what kind of markets have these been .. a slight news of hope is causing stocks to rally to so much amount which they used to rally in a year .
As i write this Citigroup Corp shares have risen 68% in just 1.5 hrs of trading . 68% in a day !!
That’s a kind of return which mutual funds are really jealous of . Last month when there was some bad news about UNITECH , it plunged by 50% in a day only to recover back 40% the next day ..
Last quarter DLF lost 33% in 2 days on the news of US FDA banning its drugs in US . and then it again came back to its normal levels .
When DLF lost for 2 days , I had seen DLF PUT options went up 50 times in 36 hrs …and on the third day when it was up again by 20% , then its CALL options went up by another 5 times . means if you got everything correct and bought call and put options at right time , you could have made 5 Crores ($1 million) with 4 lacs of money ($8000) . that’s 25000% return in 60 hrs . there is an assumption that you bought things at right time which is almost impossible … but with little luck and study at least 1000% was possible for sure …
I thought of buying DLF puts after it fell for 1st day , but because of fear , i didn’t buy it .. and it went up by 800% next day ( i remember it correct , it went up from Rs 4-5 to Rs 40) , that’s 800-900% return in 2 hrs .
I am sure Citigroup option traders would either have made a killing or killed themselves . 🙂
Anyways , options are extremely dangerous products , its not advisable to get into them unless you are sure what you are doing ..
Read the basics of what are options
This is a nice article by Charles Delvalle based on Investment Rules, i am just reproducing his work on this blog.
Have you ever been on a losing streak and felt like there was no way for you to make money in the markets? I think we all feel that way from time to time. It’s natural. After all, our emotions are never static.
The worst part is that when we’re in that mindset, we can actually create a self-fulfilling cycle. Maybe we’re trying too hard. Maybe we get sucked into a variety of different indicators that we never followed before. Or perhaps we get into one trade hoping that it’ll make up for all the losers we just had.
Nine times out of ten, it never works out though. The end result is that you lose more and more money. But it doesn’t have to be that way. So here are six simple rules for you to follow that will help you manage your emotions better and become a better investor.
Rule #1: Hope to make more money, fear to lose more.
In the book Reminiscences of a Stock Operator, this was one of the most important lessons that trader Jesse Livermore learned in his time as a trader.
When he got into a position and it started losing money, he realized that he had to get out of it quickly (cut your losses). So what he’d do was to fear that he’d lose more money and get out of the trade. On the other hand, if the trade was going his way, he would hope to make even more (let your winners ride).
Rule #2: Stick to Your System, NO MATTER WHAT.
This is a tricky rule to stick to, even for experienced traders. But the truth is this: If you have a system that you know for a fact works, then don’t stray from it. You will only end up losing money.
Why do investors stray? Sometimes it’s the feeling of invincibility they get after they’ve won a few trades in a row. Other times it’s simply because they are desperate to hit a winning investment. Whatever the reason, when you stray from your system, you stray from what you know works. Ignoring what you know is never a good way to make money.
Rule #3: Don’t become attached to your money.
Sounds easy, right? You’d be shocked how hard it is to actually implement. Too many people put money in the stock market that shouldn’t be there. If this is your retirement, or tax money, or money you owe to somebody, DON’T USE IT IN THE STOCK MARKET! Only use money that you can afford to lose.
Rule #4: Don’t play catch up.
If you’ve hit some losses in the stock market, the last thing you should do is ‘double up’ and hope to hit a winning trade. What if you don’t win? You will lose twice as much and be in even more pain.
Listen, losses are a part of the game. Every investor in the world loses money from time to time, but if you’re system works (rule #2) then stick to it and you should end up back in the green in no time.
Rule #5: Don’t over-analyze things.
I can’t tell you how many times I open up the Wall Street Journal and see an article that goes completely opposite to what I believe to be true about a particular sector or investment. Does that mean I listen to them? In all honesty, I look at the argument and see if it has merit. If it doesn’t, that’s it. I stick to what I believe to be true unless something drastically changes.
