Archive for August, 2007

Build leverage.

2 comments Written on August 14th, 2007 by
Categories: Uncategorized
Prem Sagar has an interesting post about active investing versus a fill-it-shut-it-forget-it (sorry Hero Honda) approach:
Say, you have 50 lakhs to invest. Say, you have 50 lakhs to invest.

The average performance of the market might be around 12-15%.

And you are clever that you beat the market hands down by a huge margin. Say 50% or more. Say around 18-25% PA.

Your 50 lakhs after a year in the average folio rises to 56-57.5 lakhs.

But as a active super performer, you could have taken it to 60-62.5 lakhs. (assumption)

So the cost of active involvement was around 4-6.5 lakhs. Do you think thats an attractive ROI? Could you in any way have put this time to better use? Well, only you can tell.

In a further comment he says:
My final thought is this. I have mentioned this previously. You can 1. Earn more 2. save more 3. Invest the savings cleverly. Step 3 can be delegated. Step 1 cannot be delegated. That is where my focus is currently.
(What I said there and an expansion follows)

Interesting thought there. But firstly the difference between an active investor and a passive one is usually much much higher - for the successful folks it can be even 100%.

Some of the best fund managers (who do this full time) have gotten gains of 150-200% annually (see John Arnold) Even in India, there are a number of investors that average more than 50% on their returns. In fact if you use products such as derivatives you can leverage the money to make larger investments and recoup your money.

When you take the same 50 lakhs and put a differential of say 40% on it, you get a sum of 20 lakhs (on which you pay a tax of only 10% short term gains, versus the 30%+ you pay on salary). 20 lakhs is probably more worth the effort.

Whilst focussing on earning more is important, you are limiting yourself to your earning capacity if you focus on your salaried job.

To put it in investing terminology, you have a leverage factor of 1 => the amount you work = a salary of x gets paid. More work = more pay.

As you grow older, you get leveragable assets - experience and contacts. You can now work less (relying on your experience and contacts) and earn just as much, or work just as much and earn more, increasing your leverage factor to say 4.

If you started a company, you can pay OTHER people to work for you and earn money. This is difficult and fraught with risk, but if you succeed you can increase your leverage to say 20. (For each unit of work you get 20x the return as compared to the salary you would earn)

When your money works for you you will further increase your leverage, sometimes to infinity by living off fixed deposits!

What I'm saying is: Focus on increasing your leverage. Whether it is by active investing or working or starting a company, your aim is to build assets that can be leveraged. (Money or company ownership)

Essentially get to a stage where you can make your assets working for you, instead of your having to work. This may involve innovative ways of thinking, or simply applying common sense.

Example: Doctors have no leverage. They have to work, otherwise they don't get paid. Right? Well, they have a way out. They will build certain leverages - specialised degrees, experience and fame - and get to a point where they can earn more. For instance, Neurosurgeons get paid more than general practitioners.

To further leverage, they can build a hospital. (See Madhu Trehan, Dr. Devi Shetty and so on). Having a hospital means that when you get old enough that your hands shake and you can no longer operate, you still have something that keeps giving you income.

If you're not a doctor, don't be depressed (or you'll need one). You can still create assets. For one, Active investing can speed up the process if you're good. Meaning, investing in companies that will beat the indices, tracking your investments and covering your capital from losses.

And you will notice that the more leverage you have, the lesser taxes you pay :) (as a percentage of income)

  • Salary income has the highest tax: 33% highest bracket with very few deductions
  • Business income (consultancy etc.) still has 33%, but you can deduct stuff like depreciation on your car, phone expenses, travel expenses etc.
  • Company ownership - apart from expenses, dividends are tax free (company pays 15% DDT)
  • Stock market investments - long term gains are tax free, 10% on short term gains.

Posted in Uncategorized

All that glitters is not gold, Quantum

5 comments Written on August 13th, 2007 by
Categories: MutualFunds
Quantum Mutual fund says they are a "different" kind of fund. They have no distributors (you must buy from them or from Personalfn or Equitymaster, their own sites) and say they are a low cost fund. Meaning, you pay no entry load, and no distributor commissions. Plus, they don't do big advertisements or spend on canvassing money.

