Saturday, April 22, 2017

Are you a lay investor? Trading in derivatives could make your money vanish...

Courtesy: Economic Times
Those who study narcotics addiction have invented the term ‘gateway drug’. It seems that many drug-users start with mild narcotics like marijuana and gradually move up to harder stuff like heroin and crack. It so happens that there’s an almost exact equivalent to this in equity investing as well, except that the first stage is actually beneficial.

The default Indian saver saves all of his or her money in deposits with banks or post offices or the government. Some of these people—perhaps about two crores of them—start investing in equity funds. The gateway investment to equity funds is often a tax-saving fund—one of the so-called ELSS funds.

As ELSS investments come with a lock-in, they are forced to stay put for three years, which is a reasonably long period to see good gains. For most of these investors, the idea that equity funds can get you good returns becomes an obvious. So far, so good.
A certain proportion goes beyond this gateway stage—generally with the help of equity investment’s equivalent of a drug dealer. This person often goes by the name of a wealth manager or a relationship manager or something like that and is generally employed by a bank or a stockbroker.
The logic given is simple: why are you wasting your time? Since you know that equity returns are better than a bank deposit, let me introduce you to the form of equity that can get you the highest possible returns from equity, which is effendo.
Even though ‘effendo’ sounds like a magical spell from Harry Potter (like Confundo or Diffindo), it is not. It is actually the popular way to pronounce F&O, otherwise known as futures and options, or derivatives. Effendo is closely related to a Harry Potter spell called Evanesco which makes things vanish.

Effendo can make money vanish as if by magic, as it regularly does for investors lured into short-term trading using these types of investment avenues. Actually, effendo does not make money vanish, as much as it transfers it magically into the bank accounts of your broker.
Now I know the whole shpiel about how derivatives provide depth and breadth to the stock markets, but for a vast majority of small investors, they are none of that. Instead, as Warren Buffet pointed out, they are nothing but financial weapons of mass destruction. But aren’t derivatives meant to be a good thing?

The answer to that question lies in one of the distortions that have crept it into the Indian stock markets ever since derivatives trading began. Derivatives like futures and options can be used to protect traders against risk, acting like an insurance policy.

However, they can also be used to enhance risk and returns, effectively as an instrument that offers a chance of higher gains, but also a high risk of huge losses, including completely wiping out the investor’s capital.

The real problem is not that using futures and options in this manner is possible, but that almost every part of the equities trading industry is dedicated to getting customers into this kind of trading. Practically every broker—and that definitely includes banks’ ‘wealth management’ units—does this and certainly, all the stock exchanges have spared no effort in getting as many people to trade as speculatively as possible.

This kind of institutional behaviour is certainly disappointing, but not surprising. So much of the behaviour of India’s big financial players is sub-ethical that one suffers from a bit of outrage fatigue.

However, the important point is that savers should save themselves from being herded into such kind of trading. It’s certainly not a natural extension of safe and sensible investing of the kind that one does in a tax-saving or other equity fund. There will be people who will try and tell you stories and earn fat commissions out of your money but it’s your job to show them the door.

Those who study narcotics addiction have invented the term ‘gateway drug’. It seems that many drug-users start with mild narcotics like marijuana and gradually move up to harder stuff like heroin and crack. It so happens that there’s an almost exact equivalent to this in equity investing as well, except that the first stage is actually beneficial.

61 comments :

  1. Miss those golden saturdays....when vp.sir used to provide a stock pick....

    But now miss vp.sir comments aswell...plz be back...vp sir miss u the most...before stock mkt tumbles n novice investors are at loose...plz provide some.healthy tips and not those COURTESY blogs....not feel like reading...can read ur comments repeatedly but not those investopedia's n ET's...

    Hope u consider..

    ReplyDelete
  2. Sir,
    What is your view on Websol?
    Can one enter at current levels?

    ReplyDelete
    Replies
    1. This is the only stock I am positive from solar space.

      Delete
    2. sir, what about surana solar? is there any negative about this company?

      Delete
    3. If Websol is only stock you track solar space, then what about your post suzlon eng?

      Delete
  3. Sir very nice of you to post this. I have myself suffered the negative consequences of trading derivatives so i totally relate with this post.

    As we have got the opportunity of hearing from you are a long time, wud request your feedback on the following stocks:-

    1) Amulya Leasing
    2) Emami infra
    3) Royal Orchid
    4) Centrum
    5) Rupa
    6) Websol Energy

    ReplyDelete
    Replies
    1. Tracking only Amulya Leasing and Websol and positive on the business prospects of both in long term. In case of Websol, I expect the recent reduction in debt will help the company to stay afloat.

      Delete
  4. Dear VP sir

    Can you share your view about EPC irrigation

    ReplyDelete
    Replies
    1. Already suggested one from Rs.45 level.

      Delete
  5. Sir, do you track BHANSALI ENG, GOLDSTONE INFRA, PONDY OXIDE and MINDA CORPORATION. Thanks

    ReplyDelete
  6. Dear sir, your valuable input should on KINGFA SCIENCE, VIVIMED, VIMTA LABS please. Thanks

    ReplyDelete
  7. Suzlon energy can we hold? Tanti said share holders will start reap benefits next year onwards

    ReplyDelete
  8. Thank you vp ji for this helpful article.
    Willing to know your present thoughts on
    Dishman pharma, bajaj hindustan.
    Thanks in advance

    ReplyDelete
  9. Dear VP Sir,
    I want to express my gratitude for your suggestion of NCL Industries and Enkei Wheels India. Both are doing good.

