There is a definite relationship between Risk and Reward in Markets. There are several factors that go into determining Risk but one of the biggest ones is leverage. This becomes quite clear when we look at Company valuations on the NSE.
So HDFC Bank has PE Ratio in the high 20's while Stocks like HUL, Nestlé, Pidilite etc are well past 80. So even though the quality of the Business may be equally good, the Market rate low or zero debt- read unleveraged- Companies as less risky and superior to highly leveled ones
The quality of Earnings without using leverage is always perceived to be superior to those which are magnified by leverage. Leverage equals Risk and this is discounted in Price
The same analogy can be used in Trading. Investors who are all cash get the most admiration and Warren Buffett's record of generating a CAGR of 22% over several decades is considered extraordinary. In Trading things are a bit different
Our current Margining System gives us a leverage of 7x while Trading F&O. That is high and to my mind very Risky for most Retail Traders. Before the Sebi rules came into effect, brokers were giving 5x on top of that making it 35x! A train wreck waiting to happen!
A lot of whining by those who used it and were lucky to survive it. But fortunately in any sane system, the level of acceptable Risk is decided by the lender and not the borrower. And in this case most borrowers do not even understand the level of Risk that they are taking.
The point of all this is that while it is great to talk about Returns, one must always look at Risk taken to generate it of which leverage is an important component. A person generating 60% who can go bankrupt in 1 bad month due to excessive leverage is not someone to emulate

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Pran Katariya

Pran Katariya Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @KatariyaPran

24 Jun
Had the privilege of listening to Javed Akhtar several times at the Jashn-e-Rehta festival. He was asked to comment on why the standards of Hindi Film Music and Lyrics had been on the decline over so many years. His answer was both thought provoking and worrying.
He said that it was not that the quality of music composers or writers had deteriorated. It was the standards and quality of the audiences that had declined and their inability to appreciate good music or good writing that was responsible for the poor fare that's being dished out
When I see the kind of posts or response to my tweets I can't help but think that the same has happened to Traders in recent times. A Trade is basically the expression of an idea executed thru a plan or strategy.
Read 10 tweets
16 Jun
During a workshop organized by Dr Tharp which I attended, he split us up into 10 groups of 3 each and had us play his Marble Game which he uses to teach the importance of Position Sizing. Each participant had to put up $100 with the winning team taking the whole pot
The game had a positive Expectancy so logically every team should have made money. Yet after some 15 draws in the 20 draw game, all but 3 of the teams were eliminated as they lost all their money. Just before the 20th draw, 2 teams were neck and neck and one way behind
On the last draw, the 2 teams increased their position size in a desperate race to win but a 10x loser was drawn bankrupting both of them. The third team with a modest return won the game and pocketed the $3000
Read 5 tweets
15 Jun
My largest Portfolio investment is HDFC Life. For a year until March I was merrily making 20-25 a month selling Straddles even as it went from 550 to 740. Unfortunately it suffered a 10% DD to 660. Showing signs of life again. Hope to resume Straddle selling when it reaches 700
Ok. Decided to start early. Sold a July 700 Straddle for 50
Even Option Sellers can be directional. Why should the buyers have all the fun?😀
Read 4 tweets
19 May
I disagree with the view that hedges are used by Indian Traders to protect themselves. Actually a majority of Traders here use hedges just to reduce the Margin in a Trade so that they can take more Trades. This motive actually increases their Risk.
So say you sell a BnF Straddle for 400 for which you utilize a Margin of Rs 1.5 lacs per lot. Say the Trader does 6 lots utilizing Rs 9 lacs. Now to cut down his Margin he buys the wings 400 points away for 100 resulting in the Margin coming down to Rs 1 lac per lot.
However, given the mentality of the typical Retail Trader, who wants to maximize his use of Margin, he now sells 9 lots instead of 6. So now he has reduced his POP by almost 30% because his Breakeven is down from 400 to 300.
Read 9 tweets
8 Apr
Samir Arora'a talk on How To Build an Equity Portfolio is one of the most fascinating and profound things I have heard on the Markets. We are conditioned to believe that Money is made in Markets thru our ability to pick the very best performers in the Market.
He turns the proposition on it's head and shows that if we had a Portfolio of 30 Stocks and average Stock in Portfolio was only the 90th best in the Nifty-combination of say some being 50th best and others 150th best- then we would be up 56x times over 15 years vs 7x for Nifty!
This is a return which very few have seen. He then argues that it is impossible for anyone to pick the best performing stocks in any Market due to it's random nature. So Steve Jobs had only 20% of his holdings in Apple while 80% was in Disney,
Read 5 tweets
7 Apr
Sachin Vaze was suspended only when the NIA was allowed to investigate. ATS suddenly started finding evidence against him. Today the new CP has come out with reports casting serious aspersions on the functioning of the whole Dept.
Can we really trust the Mumbai Police or the Maha Govt to get to the bottom of this sordid affair? It is so much beyond the 'federal structure' being threatened as the Maha Govt would have us believe. The very faith of citizens in law and order has been shaken to the core
I hope SC throws out the appeal with some stinging observations. I also hope that no 'Political deals' are made to hush up the issue. Many Politicians, who are undoubtedly involved, need to feel the full force of the law and face the consequences for this betrayal of democracy
Read 4 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!

:(