On their home page I have noticed some articles. Recently they talked about how your money is looted by "high cost" funds (the ones you regularly hear of such as HDFC Equity or Reliance Vision and so on) - essentially, by charging you for distributor commissions, TV advertisements, billboard costs, etc. through fund management charges. This reduces the total amount of money you have, and therefore your returns.

I agree with them when it comes to entry load. Read my post on How Entry and Exit loads can affect you - where I compare your real returns through ETFs, zero load funds and full-load funds.

But they are wrong when it comes to the whole picture. To give you an example: HDFC Equity fund has more than 4500 cr. under management. The net expense ratio of the fund is 1.83%.

Quantum Long Term Equity fund manages 37 cr. and charges you 2.5%.

For you the story goes like this. If you had 1 lakh in HDFC Equity fund, (ignore the entry load, we'll come to that later) - the expenses charged to you would have been Rs. 1830. And if you had the same 1 lakh in Quantum long term equity fund, your cost would have been Rs. 2500.

Meaning, Quantum, with all its "low-cost" statements, actually costs you more (on an ongoing basis) than a "high cost" mutual fund like HDFC Equity.

Note: If you had INVESTED the money in the funds one year ago, your story would be different, because entry load for HDFC Equity - 2.25% - would have taken another 2,250 from you making it a worse return. I agree with Quantum on its lower entry load but they compensate by putting in a higher exit load so the next effect is the same if you were to need money today.

Now, how do the 1 year returns compare? Quantum LTEF made 25%. HDFC Equity made 37%. Your one lakh would be worth 1.25 lakhs with Quantum and 1.37 with HDFC Equity. Not only has HDFC charged you lesser as costs, they have also delivered superior returns (so when you consider even that 2.25% entry load, they have done better than Quantum).

Low cost does not necessarily mean better. Sony TVs and Toshiba Laptops are not cheap. And if you still want to go zero load you can choose index funds (like UTI Master Index, UTI Nifty Index etc.) which charge you 0% entry load. (Both those funds returned over 30% last year, and their expense ratios are 0.75%)

Quantum has said that their one year performance is weak because they did not fall that much last year (during the downturn). So when they didn't fall that much the bounce does not look good. This is a mathematical flaw. If the market went up 50% in one year, you should have made 50% in the last one year (or more, otherwise why should we give you the money).

Just because they lost lesser in the downturn doesn't mean they should be excused for underperforming when the markets go up. The return difference is so big (nearly 12%!) that it merits concern. To save one or two percent in costs, we are giving up 12% in returns?

Quantum stayed in cash last year during the dip and when valuations were low (at 9000 or so). But they remained in cash even after that. Perhaps that was a mistake. After all, I wouldn't pay someone else to NOT invest my money, would I? Secondly their calls just haven't been as good as the others. That's also ok, every fund manager has his day. And finally, they charge you the maximum amount they can - 2.5% - as management fees.

I think it's easier if Quantum admitted it as their mistake instead of weaving excuses for their underperformance. And although they try to come across as the low cost fund, their fund can actually costs you more, as we've seen in the recent past.

I've met Ajit Dayal, the founder of Quantum, during an investor meet in Bangalore. I think he's a smart chap. But perhaps these guys need to sit down and work out how they must deliver really low cost and high quality returns - like the Vanguard funds in the US. To be honest I think funds from Benchmark (NiftyBeES, Junior BeES etc.) are lower cost than any others I have ever seen, even if you considered brokerage costs.

