Daily we come across article in the likes of Economic Times Etc of savvy Investors wealth creation story. But hidden there are a lot of stories of great wealth destruction of investors who bought “really good stocks at rock bottom prices and their wealth getting destroyed when market is 1.-2x from where they entered and their stocks are at 10x-20x levels from where they bought”.
This post is based on real tales of people I have come across but names (both stock scenario and persons) are imaginary.
Just go through the tale of Mr. X and his journey from 2013-14 and how he went to negative net worth even when he picked stocks at rock bottom prices , his holdings were 10 times to 20 times from where he bought and market just corrected one day 4% and next week he went bust.
In beginning Mr X bought Tata Elexsi at sub 200 level say for 10 lac . In less than 6 months It becomes 640+. Recent high is 2160+ ie. 11 times of original buy.
In the upcoming six months our savvy Mr X bought Nilkamal , another good stocks at another rock bottom price of around 100 .
Between 2013 second half to 2014 beginning our investor had a good portfolio of around 20 lac investment value built:
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Now buy mid 2014 our Mr. X’s portfolio becomes more than 70 lac . He gets in touch with some really good advisors and starts picking up other stocks but now without putting any fresh cash but on the margin he is getting on his holding. So he buys few stocks again at rock bottom prices worth also adding few of the stocks he already owned worth 35 lac . Now the value of his holdings is 1.05 crore. Thanks to Modi G by June 2015 his holdings value crosses 2.2 crores with an investment of little more than 20 lacs.
Now our Mr X comes in contact with a real wizkid and takes Ceat not in cash but fut and small quantity compared to the margin he is having. He makes some good gain as Ceat moved one way from 6xx to 11xx . So in the process Mr. X makes some good gain of say 10 lacs . Now came the black Monday of August. Market crashed almost 5% and his stocks crashed too (in fact his stocks were down from top already before the Black Monday). Suddenly Mr X starts seeing his portfolio from the Top and sees it down by almost 60-70 lac , he did not see its up 7-8 times from his investment.
Even After black Moday our investor is at :
Holding Value: 1.65 Cr
Minus Margin : 35 lac
Minus Interest on Margin: 11 lac
Minus Original Investment : 20.05 lac
Net Profit : More than 98 lac
Now broker of Mr X will be more than comfortable to give him margin of 1.1 Crore buying. Seeing market bounce back from 7600 to 8000 Mr X decides to take it and not only that he buys 3X of margin a very good and fundamentally strong counter Ceat @1100 to sell half in T+5 with some “trading gains” and hold the rest for being multi-bagger. Now the status is:
Holding Value : 1.65 Cr + 3.3 Cr = 4.95 Cr
Margin Used + Interest – Cash: 0.35+0.11+ 3.3 – 0.205 = 3.555 Cr
Now comes the real correction in market and market just retests it earlier lows but stocks further correct 10-30% and his portfolio goes down by 25% from the last value of 4.95 cr and so now value becomes 3.7125 Cr and off course broker won’t give margin of 3.555 on portfolio value of 3.7125 Cr so selling starts and after all sold net position becomes:
Selling Value : 3.7125 Cr ( if at all sold as soon as margin call came)
Minus Margin : 3.555 Cr (leave the additional interest , have some mercy on Mr X)
Net Cash In = 0.1575 Cr
Now all the holding sold and most tragic is apart from Ceat all stocks sold at 8-10-20 times of buying price Mr. X is having loss of 4 lac (Thank God he had bought some really good stuffs which didn’t correct 50-70% after rising 1000% otherwise he would have been in debit).
So what we learn from all this? I will write mine 1st send your inputs to email@example.com .