»Fast Profits Daily by Equitymaster

On This Day - 27 MAY 2020
Make Higher Trading Profits By Not Losing Money

Vijay Bhambwani, Editor, Fast Profits Daily

When I speak to traders, they are often surprised that I advocate not losing money.

They say, we're here to make money. That's true but what if you lose the money you made?

You will have to make it back all over again. Would it be better to prevent losses?

In today's video, let's find out why this is so important any trader in the market.

Hi, this is Vijay Bhambwani here and I am recording this video on a Sunday morning from my residence, as you can make out from chirping of the birds and the lovely cooing of the parrots and the Minas and all outside my balcony.

Now this video is actually more a result of introspection. Personal experiences over the recent weeks and having a lot of time on my hands in the lock down and being kind of boxed into a small work area, you have all the time to do a lot of research and reading of a lot. The crux of this video, the title of this video, I'm unsure should it be how to focus on not losing money or should it be why don't I give too many recommendations nowadays or how do you trade an economic downturn?

At the end of the day, I think the viewer should decide what should be the apt title of this video. I leave it to you. But now let me begin.

Some of the best hedge fund managers, now why do I keep bringing hedge funds into my conversations with you through these videos? Because I admire hedge funds especially the sensible ones out there who have a clear sense of purpose. Hedge funds collect 2, 2.5% asset management fees, and they might even take a percentage of the profits. They follow a hurdle rate or a high water mark, which is say, for example, 6% which is a bank FD rate. As long as they make only up to the bank FD rate, they will not share any profits with you. But anything above that, they might share a percentage of the profits. Internationally, the going rate can be as high as 20%.

Now, the very fact and by the way, in India, hedge funds are not very welcome because SEBI allows only mutual funds and that to buy and hold not the short selling types. Your average hedge funds are Wild West cowboys who are gun slingers and they just go bang, bang, bang, long, short commodities, currencies, indices, they fire away at will and buy and sell anything that they want. The reason why I admire hedge funds is these are your Alpha boys.

Alpha is the concept of absolute profit. There is no excuse for whether the market is up down sideways, you have to generate Alpha or absolute profits. So in order that the hedge fund manager have an entitlement to ask you for 20% of the profit above 6% there must be a profit above 6%.

So these are guys who have to generate profits come what may. No matter what type market it is, they will try to make money. Of course, a lot of times things do go wrong as invariably they will. At the end of the day, month, some of the better sensible hedge fund managers you will be surprised to note, focus on not losing money. That is their primary endeavour to not lose money.

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Now a lot of people have talked to since I have a lot of time during the lock down, video chatting with a lot of like minded people, enriching my brains, and learning a lot from the world around me, a lot of people in our conversations tend to get surprised when you tell them that we should try and focus on not losing money.

They say we are here to make money, which is true. We are here to make money. But think about it. Use the process of elimination. You trade. You focus on not losing money. What's left? You've eliminated not losing money. You're continuing to trade. What's left? Making money.

So if you focus on not losing money and continue to do what you need to do, there is a high degree of probability, I am saying probability not guarantee, that a high degree of probability that you will wind up making a lot more money than you would have under normal circumstances.

Let's go back in time in the year 2008. I distinctly remember the Nifty peaked out in January 2008 at 6,357 points in bottomed out in October, close to 2,250 or points. That was a sharp fall, a big fall. What if hypothetically speaking, what if you were to get off the bus called the Nifty at even say, 10 to 15% lower than the peak?

That's a fair kind of an assessment, 10 to 15% lower than the peak. Buy then, you'd have known that the Nifty is slip sliding away. I am not going to insult you intellect by telling you to get out at the absolute peek. That's not possible. What if you were to get out 10 to 15% below the peak and re enter the market 10 to 15% higher than the bottom? That's a fair assessment.

Also, you know what? You would have been far ahead of that cousin who you admire or even subconsciously tried to compete with, the cousin who had held onto all his holdings in 2008 believing in the Warrant Buffett way, I got nothing against Warren Buffet by the way, believing in the Warren Buffett way that you should let your investments ride.

But then that was a steep decline of over 60%. What if you got off 10-15% lower and got in 10-15% earlier?

You would have had a head start over somebody who allowed all his stocks to bleed on the way down and take its own sweet time recovering up there. Even if you were to withdraw this money by February or March 2008 and deploy in a fixed deposit and believe me in those days in 2008 it was easy for you to get 8% per annum fixed deposit interest, you have a much better than the guy who allowed himself to ride all the way down.

So focusing on not losing money should actually be high on our priority agenda. Which is why there are times like the present ones. I do not give out recommendations because I don't think the probability of making money is seriously high enough. I believe in deploying statistical measures, statistical tools while trading.

Now one of the finance tools that I believe in is the Jensen's measure. It's very simple, actually. Are you being rewarded by the market by one unit of profit for every unit of risk that you are taking to earn that profit? If the answer is yes, if you are getting rewarded by one unit of profit for every unit of risk, by all means go and do it. If the return is more than one unit for every unit of risk taken, probably you should borrow money and invest. By borrowing money, I mean leverage. Take it in futures and options.

But in today's day, when the statistical beta, or the sheer price volatility is as high as it is, by the way the Bank Nifty is the number two highest volatile a counter on the entire NSE. Now that's an index. You may say you might say it's a very narrow index. It comprises only 10 stocks. Fine. let me tell you about the Nifty 50. broader than thee BSE 30 index. Comprises 50 stocks. It's at number eight on my statistical beta list. That kind of volatility, I believe, even professionals may not be able to handle You as a retail investor or a retail trader, have very, very hostile odds if you're playing in this market and trying to make money. Your focus currently should be to stay alive, hang in there, and live to fight another day.

I noticed something in a financial year 19-20 in my Weekly Cash Alert service. We began well in April 2019. We had a mediocre May, but June, July, and August were terrible. Now, in hindsight, it's very easy to know why. Because industrial metals, which is aluminium, copper, lead, Nickel, Zinc, were going in for delivery based settlement. The lot sizes were being increased. For example, copper, which was 1,000 kilos, was going into 2,500 kilos. Margins were being raised and the market was going into a state of shock. Oil markets were extremely volatile.

So we had a terrible June, July, August period. I tried to pull back on the number of recommendations. We made recommendations. We lost money. It was only after September, right up to second of March, that not only did we cover all the money lost, but we ended the year with a near 43% net gain.

Which tells me that a trader who waits for the appropriate moment before firing on all cylinders actually has a better statistical chance of making higher returns per annum. When somebody who keeps trading on the time, I keep telling you to monitor the sounds of the market, keep your finger on the pulse of the market, that's not the same as trade every day. What's the market trend when the odds are completely in your favour?

Before I signed off from this video, let me remind you to click like on this video if you're watching it on YouTube. In the comments section, let me know what you think of this video and what else you would want me to record in the future.

Do not forget to share this video with your family and friends and help me spread the cult of knowledge based trading and investments. Don't forget to join Equitymaster's Telegram channel with the handle Equitymaster Official. I put up a couple of updates every day Monday to Friday and would love you to read them.

Vijay Bhambwani signing off from now till we meet again in my next video. Do take very good care of yourself, your trades and your investments. Thank you.

Stay safe!

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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