Posted in MutualFunds

Hedge fund redemptions to hit Indian markets

5 comments Written on August 13th, 2007 by
Categories: Commentary
Howard Scott writes (post on Seeking Alpha) that there may be a liquidity situation with hedge fund redemptions that could create a temporary downside:
“If investors want to withdraw money from hedge funds, a 45-day notice period is required, in which the application can be submitted. So for the July quarter, July 1 to August 15 is the application period to withdraw serious money from a hedge fund. Post-August 15 will probably see people queuing up for redemptions in hedge funds. This may lead to a cascading liquidity withdrawal syndrome across emerging markets. This has not happened yet, but if it does, stock prices can be under the selling pressure across markets, where funds have been invested,” said Seshadri Bharathan, director, stock broking, Dawnay Day AV Securities.
What this means is that if US stocks tumble, hedge fund investors will pull out their money. Hedge funds,which invest in multiple countries, may choose to sell out of India - where the markets are doing well - rather than liquidate a down investment in other countries. Which means there will be selling pressure. Dates given are interesting because if investors ask for redemptions by August 15, the fund needs to give them their money in 45 days. So if they ask for money today, the fund has to provide them the money by latest October 1.

While this can sound bearish you should not rush to sell. Why not? Simply because it's a prediction based on an assumption. That a) investors in hedge funds will withdraw and b) that these hedge funds will sell enough to ruin the market. Let the assumptions pan out. Let markets show a dramatic slowdown. Then we will see.

One indicator seems to be a dip in volume. Today (13th August) saw less than 9000 cr. turnover in stocks and about 30,000 cr. in derivatives (futures/options). These are the lowest figures in the last 45 days. Yet, the market was UP 1%!

If volumes continue to be low and the market stays up, it is an artificial high. Markets are propped up by purchases and transactions - if you have lower volume and high prices it means both supply and demand have dropped. Eventually the equation will go to lower prices where demand increases (the market always moves to where demand will increase).

But volatility is extremely high, as evinced from option prices. So if there is latent demand, it should come in this week. If not, these are signs of a trigger that is due to come. We will find out the reason later.

Posted in Commentary

Adding Twitter to my blog

No Comments » Written on August 13th, 2007 by
Categories: Uncategorized
Like Kaushik, I'm adding Twitter to my blog sidebar. Note that a) Kaushik is my co-founder at Moneyoga and b) my twitter posts are going to be small tiny tidbits which may or may not be useful.

But it should be fun. Condensed information. Big posts go to my blog.

Posted in Uncategorized

Arbitrage funds are risky?

5 comments Written on August 7th, 2007 by
Categories: Futures, MutualFunds, Stocks
Are arbitrage mutual funds really risk free? PersonalFn attempts to debunk that theory saying:
  • Buy-stock, sell-future is the common arbitrage used. Futures are usually priced higher than stocks. Yet, in a bear market, futures are priced at less than spot prices so arbitrage cannot be used.
  • Slippage in prices can result in bad execution. The author takes an example of a stock-future combo arbitraged at 100-105. The 5 rupee assumed profit is actually not that much because on the expiry day, when you unwind the deal, you may have a spot-future price of 106-108, meaning the real profit is only Rs. 3.
  • When no arbitrage opportunity exists, some funds can buy pure stocks ('naked') which introduces risk.
  • Low liquidity can cause problems because there may be enough buyers and sellers.
Before you go any further, if you want to know what futures and options are, read my Introduction to Futures and Options article. Arbitrage funds essentially buy in the cash market, and sell in the futures market at a higher price and lock in the profit.
I think they are right to a certain extent. Arbitrage funds have a certain embedded risk in them but then so do fixed deposits beyond Rs. 1 lakh. The bank can go kaput, and that is just about as likely as some of the scenarios mentioned above.

While there may be slippage (difference between exercised and executed prices) you will find that the slippage factor is usually accounted for in India where you get between 1 to 1.5% as arbitrage on an opportunity.

Secondly, arbitrage can be zero risk if it's classic arbitrage. You can't provide "assured" returns, but you can guarantee zero risk in that if you buy a stock and sell it's future you can lock in gains, unless you choose a ridiculously illiquid stock on the futures market. In the last thirty minutes of trade on expiry day nearly every single (liquid) stock converges within 0.1% of its future! So slippage on unwinding is very small compared to the actual arbitrage, and if you're worried about such small amounts you should be worried about bid/ask spreads and commissions as well. (again, small enough to hurt your net return, but will not generally introduce "risk", i.e. a way for you to LOSE your capital).