In my trading arsenal, I have a few indicators I look at and then have certain beliefs about the market and sector based on a few people I trust and what I know of the market. Everything else is just static. It’s only there to agitate you.
Rule # 6: Listen to yourself.
One thing I’ve learned is that as you trade, you find out new things about yourself. You find out what your true fears are (fear of success, maybe?), you find out your weaknesses (maybe not following your system to a T), and you find your strengths (maybe you make money best in certain sectors).
As an investor, you need to pay attention to all of these things. That way if a certain emotion is cropping up and threatening to lead you in the wrong direction, you could quickly stop it and move on.
Watch this video to know more about Investment Rules:
If you can stick to these six rules, you’ll be able to have a much better grasp of your emotions while you trade.
What do you like about this article? Do you want to ask any query? leave your reply in the comment section.
In this article I’m going to tell my conversation with one of my friend about investment and different investment tools. We have discussed on both advance and traditional investment tools.
Read this chat conversation with one of my old classmate in Graduation.
“Manish : So where are you going to invest you money this year?
Manish : But do you think they would give you good returns? also they would be locked for a long time, don’t you need that money in near future?
XYZ : Not exactly!, actually I can leave that money invested for more than 5 yrs, or may be 7-8 yrs too ..
XYZ : also, But I would like to invest some money in mutual funds … around 20k, May be I need some money to send to my brother for his MBA coaching ….
Manish : hmm.. But I think you should do exactly reverse. Invest this 20k in FD and Rest money in Mutual funds + PPF or only mutual funds.
XYZ : No no, I cant !! I have already lost 50% in mutual funds this time, I cant take risk now, I am fine with less return but a secure one …
Manish : hmm… I told you don’t put all money in lump sum. You never heard !!
XYZ : I invested because I trusted you, I thought you know more than me, but it fell so much … you gave wrong advice at wrong time.
Manish : Don’t you think it was your desire for high returns which made this happen? Equity are risky? I told you this too !!
XYZ : Whatever …
Manish : ok .. np … Consider what I said … good night … 🙂
XYZ : Good night“
What is the problem of these people?
First they need high returns, then they cant wait for long term to get that kind of return. They just hear that equity are risky but don’t believe it, they will make you feel that you are responsible for the crash. They just don’t take responsibility for what they did !!
What I actually told her?
I told her that its OK to invest at these high levels but don’t invest in Tax saving mutual funds as they will be locked for 3 years, also invest less and that too through SIP (What is SIP?), so that it can eat up the volatility and insure less losses if things go wrong.
But the only things on her mind was:
It will save her tax
Will give superb returns like it did during 2002-2007 (these are the people who don’t read “Equity investments are risky and passed performance is not guarantee for future performance”)
If she does SIP and markets goes up and up, she will be buying less units.
This is a classic example of “Overestimating Returns and Underestimating Risk”
How should you do your tax planning for the year?
First thing, if you have not done your tax savings yet, its a bad thing. It should be done at the start of the year itself, at least planned.
If you need money for short term goal, don’t invest in Shares or mutual funds !! Put it in some assured investment instruments like FD.
“Return of investment” is more important than “Returns from investments”.
If you have money which you can invest for long term, invest in Shares or Mutual funds (but only for long term). As per your risk taking capability choose combination of Debt and Equity and invest for the long term …
Why Equity?
Do you know that most of the stocks have beaten down so much that they have come down below than the price they deserve, There value has exceeded there price (Read about Value Vs Price).
Unitech : One of the largest and most respected Real Estate companies has fallen down to levels which are unimaginable !! from 532 to 40-50.
Tata Motors : Nano will be manufactured in some months, every thing looks so good, but people just sold it because of Singur tension (It was fine to sell it , but now its oversold).
There are countless examples like this in current market. Things will go fine, but with patience.
What makes an Healthy financial Portfolio? There are some good traits of portfolio which makes it better than others. A good and strong portfolio has some strong elements or parameters which it must meet. These are the Pillars for a strong Portfolio or Investments.
