's game, not to attack Cato. I'm taking most of his comments at face value, but the last one just doesn't appear to make sense given the movements at the time in market prices.

But, for longer-term investors, rather than traders, the price has closed the week at $2.02 - that has held in the $1.90 to $2 range where Cato thinks it can run to $3 "short term". So that would be a return of 107% from the $1.45 pre Grunenfeld price. The investors are already up 39%, the trader made a 4.1% gain on the $1.45 price he sold out at, if you assume a 10c gain on 100% of the original holding (and for those paying full tax, you would lose half of this in tax). The trader apparently doesn't own the shares at present, even though his system seems to suggest it'll run to $3 - I'll be interested to see if he reports when he buys back in.

So, I think yet again, investment for the long term is superior to trading. I think traders over estimate their ability (not aimed at Cato - but shown in all studies I have seen) and that transactions costs and taxes generally aren't taken into account. As I have said before, let your profits run when your valuation remains above the current share price, and don't try to trade short term moves - you run the risk of cutting your profits and not getting back in (even if you correctly pick a fall, you often hope for more before re-entering and then miss then next leg up).

I have tried to use Cato's post as a guide here as a study of how one trader has attributed his success. It's only a sample of one, but it gives most of his reasoning and thinking at the time, and you don't often get such honest reporting of what a person is doing. So thanks Cato for all your help in being able to put this together, I hope it helps you and all of us.

NB If Cato did manage to buy back in at $1.85, as he claimed on 19 Sep, he must've bought on the open on Wednesday 11th, although the number of shares that traded then was nowhere near the volume that he says he wants to own in a stock like MSB. AND that was the day he said we had run too far too quick and was expecting the shorts to push it down to 1.70/1.80 - so why buy at $1.85 - also he didn't disclose buying back in, and he reported every other twist and turn in his trading, so it's a conundrum. Then he reckons he got out at $2.08 to $2.10 - and it didn't trade there until Friday 13th - the day he said he had decided 2 days earlier to wait 2-3 days to confirm the strength of the trend - so if he actually was doing this it's hard to believe he actually bought on the previous Wednesday. It's really hard to make this add up! See graph below (red circle is the only time it traded $1.85 on Wed 11th):



NB If you have come this far, sorry for the digression, but it did say "Appendix"! The main conclusions are in the section immediately before Appendix, entitled "Bottom Line".

Happy weekend to all