Note here that risk simply means the potential erosion of your capital. Not a potential erosion of your returns. Arb funds don't guarantee returns, but they can do a zero risk deal.

Remember that funds needn't even sell owned stocks to square off. They can re-sell the next month future if the arbitrage opportunity exists, that way they save brokerage and any potential slippage thereabout.

For instance, if an arb fund had decided on the RCOM stock. When the stock is increasing in price, there has been increasing hedging opportunity on the stock (the arbitrage spread has been increasing). So if you bought on April 26 at 474 and sold the 31-May future at 477, you would make Rs. 3 per contract. On May 31, the May 31 contract closed at 505.45. The fund can sell the RCOM stock bought and square off the loss on the future (of Rs. 28.45 per share).

But the June 28 contract was selling at 512, a Rs. 6.5 premium (more than 1% for a month). So instead of selling stock, the fund can take the loss on the future, hold the stock, and sell the June-28 future again. This can be continued as long as a) there are no redemptions and b) the arbitrage opportunity still exists. Of course, as the stock keeps going higher there will be losses on the future (which are equal to unbooked gains on the stock), but that can be adjusted by selling just enough stocks to make up that loss. Again, zero risk in reality (even if the price came down).

Yet there can be a larger risk than you think, also. Some arbs (like JM Arbitrage fund) take into consideration things like dividend arbitrage (buying a stock post dividend assuming the market will take the stock back to its pre-div price) and acquisition arbitrage (buying a stock that is being acquired and therefore has an open offer at a higher price) These are inherently more risky than classic arbitrage and that introduces a portfolio risk for you.

Can you and I take advantage of arbitrage? The answer is yes. But we have to be quick on our feet and execute two trades simultaneously. Plus, we have to ensure that on the trade expiry day we either roll over our positions or square off, either of which must be done or you expose yourself to needless risk. And lastly, our commissions on our brokerage must not wipe out our gains. For instance, if I used my Sharekhan account (0.5% brokerage each way on a sell and buy of stock, 0.1% each way on the future) I would not make any returns because the typical arbitrage is about 1% a month.

But I could use my Reliance Money account, which gives me a very very low brokerage (Typical round trip brokerage for a single contract is about 0.1% all sides included). Which means I could earn 0.9% a month if I went down the arbitrage route.

Note: what follows can look like an advertisement for my new venture. It might be. I am very excited about it so please excuse me if you find it weird.

Yet, arbitrage needs me to know which opportunities to use, and how to use them effectively. And to know when the spreads are in your favour and when not. That requires time and effort which I know is difficult for the regular investor - so here is where I bring in my new company. My new company, Moneyoga.com, will address that situation by providing you feedback on such opportunities (arbitrage, how to execute, when to sell etc.) - and the best part is, most of it will be free.

And we won't stop at arbitrage - there are a lot more opportunities we can use by just understanding how the market works. We intend to create a map for you that will help you lower your risk by automatically alerting you when there are signs of negative or positive action on your stocks, and by telling you about how you can protect your portfolio, use income generating strategies or identify new stocks, futures or options you can leverage.

It's under construction and will take some time to develop. Meanwhile I'll keep posting our findings here.

Posted in Futures, MutualFunds, Stocks

How ULIPs and Mutual Funds make you pay

13 comments Written on August 4th, 2007 by
Categories: MutualFunds, ULIP
When you buy at the supermarket, you cringe if the cashier adds one item with the wrong price. You say "But it says 20% discount!", and ensure that the cashier books the discount, changes your bill amount and pay accordingly. You would never let a petrol pump operator fill even 100 ml. less than you pay for. But when it comes to financial products, if you are like the vast majority, you get taken for a major ride and in most cases, don't even read the fine print before you sign up. Even I have done this so you're not alone.