This is one of the biggest reason to invest. Isn’t it very obvious? Yes, it is. But the main point is not just its growth in numbers but its real worth. We are talking about Post-tax and post inflation returns.
The real return of Plain Fixed Deposits in these high inflation days are negligible when you factor out Inflation and tax. The best investment must be robust and good enough to provide appreciation in real worth over long period of time. Real Estate and Equity (Long term) can generate good returns.
Liquidity
Another important aspect of a good financial portfolio is that its provide enough liquidity, so that in case of need, you can get the money.
What is Liquidity? Liquidity is how fast and easily asset can be sold and you can get cash. For example Mutual funds and Shares are highly Liquid, If you have them and want to sell, you can get the money soon. Where as Real estate is not a Liquid asset. So if you need urgent cash, you might not find right price and or buyer.
Every portfolio must have some element of Liquidity, as per the requirement of the investor.
What do we mean by this? A good investor is one who sees beyond what an average investor cant see. Average investors concentrate very well on Profits, How good an investment can be, High returns etc.
An exceptional investor goes beyond that and takes care of Worst case Scenarios and situations which may cause damage. He is the real investor.
Some of the steps to be taken are :
Adequate Insurance to be taken .
Proper monitoring of performance of investment.
Getting out early in a bad investment and accepting that you made a wrong decisions.
Keep your self updated with news, laws, things which can affect you investments.
Risk management is not buying some product for managing risk but being aware of things and taking right and logical decisions.
Goal Oriented
“A good investment is one which has a purpose”
Each and every investment should be done because of a strong reason. I see people who take Insurance policies to save tax at the last rush hour of the year !!! Better loose the tax benefit and don’t take that policy.
That kind of investment is nothing more than a waste or burden. On the top of it these people don’t even need insurance !!!
When someone asks you the reason for making a investment, you should know why you did it?
Some of the bad or idiotic reasons for doing investments are :
I can save tax by that
My friend did it and recommended me
Everyone is doing it .. why shouldn’t I?
Every time you take a decision ask yourself some questions like :
Do i really need it at this point of time?
Can i afford it?
Do i understand it well? Can i protect myself if people make me fool?
What is the purpose or goal of this investment?
If you get satisfactory answers go for it else take an expert advice.
watch this video to learn more about investment analysis and portfolio management :
Sample Portfolio Analysis.
Sample Portfolio 1
Robert is a married person earning 40,000 per month. He is the sole Earner of the family and and has 2 kids. He is not a risk taker and his portfolio looks like.
50,000 invested in NSC (opened before 3 years)
An endowment policy with 10 lacs cover and 40,000 premium for 30 yrs, with maturity benefits.
1,40,000 in a Tax saving mutual funds (investment 70k for 2 years for tax saving)
Home (Rs.30,00,000)
Cash : 20,000
Car : worth 5,00,000
Jewelry worth 80,000
Lets rate his financial portfolio on all the parameters on the scale of 5 stars
Capital Appreciation : A small portion in Equity, and that too for a wrong reason of just tax saving, Saving through Endowment policy is another wrong decision, the returns are too less.
Liquidity : None of the assets are Liquid and Cash available is not enough to meet emergency requirement.
Risk Management : No Risk management, What if he dies after 10 days, What if he meets an accident, What if suddenly he requires 1,00,000, what if he looses his Job.
Goal Oriented : * (The reasons for investment in most of the things looks like they are for Tax saving, or some one suggested )
Sample Portfolio 2
Ajay is married and has 2 kids and parents who are all dependent on him, He earns 40,000 per month.
Long term investments in Tax saving Mutual Funds (Rs.4,000 per month)
Term Insurance of Rs.80,00,000 (80 Lacs)
Health Insurance of each member up to 3,00,000 – 4,00,000 (Family Floater Policy)
Yearly Contribution to PPF (Rs.50,000)
Invested 1,00,000 in Liquid Funds
Home loan taken by him and his Wife Jointly (Along with Home Loan Insurance)
30,000 invested in Gold ETF and some good shares.