    Thanks
    Ramakrishna Madugula

    ReplyDelete
  10. Dear VP sir,

    Kindly share your view on IMP powers.

    Thanks

    ReplyDelete
    Replies
    1. Sector is expected to benefit from government initiatives.

      Delete
  11. As always , thanks for sharing wonderful article sir . Hope all followers of blog realize it and don't regret later , as I am the one who learnt in hard way and know how much pain it is.

    ReplyDelete
  12. Dear VP, Your views about Cupid, Capital trust and 8K miles.

    ReplyDelete
    Replies
    1. Expecting range bound movement from first two , not tracking 8K miles.

      Delete
    2. I mean you views about the valuation and fundamentals Sir.

      Delete
  13. Dear sir
    Kindly share your views on dollar industries, will be a turnaround story?
    Thanks

    ReplyDelete
    Replies
    1. Turnaround ? . Dollar Industries which listed recently in NSE and currently trading above Rs.1500 is a company reported more than Rs.25 Cr profit in last year.Then what is the question of turnaround ?

      Delete
  14. Dear sir please your view on S Chand and Company Ltd ipo

    ReplyDelete
    Replies
    1. I dont think valuation is cheap , but in a bull market like this anything is possible. Whether a stock is good or not in a market like this depends on the strategy you are following . A good company may not be a good investment if it is not available at a good price , but you can make money even at a high price till euphoria in market .

      Delete
  15. Dear sir,
    Do u track essdee aluminium and nitco Ltd

    How this company for long term investment

    ReplyDelete
    Replies
    1. As of now both are facing challenges mainly from debt side . Opportunity lies in their brand and size . So these type stocks are double edged swords and suitable only for very high risk investors.

      Delete
  16. Dear sir,
    I have 300 share certificate of Essar steel, the company is delisted

    Now what should I do to sell this share certificate

    ReplyDelete
    Replies
    1. Normally upto one year post closing of de-listing offer company is liable to buy back.It seems some firms which deal with unlisted stocks still dealing in Essar Steel stocks but not sure about their genuineness.

      Delete
  17. Dear sir,
    I have 100 shares of Mahindra lifespace, can it be multibagger in long term

    ReplyDelete
  18. Dear vp ji

    What is your view on pennar industries, Gennex labs from a long term perspective? Thanks.

    ReplyDelete
  19. Sir,what is your view on Karnataka bank and Repro India?
    TIA

    ReplyDelete
    Replies
    1. Sorry , not tracking above mentioned stocks

      Delete
  20. Dear vp ji. Pls comment on idfc bank results and ur views after results. Npa s came down

    ReplyDelete
    Replies
    1. Still I feel , it is not a bad choice for passive investors

      Delete
  21. VP sir view on 20 micros at cmp

    ReplyDelete
  22. Hi Sir,

    Please share your view on old recommendations Gujarat Borosil, Multibase India, United Drilling.Bought at lower levels on your reco ,is it good to hold still or can we book profits...? Please reply

    ReplyDelete
    Replies
    1. All these stocks are already multiplied by many times, neutral on them at CMP.

      Delete
  23. Dear Sir, Your views about L&T Technology Services, eClerx and Bajaj Holding & Investments.

    ReplyDelete
    Replies
    1. L&T Technology services in a potential business vertical . They need to divest substantial stake in near future to comply with listing norms .

      Delete
  24. Dear VP

    Could you please share your view on Virinchi Technology

    ReplyDelete
    Replies
    1. Not tracking above companies as of now.

      Delete
  25. Sir
    What's your call on asahi song won bought at Rs 256 ..I'm a long term investor ..

    ReplyDelete
    Replies
    1. This stock suggested around Rs.84

      http://value-picks.blogspot.in/2010/11/asahi-songwon-colors-ltd-buy-on-decline.html

      At CMP Rs.315 , neutral on it.

      Delete
  26. Sir, need your opinion on ester industries, tara jewels, vidhi dyestuffs,

    ReplyDelete
  27. Hello VP,
    Do you track:
    Tinplate Co.of India and/or
    SMS Pharma?
    Thank you,

    ReplyDelete
  28. VP Sir,
    Would you be able to touch on "Bull market"?
    What is the reason behind our current rally?
    Is it due to political certainity, economic improvement, or just stock market cycle?
    Or the global consumption increasing?

    ReplyDelete
    Replies
    1. Bull or Bear market is not the result of any single factor . It seems flush of liquidity is the major reason than improvement in corporate earnings for this rally in stock prices. Whether this will sustain or not depends on the corporate earnings improvement is enough to support such a price level , in coming quarters.

      Delete
  29. Dear VP ji, what is your take on PSU banks now? Are you tracking any of the mid size PSU banks like BOI, BOB, PNB. Some analysts say that these banks may grow 2-3 times from hereon.

    ReplyDelete
    Replies
    1. Worst seems over , but recovery may be 'U' shaped.Tracking only Canara Bank,Indian bank and BOB from this space.

      Delete
  30. Sir any view on goldstone infra ??

    ReplyDelete
  31. dear sir, what is your view on jenson ? public share holding is interesting. please reply.

    ReplyDelete
  32. Sir any view on JITF Infralogistics?

    ReplyDelete
    Replies
    1. Its subsidiaries are working in sectors with potential but currently most of them are in loss. May take time.

      Delete
  33. Sir, what's your view on Lloyd electric as it will got 1500 crore from business brand Lloyd Sele which will make it debt free and market cap is nearly 1000 crore and it will have manufacturer of Ac and many items, is it a good investment

    ReplyDelete

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