Consider that:
a) you pay a lot more for a financial product (ULIP or mutual fund) than for petrol or vegetables.
b) Your savings come back to help you in the later part of your life (unlike petrol or vegetables).

It seems illogical that you should pay less attention to the fine print of a financial instrument than for your vegetables!

Mutual funds and ULIPs both make you pay in the form of unintelligible fees disguised in their documents in different ways. Let me show you how.

ULIP Charges
ULIPs have an amazing array of charges that you aren't necessarily aware of unless you read their documents carefully. Let me show you how, for a premium of around Rs. 50,000 a year, you will be made to pay fairly hefty charges.

Most ULIPs charge you a Premium Allocation Charge. This simply means a charge that you pay to have your premium allocated (kind of like your vegetable vendor telling you: You need to pay Rs. 10 for 1 kg, and Rs. 5 for the privilege of buying from me). Actually it encapsulates the commission that your friendly agent makes on the deal, and a little bit more.

But it can be huge, and the word play can get you. Allocation charge, which some ULIPs use, is the percentage of the money you PAY. Allocation rate, however, is the percentage of your money that is actually used. For instance, HDFC's Young Star Plus plan says their premium allocation rate is 40% for the first year (for a premium less than 2 lakh a year). Meaning, you pay 60% as commissions!!! Consider that, for a policy of 20 years, you are effectively paying 3% a year, much more than a mutual fund. And you pay that upfront instead of amortizing the cost over hte whole plan, meaning you don't even get the benefit of paying lower due to inflation.

Most ULIPs tell you that you will make money if you are loyal to them - i.e. when you stay with them for a long time. I wonder why, if they ask you to be loyal, that they ask you for all the commissions upfront? If you get benefits when you stay for the long term, why shouldn't their benefits also be linked to the long term?

Not only is it unfair, it is also ridiculous - because the power of compounding is not being used. Investment today multiplies at a higher rate than money invested later - so the logic in taking away most of your money today and telling you that they levy very little future charges is financial stupidity.

Some ULIPs, however tell you they have a 100% allocation rate. Like Aviva's LittleMaster ULIP, for amounts above 25,000 a year. Sounds great? Hang on a minute. Firstly, this plan limits your sum assured to 10x the premium. Meaning, for about 50,000 per year, you get a cover of Rs. 500,000. Peanuts, honestly, because if you can pay 50,000 a year you need a lot more cover than 5 lakhs. Secondly, this plan has an Initial Management Charge - which is basically taking money from your first premium. Note: Aviva's policies tend to spread the initial management charge over the entire term - meaning, they make this money over the term of your policy - which is a very nice thing for you since more of your money is invested.

ULIPs also have mortality charges which is the amount you pay to have your life cover. ULIP mortality charges change every year (unlike a term plan) and they RAPIDLY increase after the age of 50. A 50 year old will typically pay 5 times the mortality charge for the same sum assured than for a 30 year old.

You will also have policy administration charges - typically Rs. 50-60 per month. (why do they charge this? It's so small it is ridiculous to charge the policy holder. Like saying "I need to staple your policy document together so please pay for the staples").

Then of course, there's the Fund Management Charge, which is reflected in your NAV. Typically between 0.8% and 2%, this may look less than a mutual fund's charges but when you add this and the other (non-mortality) charges together, things will look different.

Finally, there's the surrender charge. This is what applies should you surrender your policy before the policy term. This can get complicated, because people use such terms:

Surrender Charge
– on Initial Units: [1-(1/1.10^N)] * value of initial units, at the unit price, on the date of surrender
– on Accumulation Units pertaining to regular premiums: [1- {1/(1 + x)}^N] * value of accumulation units, at their unit price, on the date of surrender. The variable x varies with the number of completed years premiums paid at the date of surrender:
...
Sounds like Greek to you? It simply means they are finding innovative ways to take away more of your money. The above means that if you want to exit after paying 3 years premium of Rs. 50,000 each on a 10 year policy, and the X (which is given in the policy document) is 1.75%, you will be charged approximately 35,700 (assuming when you surrender, the net unit value is 150,000)

Remember: If you stop paying your premium, your policy may "lapse", but the fund value (minus surrender charge) MUST be paid back to you after three years from inception, or a small "reinstatement period", typically two years (whichever is later). It is legally your money. Don't let anyone tell you otherwise, and you can go to court to claim it as well.

