History has it that Benjamin Graham and Warren Buffett are role models as far as value investing in stocks is concerned. These two accumulated so much wealth that Warren Buffett, even today is one of the richest man in the world.

However it is not easy to emulate these two great investors, but there is a slightly easier way to hand pick a few stocks to do value investing which is defined in the course how to invest well to retire rich. Those details cannot be shared here. However this article will help those who have done my course more.

Here are some of the important things to before investing in a stock for the long term:

Buffett’s Investing principles of investment:

Note: These Investing principles will look very easy, but the fact is they are not.

Intrinsic Value of the Stock Is Very Important:

Intrinsic value of a stock is its current price compared to the company’s future earnings power. This is very difficult to assume. And for those who believe in back testing when they want to test any option strategy here is where all their back testing will fail.

This is the reason never believe in back-testing. It is just what may have happened in the past but it is not guaranteed to happen in future. There is no dearth of many strategies that have performed very well in back testing, but failed in actual live trading. People still believe in back testing for reasons better known to them.

Nifty is not a living thing that it will keep repeating its own history in the future. 2007-08-09 is the best example of back-testing gone bad. Nifty went 50% down and then 50% up within two year.

And then it never happened till now. How in that case is back testing worthwhile?

Back-testers are the ones who look at the past but are unable to look at the future. A far as stock investing is concerned those who look at future only make money.

Past is past – if a stock has given 100% return in 12 months then there is no guarantee it will give the same return in future. Back testing cannot find out the intrinsic value of a stock.

Future earnings can be guessed by how well the company is performing and what are the chances of it doing the same business and keep the pace of its growth in the same rate as last few years.

Obviously this cannot be done in any stock, you need to classify stocks to do that. There is a way to do that written in the how to invest well course.

Once you have selected the stocks to research future valuations gets a bit easier to reach because you research only in good stocks.

Area of business

Like if its morally legal (like food), morally illegal (like gutka, tobacco etc), cultural or modern depending on the current prevailing society, is this business sustainable by future generations etc.

Business Management

Who are the people who are running the business and managing it. Have the decisions they taken in the past benefitted the company or not? Is some kind of fighting going between them etc.

Financial Measures and Value

Some of the Buffett principals were easy to execute but difficult to calculate. For example Economic Value Added (EVA), is difficult to calculate but easy to implement.

Economic Value Added (EVA) is an estimate of a firm’s economic profit in future. EVA is the net profit less the equity cost of the firm’s capital. The idea is that value is created when the return on the firm’s economic capital employed exceeds the cost of that capital.

Please read above the Intrinsic value to some extent is trying to figure out how well is the stock price placed in compare to its future profits.

EVA is hard to know, but once you know its easy to implement. If EVA signs are positive he bought the stock immediately without looking for support resistance etc which most day traders do. If the company’s future is bright it’s stock will definitely rise in future.

Calculation of EVA needs a lot of mathematics and adjustments. Once you get to know how to calculate EVA, it’s easy to take a decision to buy a stock or not.

Small Note: For intraday day traders these things does not matter. All they need is to control emotions and trade. On top of that intraday day traders get a huge margin of over 200% on the capital used therefore they can exit with small profit or loss. However stock investors for the long term need 100% of the capital to be invested. For them the above does matter. For multimillionaires like Buffett it is even more important because they deploy a lot of capital in one stock. They cannot do it without proper research.

Buffett had to foresee the future of a company before investing millions.

As you can see the above is very easy to understand but difficult to find out. Buffett initially did it all alone but later had resources to look into these before investing the money.

Today 23-February-2017, is India’s Stock Markets Exchange Derivatives – Futures and Options expiry day for derivatives for the month of Feb 17 not other months.

Which means all options and futures contract for this month Feb 17 will expire today at 3.30 pm. Out of The Money (OTM) options will expire worthless and In The Money (ITM) options will have only the intrinsic values left in the premium at around 3.25 pm.

