The New
Strategy for Earning from Stock Market
What is the basic of investing? Buy low sell
high. Isn’t it? We have been taught this fundamental strategy of investment –
including stock market investment – from the very beginning.
While it may still hold good for other forms
of investments, it is now time to question this fundamental aspect in relation
to stock market investments.
Following a week of mayhem in which the
Sensex lost about 11%, millions of people around the country are ruing about
the lost opportunity of booking profits and getting out before the crash came. With
a new session slated to begin in about 27 hours, the biggest question haunting
investors is whether the biggest bull run in Indian stock market in its 130
years of history is over or not.
The buy-low-sell-high school of investors are
never sure when it is truly low and really low for buying. Similarly they are
unsure when a high price is the highest. Normal greediness prevents on from
selling off a stock even at a hefty profit because one feels the stock may
appreciate a few more rupees and fetch a higher return. When the first fall
comes, it is shrugged off as a normal correction to be followed by another bout
of dizzying rise in price. But that rise never comes and one is trapped helplessly
in a spiraling downward fall that wipes off large chunks of profits every day.
Expecting the price to reverse, the investor holds on to the stock, mentally
promising to get out if the price increases just a few more rupees but that rise never comes…
If one goes through the history of Indian
stock market in the last 15 years or so – more than that is of little practical
value as large number of investors entered the stock market only during Harshad
Mehta induced bull run in 1991-92 – one would see the same theme occurring at
every bull run and its aftermath.
Especially the small investors would enter
the market when the bull run has become a matured move and prices have moved up
substantially. And soon enough there would be the reversal and these investors
will clutch on to their stocks hoping for an upward revision which would never
come. Till the historical bull run of 2002-? (I am of the opinion that the bull
run is not over yet), Indian stock
market had a 10/12 months of bullishness followed by 30/36 months of
bearishness. So investors stuck with higher priced stocks would watch
helplessly as prices go down over a period of time, wiping away his wealth,
till one day he would decide enough was enough, and to sell off and take the
loss.
And strange enough, soon enough, markets
would start rising again.
Not surprisingly, these investors rarely made
any substantial profits from stock market. Till came the 2002 bull run when the
markets defied everything and went up up and away for a period of 3 years
(broken by one 2000 pt correction in 2004 that wiped off profits of many
investors in one day of bloodbath; plus 2/3 short term but deep corrections).
With a long period bull run, investors who did stick on did make some money
this time around.
But then came the last crash that wiped off
investors wealth to the tune of 12,000 crore in 3 days!
No wonder, our parents – and their parents –
had always advised – keep off the stock market.
But then where would you get a 30% - 200%
plus return these days unless you could handle the heroin racket?
The New
Paradigm
Let us understand one thing that very few
investors are really knowledgable about. Markets have changed since the 90s.
Market participants have changed. And as Udya Kotak was saying the other day on
CNBC Tv, markets are today aligned all over the world and not just stock
markets. Bond markets, gilt, commodities, forex – everything is now linked to
one another, cause and effect relationship affecting every market worldwide.
Which means, volatility will be
unprecedented.
Markets will be unpredictable.
As we have no control on global economic and
political conditions, no amount of fundamental analysis can secure our
investment from sudden and sharp fluctuations.
Just imagine, a rise in inflation figure in USA
led to a global stock market downturn. The logic? Fed may increase interest
rate again which in turn will force industry to go slow on expansion and in
turn will lead to degrowth in the demand for commodities and affect the
worldwide economy as many countries in the world are dependent on exporting to
USA; specially China. And as we all know, Chinese demand for commodities has
been keeping commodity prices high. On the other hand, higher interest rates
will dampen the enthusiasm of FIIs whose risk/return ratio in emerging markets
will become unattractive with cost of borrowing increasing. Hence there may be
withdrawl of FII money from emerging markets also.
How many investors have the know-how or the
information to process all the emanating data and news from all over the world,
on a daily basis if not hour to hour, to form an opinion and take a call on the
market?
So investment in stock market is not so easy
today as to listen to some TV commentators and brokers. Or to be able to read
the balance sheet and being able to calculate the PE ratio.
Fact is, among the millions of investors,
very few are actually capable of handling the complexity of the markets today.
So we have he Finance Minister to sundry
experts to advise the investors to go through Mutual Funds. As if the mutual
fund managers are Super God and they are wizard enough to sift through the maze
of data, information and developments around the world to be able to pick
stocks that are downturn proof.