A major issue, which I've talked about earlier, is that ULIPs deduct some charges from your units, and some charges from their NAV. So at any given time you need to ask them both for the number of units you currently own, and the current NAV - and both can change anytime. In a mutual fund at least the only variable is the NAV.

Mutual funds
Mutual funds have not quite as many charges but they're quite relevant all the same. Firstly the "entry load" is charged to you on buying units in a fund. This is the same charge even if you buy the first time or later, and typically vanishes when you invest more than 5 crores, in which case you are probably not the kind of person I mentioned earlier in this article.

Entry load is actually commission given to the agent. Anyone can become an agent by becoming an AMFI test and getting certified. But even if you are an agent, you do not get commission on mutual funds taken in your own name! And they don't excuse you from the entry load either. It's illogical.

For those funds without entry loads, there may be an exit load, meaning you pay if you get out of the fund within a certain time. Some funds have exit loads to protect themselves from redemptions but in passive funds like index funds, the concept of an exit load astounds me.

Closed ended funds charge you amortised issue expenses if you exit before three years. Such funds basically take away 6% of your money upfront and charge it to you in bits and pieces daily, over a three year period. You can't attempt to exit early because they will charge you the unamortised expenses on a redemption.

The fund management charge of course varies by fund. Typical expenses are of the range of 1.5-2% for equity funds. Index funds are the cheapest here; since they require very little decision making, they should charge less. I say "should" because many charge a lot - upto 1.5%. Benchmark's NiftyBEES, an exchange traded fund, charges you very little - only 0.8% as far as I know. Fund management charge is reflected in the NAV of the fund, and is not something you pay. But it's good to be aware.

I hope this opens your eyes to the various ways you pay for your own financial products. You may not be able to negotiate away these charges, but you should choose a product that does not try to take as much as it can and hide things in small print. Don't trust anyone, including your advisor. Our legal system ensures that all such products MUST document all charges on the brochures and offer documents, all of which are available online. So if you're reading this (and not yet asleep) you can read those documents as well.

Happy investing. Caveat Emptor. (means buyer beware)

Posted in MutualFunds, ULIP

How To Handle A Sinking Market

7 comments Written on August 1st, 2007 by
Categories: Commentary, Stocks
The mayhem is here. Nifty is down 183 points to 4345 and Sensex is down 615 points to 14935. A 4% drop in a single day of trade. Every single index is in the red, and nearly 90% of stocks are down today. Is it time for the bears? Is it time to exit? To go home and forget about stocks for a while?

First, let's address the situation. What is this "fall"? The market rose vertically from near the 4000 levels in May to 4600 this month. Falling down to 4300 is not a big deal. The fear is the SUDDENNESS of the fall - I think none of us would be concerned as much if the market slowly went down over two months. But that is the nature of the market - it falls sharply, and rises slowly.

Why? Because a very large part of market participants, including FIIs, are driven by sentiment and momentum. That means on a short term (a day, a month, a quarter) markets move according to psychology rather than fundamental triggers.

Let me now try to explain why we fell, and more importantly, what you can do about it.

Markets in the U.S. fell 200 points yesterday. And most of this fall happened in the last two hours. The Asian markets moved wildly down (Japan, China, Taiwan) and then we followed suit in India. That's it. There's no story, no major problem, no threat, no trigger, nothing. Just bad sentiment.

Why the market slid is not important. The fact that it did is. You now have to react to this slide. How?

