The Best Kept Secret of Rich Traders

Hi, this is Vijay Bhambwani and I'm back again with you to talk about a very critical aspect of trading.

A lot of viewers have sent me feedback and I am very glad you're talking back to me. So I know what's on your mind and what else I can do to add value to your experience on this channel.

A lot of my viewers have asked me why is it do I cover fixed interest and bonds as an investable avenue?

I'm sure you've heard of the Rich Dad Poor Dad series of books written by Robert Kiyosaki. If you read those books, you will realise that the attitude towards money of the rich vastly differs from the not so rich.

So the way you think about money, the way you handle your money, determines how rich you are going to be over a period of time.

Now to a rank and file investor, equities are the fastest capital appreciation and long-term capital multiplication asset class. I have no dispute with this point of view.

But if you do not resort to asset allocation and if you are 100% exposed to equity, you are making your portfolio vulnerable to a lot of volatility or what is also known as statistical Beta.

This is what I keep mentioning on my social media accounts like Twitter, Facebook, and LinkedIn etc. Now to be able to make high profits and in the quickest possible time, it is very important that the trader take care of two aspects.

Number one, there is no guarantee that the short-term trade in derivatives or even in the spot segment, that your initiating, will give you profits in the time frame that you desire it.

So it is quite possible that the intraday trade that you initiate, might just spill over to the next day without either hitting your stoploss or even reaching your target. So you have no choice but to carry it over to the next day. We professional traders call it overnighters.

So what if you were to carry your trade for a couple of days, or maybe even a couple of weeks?

The pressure point for a trader is on one hand, you have to have survival income or survival money, cash flow.

On the other hand, you need a good amount of capital to keep the trade alive, to look after span margins which might fluctuate and the more volatile the market becomes, the higher could be the span margin as raised by the exchanges.

There is then also this concept of the concentration or the exposure margins. The market wide WPL, which I discussed in my previous video, will tell you that as soon as the MWPL in individual stock crosses the threshold of 60%, the exchange, thanks to SEBI norms, will start raising the span margin.

So you're as it is in a cash crunch because your trade has not really squared up in the time frame that you desire. On the other hand, to keep the trade going, you are supposed to shelve out more money towards the margins.

And if the trade is temporarily not going in your favour, then you are also supposed to pay mark to market, or valuation profit or loss, to the exchange before the next day's trading session begins. Otherwise, the risk department in the back office of your broker, will square up your transaction for the want of money.

In such a scenario, and especially towards the end of the calendar month, a trader has to have an overhang of stress on the mind as to how to fulfil the monthly bills, your electricity, telephone, your maid servant, and your domestic help, your rental bills, your child's school fees etc.

You cannot square up a transaction because you ran out of either span and mark to market margin or even your survival expenses.

So the reason why I talk so often about sovereign bonds and other fixed income securities is that you allocate, and this is something that all professional investors and high networth traders do, you allocate a mix towards bonds, fixed income yielding securities, etc, and the amount allocated there, should be substantial enough to be able to take care of at least 4 to 6 weeks of your house expenses.

That gives you the freedom to stick around in a trade without the stress of worrying about how you will pay or monthly bills come the first of the month. Believe me, the difference of trading is like chalk and cheese.

A trader who has no provision towards meeting the household expenses on the first of the month cannot, with a free mind, roll over trade to the beginning of the new derivative cycle because he has to make a choice about putting food on the table for his family and to meet the margin and mark to market calls from the broker.

To that extent, traders like me have a much higher allocation towards bonds and other fixed income yielding securities, so as to cover their household expenses, and then trade with a free mind.

A mind that trades with fear and with pressure of money, cannot take bold decisions. You are actually cutting of your hands and restricting yourself, by putting all your money into equities.

Sure enough, equities will multiply your money over a period of time but, hey, you need to stick around and equities for that long.

If you need to pull out money from the markets and unfortunately during the times when the markets go against you, which is up when you're short or down when you are long, and if you do not have provisions for household expenses, you will be a lot more scared as compared to a trader who's got cushion of fixed income yielding securities.

Now you know why I resort to fixed income securities and keep harping about bonds and EEE tax exempt schemes, income yielding securities etc so often and so vociferously.

Please allocate enough money in fixed income yielding securities, which will take care of at least four, if not six weeks of your household expenses and then see the way you trade so boldly and stress free in the market, either in the cash or in the derivative segment.

This is Vijay Bhambwani here. Before I sign off, let me remind you to subscribe to my YouTube channel. Click on the like button if you see this video on YouTube.

In the comments section, do let me know what you think about this video and what else you would want me to cover for you in my forthcoming videos.

And please join me on 21st of January 5 PM, on Tuesday, for my summit, the Instant Income Summit registration for which is absolutely free and I bring to you and exciting new product with Equitymaster that should be extremely critical for you in your journey as a trader. See you there.

Vijay Bhambwani signing off for now. Please do take very good care of your investments and trades.