I also offer a conservative course for option & future traders to earn a monthly income. Click here for the details of the course. Click here to know the course fees.
Interestingly a lot of people call me and ask if they can get a loan and trade after doing my course. After-all a personal loan is given at 12-14% interest and if they can make 24-36% per year then they can take this profit home after paying back the loan.
Well sounds good but really a bad idea. Go back to history – name 1 person who took a personal loan or borrowed money from general public/banks/lending companies on false promises of great returns, and converted it into stellar returns from the stock markets – returned back the loan and lived happily ever after. No, not a single person has ever done that. What gives you the confidence that you can?
In fact you may have heard a lot of Scams and failures on these lines but not a single success story. Some are actually behind bars.
Why? Why do humans fail to convert a loan or borrowed money into stock market success story? We will explore in this article.
Well here is one email I got that inspired me to write this article. Email slightly edited to hide sensitive information.
I subscribed to your conservative strategy course 2 months back. I find myself very lucky that I could associate with you through the strategy you shared after all your hard work & lessons learned. On a serious note subscribing to TheOptionCourse.com seems to be turning point of my life as you gave us the direction. When I used to trade 1 or 2 lots I felt your nifty conservative strategy useless as ROI looked very low but when I started paper trade with 10 to 20 lots then I came to know how powerful this strategy is to generate regular income.
I need your advise on my below plan, Please give your advise as it could be make or break strategy for me.
1) I am planning to have personal loan of 10 lakhs @ 12.99% interest rate which I am offered from ICICI bank.
2) With this amount I am planning to build portfolio using entire 10 lakhs into Axis bank, HDFC, SBI, Coal India, TCS, Infosys, NTPC & L&T at current price with equal fund allocation before 15th Dec 2015.
3) Then using collateral value (approx 8 lakhs) I want to trade every month using below conservative nifty strategy-1.
[Email edited here as the Strategy 1 of the course was written here. However this gave me almost an attack when this person told me that he will trade my strategy AS IT IS BUT WITHOUT PROTECTION (THE HEDGE) – to generate MORE returns.
Here is the main reason why traders fail to convert loans into spectacular returns from stock markets
Since he has to pay 12.99% as interest a 3% return is less, which is quite correct, BUT THIS IS WHY traders all around the world lose money trading.
There is a limit to what you can make trading in the stock markets. Once that is achieved, the mind set once they start making money changes pretty fast to how to trade more aggressively and make money. The “I can never go wrong” mindset comes in. And this is exactly where things starts to change dramatically. Note that the problem is not with their mindsets – the stock markets does not know you or your mindset – all it knows is the trade you have taken. The problem is changing the style of the trade from may be conservative or disciplined trading to very aggressive trading.
With aggressive trading let me guarantee you this – the best of the best traders will get stuck in one bad trades out of 10 trades they take – and the spiral of losses begins. Even he loses 1% trading aggressively remember that he has to return 12.99%. He has already lost 12.99%, now 1% more. This is 14% money already lost. This keeps playing in his mind – to get that he trades even more aggressively this time with more risk and loses even more money, until his account shows a zero balance, or he gets a margin call.
On social front when he loses money the trader gets into a reclusive mode and sometimes even avoids his own family. He knows that his dream of being extremely rich is over and he does not want to face the reality. That’s the reason he starts avoiding everyone, and gets irritated on everything. This is where he recognizes that he did a huge mistake. End result – some go to jail, some suicide, some check into counselling centers.
Aggressive trading means there can be a loss of 20-25% in a single trade. Well there can be gains as well but when do aggressive traders wait for a 25% gains?
However loss of 20% is quite common if there is no hedging. One single loss and his game is over for good.]
4) If Nifty still moves further 200 points then I will stop loss that side options & will enter into your Conservative Strategy-2. I made this modification to gain around 4 to 4.5% per month using conservative strategy. Only risk would be if Nifty give one side moves of around 300 to 400 points in one day then I will in huge loss.
Another bad modification to my strategies which is not required. Modifications are OK as long as there is a strong logic behind it and protections are in place.
So you already know that there can be huge losses, still you want to try. WHY?
I need your advise on below points:
A) Whether risk reward would be favorable on point no 4.
B) Whether should I use entire capital of 8 Lacs to buy this 8 stocks at current price or should I buy in three steps. Because current level seems very attractive valuations for all these stocks.
C) Do you have any view on my stock selection, I mean will it be balanced portfolio or is any stock you feel to eliminate?