Rs.25,000 Cash
Lets rate his financial portfolio on all the parameters on the scale of 5 stars
Capital Appreciation :Â Appropriate investment in Equity with long term view, and some money in Debt.
Liquidity :Â Has good amount of money in Liquid funds, Cash and Gold ETF, which have good liquidity and can provide him Money quickly in case of requirement.
Risk Management :Â In case of any type of Eventuality, He is properly covered. He is protected well against Death, Health Issues, Home related issue, Emergency issues.
Goal Oriented :Â Most of the investments have strong and valid reasons.
Like Term Insurance is required for Financial Cover, Mutual funds investment was for Long term Wealth Creation, PPF investment for Wealth Creation with Debt Route and safe investment, Joint Home Loan with wife for Tax benefits, Health Cover for Tax benefits and cover against Health Issues, Gold Investment in ETF because of Diversification and Liquidity, Cash for instant requirement, Liquid funds investment for Liquidity along with some returns.
Note : Both the financial portfolio’s are created just for the illustration.
Summary
Each and every person portfolio should be strong on all the areas, it should pass all the criteria to some extent. A portfolio should pass all the parameters for different requirements. If you have a financial portfolio ask yourself all these questions :
Is it good enough to provide stable and good returns over long term. Is capital appreciation happening in Value or just numbers are growing, but post-tax and post-inflation returns are negligible.
If i require instant money within 2 hrs, 2 days or 5 days, Is my portfolio smart enough to provide me.
Is my portfolio good enough to provide protection to me and my family against calamities or any unexpected events . Do i review my Portfolio in regular basis to cut out the losers.
Is my portfolio a result of my Needs and requirements or Greed, Ignorance and Hearsay and emotional Buying? If that’s the case, take action !!!
People who want to trust someone more experienced and more knowledgeable should read SudarshanSukhani recommendation at https://tt-wealth.blogspot.com/2008/10/portfolio-for-safety.html
SudarshanSukhani is a well know and respected Technical Analyst of India and often talks on CNBC .
This page contains all the “Term of the Day” posted on this blog earliar .
1. Short Selling
Short Selling : Short Selling refers selling of shares without owning them . If you short sell a stock , you first sell them at higher price and later you buy them (cover them) back at lower price .Lot of times you feel that markets will go down , at that time you short sell a stock . People who deal in Derivatives can either Sell the Futures or Buy PUT options . Short Selling can offer tremendous returns in short frame , because bear markets are markets fall with much speed and momentum compared to rising market . Read more
2. Derivatives
Derivatives : Derivatives are contracts whose value depend on value of some other thing. Examples are Futures and Options . Value of Stock is independent , But value of Futures or Options depend on the movement of Stock . Derivatives are dangerous Instrument and not recommended for Starters . In India People are attracted towards Derivatives because of its Return potential , but they underestimate its Risk potential and its ability to paralyse investor or trader financially , Better to learn first and then enter in Derivatives. Read more
3. P/E Ratio
P/E Ratio : P/E ratio is a reflection of the market’s opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios. This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company’s EPSremaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment. Its one of the most imortant Ratios you can look at .
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
4. ETF
ETF : ETFs are a basket of securities which tracks an underlying and are traded on a recognised stock exchange. Examples are Nifty Beas (this tracks Nifty) and Gold ETF’s (this tracks Gold prices) . Read More
Soon there will be Silver ETF’s in India .
5. FMP
FMP : FMP’s are close ended mutual funds , similar to FD’s but much more tax efficient and with marginally superior returns , but they have there own risks . The returns offered by FMP’s is indicative and not guaranteed. They come from 1 month maturity to 1 yrs maturity . In year 2008 , FMP have done very badly because of defaults . Read here for more
6. Technical Analysis
Technical Analysis : A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. It is generally used by people who want to take advantage of short term price movement. Technical Analysis can make you a better than average Investor
7 . Demat Account
Demat Account : Demat account is an account where shares are stored electronically . Just like Bank account deposits money , Demat account deposits your shares . Now a days , you cant hold shares in physical form , every share has to be in physical form . A person can only hold a single Demat account (trading account is different) .
