Chanakya says that a Man without Wealth doesn’t get it even after a hundred attempts. Just as Elephants are needed to catch Elephants, Wealth is needed to capture more Wealth. In this article, I have made an attempt to analyze the above statement of Chanakya in terms of the way people invest/trade in Stock Market.
Stock Market is a sea of opportunities for creating Wealth. However, to sail through this financial Sea successfully, you need to invest in a robust Ship, and need to follow certain navigation rules. We are often fascinated by the stories that a financial wizard created his fortune by investing a penny and created a million pounds. In reality, there is no such free Lunch in Stock Market. You need Wealth to create Wealth.
A Stock is worth Rs 100 today. A man has a capacity to invest Rs 1 Lakh. The Stock is strong, and has the potential to increase by 25% in the next few months. He invests the whole amount at Rs 100. Another man with the same investment capacity invests only Rs 25000. Now consider two scenarios. In the first scenario, the Stock increases by 25% in the next two months. First investor makes Rs 25000, and the second investor makes only Rs 6250 (as he had invested only Rs 25000). Who is the smarter investor of the two? Answer this question after reading about the second scenario. In the second scenario, the Stock decreases by 10% next month. Investor A watches silently (with no more investment capacity), and Investor B invests another Rs 30000 (at Rs 90). Stock further decreases to Rs 80. Investor A again waits for the Stock to go up, while Investor B invests another Rs 20,000. Stock again reaches Rs 100 in fourth month from Initial investment. Investor A is still waiting for the Stock to go up to make some money (sitting at Par), while Investor B Sells his Stock purchased at Rs 80 and 90 at Rs 100. Investor B makes a profit of Rs 7000 (21% p.a. on the total investment capacity), while Investor A is yet to make profits. Investor B is likely to repeat the same investment pattern in case of repeat in scenario 2. Investor A tried to extract the maximum from his Wealth by committing the whole investment at once. He can succeed only in one scenario, i.e. the Stock going up from his purchase price. Investor B is likely to make money in all the scenarios. He could still make money from Situation 2 because he had Wealth available at suitable opportunities. If investor A wants to earn more money, and in all situations, he should increase his Investment capacity. Considering the dynamic nature of Stock Market, a smart investor is the one who has wealth available at all given opportunities.
With every passing day, more and more traders are getting attracted towards Options segment of Stock Market. It constitutes about 75% of the daily turnover. I have been teaching/ advising on this segment for the last 6 years, and have interacted with number of traders. Smart traders make decent amount of money by employing optimum wealth in this segment, whereas those making the mistake of trying to extract more and more gains by investing smaller capital often end up losing money. And those who go only long in this segment (to avoid paying higher margins involved in Shorting) often end up losing 100% of their capital. There are many safe hedging strategies available in Options segment like Calendar Spreads, Ratio Spreads, Covered Call, Bull Call/ Bear Put spreads. By prudently investing in these strategies, one can easily make 24 to 40% in a year in a safe manner. And I am stating this on the basis of research conducted by my team at Expedient Consultants (published in leading international Journals).
Summing up the above, you need Wealth to create Wealth. If you try to sail through the sea of financial opportunities with limited wealth, no one can save your financial Ship from Sinking.