D) In one of your articles on How to become smart trader, you mentioned that why not earn more than 3% when you are fully Hedged. Can you please suggest is there any modified version of Strategy-1 which does have little risk but we can earn upto 4 to 5%. This because EMI for my personal loan would be Rs. 22,700 & I am planning to earn 35,000 from 8 lacs every month using conservative strategy.
E) No one would advise taking personal loan to trade in stock market but still I am gaining confidence in earning consistently through nifty conservative strategy so what is your view on taking personal loan for trading conservative strategy in stock market?
Request for your advice/comment on above points to fight back all my past losses in stock market & Your advise does really have lots of weight-age on my decision making.
Thanks a lot for your valuable support.
Thanks & Regards,
Mr. Dhiren, you got my answer. DO NOT take a personal loan and trade especially aggressively – you will play with fire. If you lost money trading then you lost it. Remember that when you are making money now please do not think that you are “getting back” your money from the stock markets. This sounds like revenge and revenges do not work in stock markets. Think that you learned from your past mistakes and are now doing better in the business, that’s it.
Now lets discuss your points, point by point.
>> 1) I am planning to have personal loan of 10 lacs @ 12.99% interest rate which I am offered from ICICI bank.
Great. But other than trading or investing in stock markets is there any reason? If not you are better off without the loan. You will have 10 lacs at 12.99% rate for nothing.
>> 2) With this amount I am planning to build portfolio using entire 10 lacs into Axis bank, HDFC, SBI, Coal India, TCS, Infosys, NTPC & L&T at current price with equal fund allocation before 15Th Dec 2015.
Stocks looks good for the long term but still investing in stocks at one go is NOT advisable. Read my articles on investing in Axis Bank, ICICI bank and Sun pharma. In none of these articles I have told buy at one go. I have always maintained that start buying and keep some cash to buy more at a 10% drop – else sell to book profits ar 10-12%.
All 10 lacs investing at 1 go in stocks markets, even if in great companies is a bad idea. Markets are currently falling and we do not know when they will bottom out. Trying to time the stock markets is the biggest mistake of investing. No doubt why option buyers lose.
>> 3) Then using collateral value (approx 8 Lacs) I want to trade every month using below conservative nifty strategy-1.
Strategy 1 – the most conservative strategy in my course is intended to be traded with YOUR MONEY (the money that you own), not your parents or friends or money that you got from a loan. The real essence of the strategy is that you trade peacefully – not with any kinds of stress or panic in mind. On top of that you are tweaking the conservative strategy to become an aggressive strategy. Once you do not buy hedge, it is no more the same strategy.
>> 4) If Nifty still moves further 200 points then I will stop loss that side options & will enter into your Conservative Strategy-2. I made this modification to gain around 4 to 4.5% per month using conservative strategy. Only risk would be if Nifty give one side moves of around 300 to 400 points in one day then I will in huge loss.
Really? Conservative Strategy-2 is not made to be traded like that. You are making modifications to lose 4-4.5% and not gain. Yes a sudden 200-300 points move does come and while traders trading it conservatively will lose only 1-2%, your loss will be at 5-6%. And do not forget that its a loan – so your losses are even more.
>> A) Whether risk reward would be favorable on point no 4.
No. In my book trading without hedge is NO trade. Risk reward is BAD on a 10 lakh account.
>> B) Whether should I use entire capital of 8 Lacs to buy this 8 stocks at current price or should I buy in three steps. Because current level seems very attractive valuations for all these stocks.
Read This – How To Invest In Stocks:
Three four steps to buy stocks is good BUT you cannot and should not do it on entire corpus that you want to invest in markets. At any give time, you can invest in a couple of stocks – not 3 or more. Moreover no stock should be allocated more than 10% of your trading capital. In fact the less the better, but no less than 5%, because if any stock performs its profits should have a meaningful impact on your whole portfolio – else if you allocate too less to any stock even if it becomes a multi-bagger your portfolio will not show a meaningful return.
So basically if you know a little math, you stock portfolio should not contain less that 10 or more than 20 stocks. And investment has to be done gradually NOT at a single time. If possible invest the entire corpus can be into to a liquid fund generating 8% return and take even money out every-moth and invest in any one or two of the stock in your list. Once you have booked profits in any stock, you can wait for its fall to invest again or research another stock.
Remember that the number of shares can differ according to the price BUT the money invested should be the same for entire year.
Looks like I am telling too much for free. Let me stop here. 🙂
>> C) Do you have any view on my stock selection, I mean will it be balanced portfolio or is any stock you feel to eliminate?
