One of my friend is fond of shares and options trading , from a capital of Rs.50,000 , he grew it to Rs 2,00,000 , whereas I am almost at the same place from where I had started because I do some thing called “Risk Management” … Every time I take a trade or invest in anything . This is how I go about it .
– Either I don’t take the trade
– Or I take the trade, but work on risk management, I hedge it using PUTS or invest less in that.
Because of these two things I either miss big profits or make very small profits. managing risk involves cost and that’s the cost you have to pay for trying to be “safe”.
Last week we both purchased some thing which gave him 50% return, but gave me just 7-8% return over my investment. The reason was that I also hedged my position and tried to be “smart”, which my friend didn’t Acknowledge.
There are many incidents like this, because of which I always lag behind him when it comes to performance, and I am always ahead of him in being safe which never helped until now.
Jan 7 2008 :
10:30 AM :
Markets were a bit up and things looked good , He bought Satyam’s Calls with almost all of his capital, He has good intuition of which options may work and which may not, but I tried to convince him that buying a PUT on a lower strike price will save him in case he is wrong.
But to my expectation, he was “sure” that it would work, He put SL at 175 just to show me because of the fact that he knew it wont be touched at least today.
11:30-12:00 PM :
Satyam Fiasco news came in and within no time Share was down 30-40%, No surprise that even SL was not entertained … because prices never stopped .. everyone was just in a rush … With in some time Share plunged to 60-70, My friends calls were worthless and It doesn’t look that it will now move up from this point.
In short He is dead … He is out of this game now … He has 20,000 cash and all 1,70,000 or 1,80,000 he had put in calls are not even worth 4,000 – 5,000.
Price of Satyam 120 PA Jan 29
11:00 AM : Rs.1
2:30 PM : Rs.90
Return : 9,000% in 3 hrs.
What is the point I’m trying to make?
Everybody likes to make big profits and we should but not at the cost of risk of blowing up all our capital. Its not just related to Share markets or options. It also applies to Debt market, Mutual funds.
Do everything you can do to minimize or avoid the risk. Its very true that returns comes with risk. I am not saying “not to take risks”, i am talking about “managing risk”.
“Managing Risk” is the biggest measure you should take if you are in this field.
In some of the next posts we will try to see what are the different kind of “risk management” techniques and its importance.