Question: Are you in the market for the really long term and don't care about your portfolio for the next few years? Stop reading here. This is where you shouldn't bother. Nothing has changed from yesterday to today, except a CRR hike, which is another short term thing. Take some rest, and watch cartoon network or Pogo for a while.

But for the rest of you that are active investors: What can you do? You've probably seen some of your stocks down 10%. Still, you're probably profitable because let's face it, this bull ride started four months ago. You want to protect your profits, but how?

Here's my points:

  • React to the markets. Don't try to predict them. In times of volatility you can never say what will happen unless it has already happened. People will give you conflicting opinions - and someone will say this is temporary and others will say it'll go down forever. Forget them. What matters is how you react, not what other people think.
  • The trend is your friend. Meaning, if the trend is down, sell. If the trend is up, buy. As an example: The markets opened more than 2% down today. Half an hour later it was still down on heavy volume. That's as good a sell trigger as I know. If you had short sold the Nifty future then, you could have covered most of your losses in the underlying stocks by the end of the day.
  • Respect your stop losses. You bought stocks for a reason. That they will rise in value. When they fall, they are going against your reasoning. Keep a limit on how much you lose and take the loss when the stock goes there. For instance, BHEL is a great stock. Fantastic long term prospects. Still, when it fell from 1890 to 1700 in a few days I sold the stock. It could be a great company, but when the stock falls 10% without proper reason, what is the assurance it will not fall ANOTHER 10% without reason? Most of the time stocks retrace MUCH more. So I would rather exit the stock than see my money go down another 10%. (Note: My stop losses are usually 20% because of Indian market volatility. BHEL was a special case: When my stocks reach 50% above the level I bought at, I cut my stop loss down to 10% from the highs)
  • You can never make money from the first 10% slide. It will be a surprise, regardless of how good an investor you are. You need to make money from the NEXT 10% fall, which will happen because of the panic in the markets. You can thus recover what you made. But how? Buying put options, selling call options or selling futures. If you do this, you must be careful and track the markets closely, so that you cover any losses. If you short sell a Nifty future (Rs. 16,000 margin) and it goes up 32 points, you've lost 10% of your margin - so you need to cover.
  • Don't buy on the way down. Buy on the way up. Meaning, if a stock is falling and you like the price, don't buy it yet. Let it reach its lows, retrace back up say 5% and then buy. That way you don't catch a falling knife.
  • There are ways you can make "income" from the volatility. This involves using bear put spreads, writing straddles and writing calls. Another way is to buy way out-of-the-money puts and calls, knowing that whatever happens, the market is either going to be up sharply, or down sharply, which gives you an upside either ways (since you buy both a put and a call). This strategy requires explanation, so let me explain that in another post. But suffice it to say that there are ways for all of us to make money using futures and options even in a downturn.
Now let me tell you what factors might impact the market:
  1. CRR hike of 0.5%. People say this will not impact lending rates but that is baloney. Fixed deposits are already booked. You can't change those rates. Floating rate loans can still be moved. So what do you think a bank will do? Most likely lending interest rates are going up. Meaning, bad for auto and real estate.
  2. Money flow: If the US markets go down, FIIs are likely to take their money out of India, because their investors may panic, or because they want to invest back in the US. Either ways, money will flow out of India. How will you know? See the dollar. if it keeps rising to Rs. 41 per dollar or more, money is flowing out.
  3. Panic: Every single bear market was created out of panic. When panic selling happens, the market moves FAST, spiralling downwards. You can't predict panic, you can only react to it. If you will participate in the next few days watch out for panic.
But don't do any random trading. Think about why you are in the market, and stay disciplined. It's easier said than done, but if you don't say it, you won't do it.

What am I going to do? I've been actively protecting my portfolio and have been seriously in cash (nothing to invest in since I sold BHEL and Balaji) - so I'm doing some F&O strategies to test our markets. We're writing software to analyse patterns, and what better time to test our patterns than in such times! Once we have our analysis, I will show you how you can make money at such times as well.

Posted in Commentary, Stocks

Newer Entries »