Therefore you must close all options for Feb 17 contracts before 3.25 pm (5 minutes before market closing to avoid leaving it open by mistake), if possible, especially In The Money (ITM) options. Please read carefully to know the reason. In short it is dangerous to leave it not closed.

Old subscribers may remember that I have keep saying in my blog since last two years, do not let your options expire worthless, there can be a penalty by the exchanges.

Securities Transaction Tax (STT) is A Huge Danger to Let Option Exercised and Not Closed Before Expiry Day

Now there is even more and severe danger of letting them expire exercised (not worthless). The Securities Transaction Tax (STT) tax on options that do not expire worthless but get exercised face a huge Securities Transaction Tax (STT) of 0.125% on the Total Value Of the Options.

What is an Exercised Option?

An option is considered exercised if it was bought any day before expiry, is In The Money (ITM) and not sold before the expiry day of the that expiry month options only.

An option is considered worthless if it was sold any day before expiry, is Out of The Money (OTM) and not bought back before the expiry day of the that expiry month option only.

Securities Transaction Tax (STT) is not applied on worthless options which were sold and not bought back and are Out Of The Money (OTM)

Securities Transaction Tax (STT) is applied on exercised options which were bought and not sold before market closing on expiry day and if they are In The Money (ITM)

Important Note:

To avert chances of any penalty or to avert risk of STT (no one knows all the rules of STT), it is better to close all derivatives, options or futures, In The Money (ITM) or Out Of The Money (OTM), before the expiry day.

Though some of my options too expired worthless in Jan 2017 too, but luckily they were all sold not bought and they were Out of The Money (OTM). There was no brokerage and no STT levied on my options since they expired worthless and were sold not bought back.

But even if there was no STT done on sold options that expired worthless, I still recommend close all derivatives before expiry day. Now we just do not know what may happen. If your brokerages are too high you can register with a low cost brokerage firm which costs next to nothing to close options and futures. It is better to pay a small fee rather take the risk of letting options expire in the money or out of the money, exercised or worthless.

Contact me to help you open an account with the lowest and one of the best brokerage form in India.

Please note that only February 17 month options will expire today, not any other months options.

So, this rules applies today to February 17 month options only. Today is options and futures expiry day of February 17 month options and futures contacts only, rest of the remaining months options and futures will not expire today.

Small Note: My Conservative Options and Futures course is designed in such a way that we do not wait till expiry day to avert these kinds of dangers. They are very conservative in nature and have risk management inbuilt due to hedge. This is the reason a lot of traders are doing pretty well trading my strategies since 2014. Contact me to know more about it.

What About Securities Transaction Tax (STT) on Options That Are Closed Before Expiry Day

In the case of options trading and closed when the markets are opened anytime before the expiry day, the Securities Transaction Tax (STT) is 0.05% on the premium. This is ok and it makes sense and is easily affordable.

But here is the problem and a BIG one.

What About Securities Transaction Tax (STT) on Options That Are Not Closed Before Expiry Day?

The Securities Transaction Tax (STT) on exercising an option is 0.125% on the total value of the options bought. Exercising of the option is that you bought an option (it does not matter when you bought – 60 days, 50 days, 40 days, 30 days, 20 days, 10 days or on the expiry day for Intraday day trading), but are not willing to close the trade to save brokerages and taxes, or have forgotten to close it and leave it till expiry day’s markets close – after which you cannot trade them.

This is where the problem lies. When an option is exercised, the Securities Transaction Tax (STT) is paid on the entire value of the option and not just the total profits made.

Example on Securities Transaction Tax (STT) On Options Getting Exercised

For example let’s say Trader “A” forgot to sell his option on expiry day. Nifty closed at 8872.55.

It does not matter what the premium was of the options he bought when Nifty closed.

Suppose Trader “A” made a profit or loss of Rs.1 lakh. Again it does not matter what the profit or loss was made on an exercised option.