8. Trading Account
Trading Account: Trading Account is an account through which you can buy and sell things on stock market . Dont confuse it with Demat account , Demat account is just a place of storage . Trading account is a platform which provides you a service of buying and selling things . You can have multiple trading accounts , which will all be connected with your single demat account .
9. Futures
Futures: Futures are the contract which gives you a right to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price . For Example, If you buy Reliance Futures for June series, you will get a right to buy specific number of Reliance shares at a fixed price on last Thursday of June . The future date is called the delivery date or final settlement date . Read more
10. NAV
NAV: NAV is a price of a mutual fund unit . You can see it just like a share price of company . Mutual funds invest the money in market and its tracked by NAV , if investments goes up , NAV goes up and vice versa . Generally NAV value starts with Rs 10 .
There is a myth among investors that low NAV mutual funds are better than high NAV mutual funds, which is totally wrong .
A Rose can be of more value than a Dress to your Wife or Girlfriend on Valentines Day. Even though that Rose was very less in Price compared to a Dress.
Today we will discuss things about investment products from a different perspective – Value and Price.
What is Price and Value?
Price : Price is the amount of money needed to purchase something.
Value : Value is the worth or Importance of something.
An Example
We pay Rs.8/Kg (20 cents/Kg) for Salt as part of our Groceries, Will we stop using it if its price rises to Rs.100/Kg or even Rs.400/Kg. May be not !!! Why ? Because the Value of Salt even then will be Very high, compared to the price we pay for it. Considering that, its a very cheap product.
As a personal Example, I recently bought a second hand mobile (Nokia 6610) to keep at my home as a land line just for Rs.800 (worth 8,500 at time of buying, excellent condition). The price i paid for it was much much less than the value it would provide to me. So i consider it as one of the best investments made till date.
By cheap I mean its Price vs Value is very high.
Cheapness (P) = Value provided by P / Price we pay for P.
The same way there can be things for which we pay high amount, they don’t have high value for us.
Please understand that it depends on individual where something is of great value or not. For example for me, an expensive Mobile set with 134 different things costing Rs.10,000 is low in value and high in price. I don’t buy things like that, but a digital Camera worth 12K a value buy for me (because of my interest in Photography)
So, in short we can say “Price is What we pay actually, and Value is what are ready to Pay”
We understand this in our daily Life, but we forget this simple rule when it comes to money and investing. Most of the time we invest in things which we should not because of this basic rule, but we are carried away by emotions or simple stupidity.
Watch this video to learn more about the difference between Price and Value:
Let us now see Some of the products which are really High Value, Low price
“How much are you ready to pay as yearly premium for Rs.50,00,000 Cover for 25 yrs tenure?”.
This is a question I ask a lot of my friends in there 20-30’s. And I am amazed to see that even with a miser mind they tell me at least twice the amount what it really costs. Everyone said 2k/month or min Rs.20,000/year. The actual cost is not more than 13-14k, in fact the best price is 10,112 for 30 yrs tenure from AEGON RELIGARE Life Insurance (Click Here to read more on this).
This clearly shows that it cost way less than the expectations of people and what people are ready to pay for it. The value offered by Term Insurance is more than what it costs.
Endowment Policies :
I am not sure if its my hatred for Endowment Policies or they really deserve my criticism every time, Or may be there are both the reasons. We pay so heavy price for Endowment polices and the value provided by them is almost nothing. Its a product designed for Wealth Creation, but wait … not for investor but for the Insurance company. (Click here to read more on Badness of Endowment Policies)
The other products I would rate in category of Cheap and Expensive are :
Good Stocks in low markets (Like current markets, Buy Reliance, Infosys and Jaiprakash Associates for Rs. 1,00,000 each today and your retirement planning is probably Done !! If you are around 25 and retiring at 60)
An interest free loan given to a close or a very good friend. (even if you don’t get any interest, you get some emotional satisfaction or valuable relationship which is more important).
