One of the main differences between foreign funds and local funds is the way they react to major movement of shareholders especially top guns who are driving the company. This is also the main reason why foreign funds could cut their losses to the minimum. Right, you can call them kiasu, kiasi or whatever you wish but the fact remains that professional investors hate uncertainties. Ever wonder why the professional investors seem to be able to play the games many times more than you?

A good example is Gamuda Berhad’s (KLSE: GAMUDA, stock-code 5398) latest stock plunge that erased more than RM2 billion off its market capitalization in merely two-trading days, its biggest tumble is 10 years. Reason – the Malaysia second-largest builder’s Managing Director, Lin Yun Ling, who is also one of the founders cashed-out from the construction business. JPMorgan Chase & Co. (NYSE: JPM, stock) immediately cut its price estimate to RM3.30 from RM4.40 a share after the Gamuda MD reduced his stake from 5.23 percent (104.7 million shares) to 1.73 percent (34.7 million shares), pocketing a cool RM350 million.

Although Lin will remains as managing director it doesn’t change the perception amongst the investors (well, at least JPMorgan thinks so) that the risk of Gamuda not getting more gigantic contracts increases. Furthermore in Malaysia it’s who you know rather than what you know that would land you with government contracts. Of course you have local analysts such as TA Securities who did not see any reason for alarm and in fact the firm upgraded Gamuda to “Buy” with a target price of RM5 a share.

The chain of thought from foreign funds were that if the founder and captain of the ship decided to cash out, he might not see any more “interesting project(s)” in the pipeline else he could wait for the fruits to ripe. Other traders might think this is bargain hunting opportunity, reading from technical chart. Nonetheless the trading rule from foreign professionals is to cut or sell when such major event happens. Hence depending on which school of thought you’re comfortable with, you have the option to either buy or sell the stock at this junction.

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February 22nd, 2008 by financetwitter

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