Far from it. History has shown that most
Indian mutual funds have a dismal record when it comes to investment in stock
market. They make money only when the market has a bull run. They lose money in
any downturn – same as other investors do. They seldom has a better return than
the broader index and they are known to have wasted millions of small
investors’ money by playing the market wrongly, and even by sheer mismanagement
of funds – which is a very mild and diplomatic way of saying some fund managers
may have been corrupt.
It is a matter of fact that any individual
investor can make more money by investing in a major stock during a bull run
than the returns one would get from the mutual fund.
There is a Chinese proverb that aptly sums it
up. When the flood comes, the leaf floats as well as the log. The same is true
during a bull run, When even the most insignificant stock may see a rise in
price along with the major ones. So it really does not take a so called expert
– a fund manager in MF – to make money. Even a relatively less informed
investor can, on his own, if he keeps himself informed.
And for solace, he knows that when the market
goes down, the expert will also show a dismal result so he is no better off
dealing with a mutual fund.
Then how can investor make money in stock market?
One, by being a passive investor and having a
very longish term holding – perhaps 3, 5 or even 7 years. But any time within
this period he finds he has a good profit (up to him to decide what is the
quantum. If he is very greedy he may lose everything he has), he should book
profits.
Second, by thinking that all his investments
are for his son/daughter and he forgets his investments totally. Hopefully, in
15/20 years, the value of his investment would have tripled or quadrapled. It
may even vanish if he was unlucky enough to choose a company that goes under.
Third, if the first 2 options are not really
good options (they aren’t), he should turn from being an investor to a trader.
Make
money daily for kal kya hoga kisko pata
As markets will remain volatile and uncertain
- more so now than what our fathers had seen in their times – stock market, in
a sense, becomes a total taboo to persons not having sufficient funds (please
note I have refrained from using the word expertise for there is no one having
that level of expertise which could prevent sudden loss for no one can foresee
a sudden plunge).
Having said that, I would like to present an
alternative model to making money from stock market.
Intraday
trading
Labelled as ‘phatka’ which is local slang
meaning gambling, Intraday trading has been the most misunderstood and misused concept.
But first, for the uninitiated, what is Intraday trading?
Intraday trading is squaring off positions
within the day. With our stock market following a ‘compulsory rolling
settlement’ system, theoretically, all trades done today are to be ended by end
of today’s market session. If one had sold, one had to ‘deliver; the stocks on
the T+2 (trading day + second working day) day to one’s broker. If one had
bought, one had to pay off the broker on or by the designated day.
The intraday trader squares off all his
positions within the day. If he had bought, he had sold – either at a profit or
at a loss. Vice versa if he had sold. End of the day, he either had a profit or
loss. But no outstanding position or obligation for payment or delivery.
With no future price movement to bail him
off, or any buffer to see his trade through, intraday trading is the most risky
form of trading. But with brokers offering much higher leverage on the capital
to intraday traders (anywhere between 500% to 1000% - meaning one could trade
to a value of 5 to 10 times one’s capital deposited with the broker as margin
money), making large income using a small capital is entirely possible unlike
investment where one is allowed to buy stocks worth only up to 100% of the
capital.
Therefore, on a small Rs 30,000 capital which
is woefully inadequate today for stock market investment with most better
quality stocks valued at Rs 500 and above, one can only hope for a small
incremental growth even in a raging bull market.
But the same person, turning from being an
investor to an intraday trader, can take a position worth even Rs 3,00,000 on
an intraday trade and maybe make Rs 2000 – 2500 on his trade. On one day.
If our trader can repeat this success on the
next 22 trading days, his earning would be a whopping Rs 44,000 – Rs 55,000
(gross). That would be a phenomenal ROI that heroin traders would also probably
envy.
Let us examine the opportunity once again.
Margin
money paid to broker = Rs 30,000
Leveraging = 10 times
TOTAL
INTRADAY TRADING CAPITAL = Rs 3.00 lacs
Price
of one Reliance share = Rs 1,000
No.
of shares bought = 300
Appreciation
in Reliance share price = Rs 8.00 (Normally 1% min. to be explained later)
Profits
taken on 300 shares @ Rs 8 = Rs 2400
(gross).
Is this feasible? Of course it is. Lot of intraday traders are doing this sort of trades
every day.
Is it risky? Yes. Unless you know when to buy
(or sell when taking a short position) and which stock, it is definitely a
risky strategy for as I said earlier, you have no future day price movement as
a buffer to save your trade. You either make a profit today or make a loss. Or
barely escape.
So how can Intraday trading become more
acceptable way for making money in stock market?
Easy. By ensuring that every trade has at
least 85% to – even better – 98% chance of success.