Now this is an interesting question. I am an options guy, not a stock guy. I have a close list of 10 stocks that I follow. 20-30% change every year. And these are stocks to be traded/invested for medium to long term. The risk is mine – so I do not tell any one asking for advice on stocks. Barring a few stock investing ideas in my blog I do not usually recommend any stock, until there is a very strong reason to do so.
Frankly, I do not know if you are following any risk-management methods. So someone may invest his entire savings in one of the stocks I recommend and if that stock does not perform – he will scold me for giving wrong information. In reality the trouble was not following the risk-management principals. Just like how it has worked for others – my stock portfolio has worked the same – some returned great, some I had to exit in losses. People who have taken my course know that I do not invest stock and forget – I trade the conservative stock strategy on it so all in all even if the stock does not perform I can make money. However you may not know the strategy and lose money. On top of that why should I do stock research for you?
>> D) In one of your article of How to become smart trader, you mentioned that why not earn more than 3% when you are fully Hedged. Can you please suggest is there any modified version of Strategy-1 which does have little risk but we can earn upto 4 to 5%. This because EMI for my personal loan would be Rs. 22700 & I am planning to earn 35000 from 8 lacs every month using conservative strategy.
Good question. Read that again – I said why not earn more than 3% when you are fully Hedged – NOT when you are NOT hedged. You are doing exact opposite of what I said or you are trying to understand what is not written there in that article.
I have given you the best possible strikes to chose for strategy 1. You know very well how to try to take more risk and try to make more – but that’s an experiment you need to do and that’s not my job. I have done enough research and got to those strike prices. Rest depends on the trader. If you are good trader you can always better that. How can I do research for you?
Now this is VERY Important thing he said that summarizes why you should not take a loan and trade:
“This because EMI for my personal loan would be Rs. 22700 & I am planning to earn 35000 from 8 lacs every month using conservative strategy.”
So you will trade in panic. You have no other choice but to make more than 22,700 per month or you pay money from your pocket. And this needs consistency – every month this person will have to make that amount. There cannot be a single month of losses. And if there is a loss of 20,000, then total money he needs to create a balance is 42,700 the very next month. To cover this up this guy will take even more aggressive trading involving Futures. Now he will get trapped – this 42k loss will convert to 1 lakh and then some more.
>> E) No one would advise taking personal loan to trade in stock market but still I am gaining confidence in earning consistently through nifty conservative strategy so what is your view on taking personal loan for trading conservative strategy in stock market?
Its good and nice to know that you are earning consistently through nifty conservative strategy – its meant for that. But it is meant to be traded with your money and with the money you do not need for next few years not months – so that you can compound. A loan is a money that is not yours and you will have to return it very soon. Even if successful you only get to keep the profit percentage of the trading. You cannot keep 10 lakhs with you – that you will have to return to your banker. All in all the money you make is not substantial as you keep only a percentage of the profits, not all profits. Compare this to the hard work you do – this is not significant. To me the Risk-Reward ratio is NOT in favor.
>> Request for your advice/comment on above points to fight back all my past losses in stock market & Your advise does really have lots of weight-age on my decision making.
Read this “fight back all my past losses” – were you fighting the stock markets when you were trading and losing? You lost the fight, now you want to fight back and win. This is called ego. No egoistic trader has made money trading the stock markets. Not just that. No egotist person has ever won a war, let alone the stock markets. Never trade with revenge in mind – stock markets have humbled 95% of traders and will continue to do so. The rest are highly disciplined traders making huge profits – but they am sure are very humble towards life as well as towards the markets.
Just be happy with the small profits you are making and forget the occasional losses – you can never win always – that is part of trading. If you can get to that figure of 20% return a year from your whole portfolio, remember that your returns are one of the best in this world during the current times.
Conclusion why traders fail to make money on borrowed capital or loan:
1. They are over-confident and think that they can never go wrong.
2. And therefore start taking very aggressive trades and start losing.
3. To recover losses they trade even more aggressively so that they not only recover losses but make huge profits.
4. They make more losses.
5. When they see that their ship is drowning and they cannot sail anymore – they declare bankruptcy or give all sorts of excuses to their bankers/lenders.
6. End is bitter for both the trader and the person/entity that gave them loan.
So the lesson is – Trade with your own money – part of which you can afford to lose. If you find success, only then increase your capital, gradually.
Have you ever taken a loan and invested in Stock Markets? If yes what as your experience?
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Dilip Shaw, Founder
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