What are some of the investing lessons one can learn from the crash in the market of January 2008? Can one be better at trading learning something new from the crash?
I have also been struck by the crash and lost almost 30% of my total portfolio. There are some lessons to be learned from the crash which I have started following and just thought will share it here as well.
- Never run after stock when it’s rising.
- Try getting out of the stock when they are flying. Don’t try to hold them for more profit.
- Get your greed away and out of the stocks.
- If you wish to get into high beta stock, get the money into the bank and wait for the crash.
- Future and Options are not for retailers and is for professional traders. So stay out of it if you can’t follow strict stop loss and profit booking.
Follow the principle of Sell when everyone buys and buy when everyone sells because its suggested and followed by the best in the business.
Now if you ask yourself, why stocks like RNRL, Ispat, RPL, Essar oil, and Nagarjuna fertilizers have lost 50-70% of their value. The simple reason could be that they just went up at that rate. Now if you tend to get into the stock after the rise, then you are at the risk of making some quick bucks if it continues to fly the second/third day running, but then you can get hit the hardest because there is no reason for any stock to go up by almost 30-50%.
Now, what you should be doing for stocks which can double your money in a week. Simple put the money into a bank account and wait for the stock to fall more than half percent-rise in a day.
Say the stock price of ‘X’ previous day close is at Rs 100 and suddenly you see a 30% price rise for the stock and its at 130.
Now should you try to catch the stock at 130?
The answer is no.
Wait for the stock to correct at least 15% in a day. i.e., half of 30%. ‘X’ stock cannot go all out moving in one direction, but when the stock starts correcting 15%, then that does mean you will get the share when it’s stabilizing at some price, and then that will become a right support level. Ultimately it may so happen that the stock you buy would be at 150 but that 150 will be the price where the stock has excellent support and also have the option of getting the benefit of fast movement.
Say if you invest in the equity you will get benefit of around 25% per annum but as we become more and more greedy we tend to find ways of getting 25% per month, and then we tend to be in a position from where we cannot recover the money, and that is with the future and options. With cash market, your invested amount cannot become zero, but in future and options it can become zero, and that could lead you to the out of equity, and so then you need to be settling into 8-10% Fixed deposit savings.
Now the question would come as to how you can get your money to zero in future and options. Say you have invested one lacs in future and options and you get an exposure of 4 to 5 times and then you can buy equity up to 5 lacs and so you tend to get more equity than your capacity helping you giving more money. Now if you happen to invest in a stock which moves almost 20% in a day wherein 1 lac you can gain one lac or loose the same.
“Say the stock price of ‘X’ previous day close is at Rs 100 and suddenly you see a 30% price rise for the stock and its at 130. Now should you try to catch the stock at 130. The answer is no. Wait for the stock to correct at least 15% in a day. i.e. half of 30%. ‘X’ stock cannot go all out moving in one direction but when the stock starts correcting 15% then that does mean you will get the stock when its stabilizing at some price and then that will become a good support level. Ultimately it may so happen that the stock you buy would be at 150 but that 150 would be the price where stock has a good support and also have the option of getting the benefit of fast movement.”
Can u xplain me this ? 15% correction should make the price 115. Where does 150 come from ?
Shabbir Bhimani says
150 comes from the fact that even if the stock corrects, consolidates and then makes a new support and then when there is fresh breakout which may be higher than the first peak of 130 then also your stock has more potential to go higher and it will not have the pain of going down.
150 is just a value above 130 for breakout.
What is your views about intraday trading? I know it is risky but many people do it without spending money every day. Do you believe in that? I read in your article that intra day is good only for brokers not customers.
Shabbir Bhimani says
If you know how to do it and if you want to learn doing it I think it is one of the best thing even for customers but if you are just trying to go with the flow I think it is best avoided.