Expensive financial products:
Endowment Policies
Bank FD (at the time of High inflation)
NSC
Most of the stocks in High Markets ( not true for all stocks but most of them) – A high interest loan given to someone whom you don’t trust much. (Even if you get good interest, there is risk of loosing money)
Every time you invest your money its important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it.
Most of the successful investors become one because they invest in stocks which are trading at price lower than they deserve, which market eventually finds out later. Currently In this markets Reliance is trading at 1400 (Oct 11, 2008), the it was trading at 2300 before a month, and has lost almost 40-50% in a month.
Considering it is going to start its OIL exploration and other things, its a good stock to own and at an excellent price. Its price is less and its value. Which makes it a good investment regardless of what is going to happen next month or next quarter. Sooner or Later it will turn out to be a good investment and reward its investors.
Same is with Jaiprakash Associates, ICICI Bank, DLF, Ranbaxy and other similar blue chip stocks.
Summary
When you analyse some product, stock, mutual fund, Home (Real estate) or anything for investment matter or even for general shopping, always consider value and price for it.
Disclaimer : Any stock discussed on this article is not a recommendation. Please analyse it yourself and then invest. It can also result in losses.
What do you think about this article? Do you like it?
As I write this article on Oct 9, 2008, Sensex is below 11000 (10850) … Most of the Mutual fund investments returns (since peak of Dec 2007 – Jan 2008) must be down by 40-50% (lump sum investment) and 25-35% (if SIP). Looks like Sensex is heading towards it original value of 6000 or 7000 which will bring losses to 60+%.
Though most of the investors know in theory what to do in these situation, most of them will still not buy, Now the physiological investing problem happens, For long term investors its the best time to invest, but no one will take the plunge after burning there hands so badly.
Do Indian Markets have many reasons to Decline further?
Remember, the global markets are looking bad, not Indian. Indian markets are just following US and European markets because they are the “Big Boss”.
The US markets and European markets are the culprit for the global slowdown. The sub-prime crisis related issues will have deep impact on US and global investment banking firms. India or other Asian countries are just bearing the pain along with global stock markets.
Yes we are in Bear markets, in fact every country stock markets are, but the bearishness of markets are exaggerated because oh high oil and US sub-prime crisis and subsequent Bank Failures.
India is not short of its local good news like
Nuclear deal
Stable growth of more than 8% p.a
Inflation now coming down from its high (and as Oil comes down, the inflation will come down further)
Strong Corporate Earning and Many companies on the verge of setting global standards (Reliance starting its oil production soon, etc etc)
Once things are in control (should be soon, but no one can be sure), another bull market should be more exciting than the last one. Prices will move like rockets and people who will benefit most will be one who will do investments in these down markets.
Is it the right time for investments?
This questions was answered by many pundits when Sensex was around 15,000-16,000. Some said YES, some said NO. People who did investments must be thinking why they did it and people who did not must be happy for not investing that time. The scenario could have been exactly opposite if markets would have gone up.
So what do you do now?
The best idea is to invest a part of the money now, If the markets go down from here, You still have another part of your money in hand which you can invest later and again invest more if it goes down further. It will ensure that your average cost is not very high, and a decent run in markets will result in profits.
If markets go up after you buy some mutual funds or shares, you at least are in profit and not LOSS. which is a privilege now a days in Market. Once there is a good confidence that markets are stable and wont fall further, you can then do rest of your investments.
Remember, Don’t try to make profits in stock markets, just try to avoid losses and make sure that you preserve your capital. If you can do that much, profits will be at your feet.
As Warren Buffet said “We need to take very less correct decisions in Life, as far as we make sure that we don’t take many wrong ones”
In this article I’m going to talk about importance of partial profit booking. The scope of this article is only risky investments where we have risk of loss. It’s not related to Debt products where we are sure of returns.
Partial profit booking is relevant if you invest in Shares, mutual funds or derivative products.
What is the main goal of investments in Equity?
When we ask this question, most of the people would get it correct, Answer is Capital appreciation or fast growth of money. But most of the investors concentrate so hard on maximizing profits that they underestimate risks and that’s the main reason for most of the losses they make.
The biggest goal while doing Equity investments has to be “Capital Preservation” and only then you must think about any profits. So the main concentration must be on “Capital Preservation”. If you don’t concentrate on capital preservation, it can erode because of continuous losses and then you will have to try for profits just to get back to level you started.
Suppose by taking a lot of risk you can either earn 60% or lose 60%. If you get profits, it’s great. But if you lose 60%, then you will have to earn 150%, just to get back to your starting Capital. Whereas if you take a less risky route where you just earn 10% or 15%, your money will grow slowly and steadily, it will soon increase due to compounding effect.
We are investors, we are not god, we can’t predict markets move accurately. We can only avoid bad moves and take decisions which can help us minimize our risk and losses. We will soon see how Partial booking of profits can is so important while doing investments.
What is partial booking of Profits?
When we invest our money and if we get some profit and then we are not sure what can happen next, we book a part of it to minimize our risk. The main idea here is that if we gain some profits, we should book some part of it to make sure that we already got that profit in hand and not just in mind.
For Example
Ajay invested 1,00,000 in shares, which grew by 20% in 6 months. Now he is not sure what can happen, Markets are uncertain and now there might be 40% profit or 40% loss (just for example). He has 3 options here
1. If he does not book partial profits
His investments grew to 1,20,000 and now he can get profit or loss of 40%. Let us see the range of his return.
In case of 40% profit, he will get 1,20,000 * (1 +.4) = 1,92,000
In case of 40% loss, he will get 1,20,000 * (1 – .4) = 72,000
Total investment: 1,00,000
Returns: In range of -28% to +92%
2. If he books partial profits
Here we assume that he books his 50% profits. His investments grew to 1,20,000 and books profit of 10,000, he get backs 60,000 back and rest 60,000 is still invested. Let us now see the range
In case of 40% profit, he will get 60,000 * (1 +.4) = 96,000
In case of 40% loss, he will get 60,000 * (1 – .4) = 36,000
As he has got back 60,000 back earlier, the actual range will be
Just before the NSG waiver meeting, Robert invested 35,000 in options, he was very sure that markets would rise. Just after news came about NSG waiver, markets were suddenly up and He was in 12k profit overnight. This was a positive news for market and he wanted to remain invested.
He was very sure that market would rise further for next few days and his money would grow to 60-70k. People who are familiar to option trading will know that 30k can become 60k or 90k in a single day.
Robert was so confident that he did not book partial profits. Next day there was Lehman Brothers Collapse and it was a great shock to world. From next day stock markets fell and his investments fell by 90% in 2-3 days. His money grew from 35,000 to 47,000 and then fell to 8,000 in 3 days. Now he was in 27,000 loss.
What if he would have booked partial profits?
If he would have booked 50% profits. It means he invested 35k which grew to 47k and he takes out 50% of his investments, He should have taken out 23k and left 24k invested. In that case even if markets feel by 80%, His 24k would become 5k. Remember here, that he has already booked half of his profits and his exposure has reduced by 50%, which will help him in minimizing losses.
Total investments = 35,000
Final value = 23k (booked earlier) + 5k = 28,000
Loss : 7,000
Summary
Markets are uncertain and volatile. If we get profits anytime, make sure that they are partly booked, By doing that, you make sure that you have actually got some profit materialized and reduced your exposure to investments after it has gone up. If your investments start falling again, you will suffer some loss, but that loss can be compensated by the profits you have already booked.
By partially booking profits you reduce your risk for huge losses, at the same time you also cut your chances of making large profits, which is fine. Concentrate on cutting and avoiding losses and risk and not making profits. Profits will automatically come once you know how to manage your risk.