Why profit or loss does not matter here you will know soon.

The Securities Transaction Tax (STT) will be Not be levied on Rs.1 lakh profit or loss. It will be levied on total value of the In The Money (ITM) options.

Supposing the above trader bought 1000 lots of Nifty options and forgot to sell it and it got exercised. Nifty on that day closed at 8872.55.

Since Trader “A” allowed the Nifty options to be exercised, he has to pay STT on the full value of the options bought.

Here is the Calculation of STT on Exercised Options Bought but Not Sold Before Expiry Day

One lot of Nifty option currently is 75. He bought 1000 lots. Nifty closed at 8872.55

Total value of the option:

8872.55 * 1000 * 75 = Rs.66,54,41,250.00 (Rs. 66 Crores, 54 Lakhs, 41 Thousand and 250.00)

0.125% of 66,54,41,250.00 = Rs.831,801.56 (Rs. 8 Lakhs 31 Thousand 801.56)

Profit was Rs.1 lakh.

STT needs to be paid = Rs.831,801.56

So the trader is in loss of = Rs.(100000 – 831,801.56) = -731,801.56 (Rs. 7 Lakhs 31 Thousand 801.56)

This in spite of making a profit if Rs.100,000.00 on the options he bought.

Or even after making a profit of Rs.1 lakh, Trader “A” will be in a huge loss of Rs. 7 Lakhs 31 Thousand and 801.56.

Do not let such a situation ever come in your entire life of trading.

A real trader Mumbai-based Chirag Gupta, is currently facing a loss of Rs.18 Lakhs even after making a profit of Rs.6.07 lakh on the options he bought but did not close on the expiry day of January 2017. He bought options for 0.05 but did not close for reasons known to him. I cannot say why he did not close as he has not said it anywhere, so I do not know.

In absolute shock he has started an online petition to stop this STT on exercised options. Here is the petition:

https://www.change.org/p/security-transaction-tax-stt-a-trap-for-traders-and-a-systemic-risk-for-capital-markets

A Note to Mr. Chirag Gupta: If you are reading this let me tell you that I am extremely sad with what happened to you. I am sure my readers must be also be very sad after knowing your story. Please let us know in the comments section why you did not close the options you bought before markets closed on that fateful day? It will help us tremendously to avert such a situation. Sorry Mr. Chirag Gupta, but lets hope for the best.

His article is published in Economictimes as well.

Conclusion

Close all Futures & Options on or before its expiry day to save huge Securities Transaction Tax (STT).

This is continued from page 1 Learn Warren Buffett Investing Style. Please also read the first page of Learn Warren Buffett Investing Style.

Its Long Term Investment Not Short Term

This is where a lot of traders lose patience. They buy stock with a long term view but after one month when they see a profit of even 5% they exit happily. This is known as change of plan for a short term profit.

After a few days they see the stock has gone up further then they rue their decision to sell at a small profit, so they buy it again only to see the stock going down, then of course they sell it. Time waits for none so over the long term they see they are making no profits either in their derivative trading or stock investing.

The reason is pretty simple when you plan something stick to your plan.

How to choose stocks to invest and how to invest in them and when to exit is written in my course how to invest well and retire with crores. Since its a paid course it cannot be explained here.

Reduce Buying And Selling of Stocks Very Often

Some traders love to keep buying and selling stocks just for fun. These people are doing two mistakes here:

1. They are increasing taxes like STT (service transaction tax), brokerage commissions, and income tax of profits from short term investment in capital gains.

2. They exit some stocks in small profits and sell some in small loss. If they take into account the taxes paid, brokerages paid and profit and loss ultimately they end up making nothing. in fact they may end up losing money.

Please understand that since RBI knows every trade there is no escape from paying taxes. So please keep taxes in mind before making profits.

If I buy a stock for the long term minimum term I keep is one year to save taxes. In between I try not to even see the stock price to control my emotions to sell. Even if I see the stock is giving me good profit I calculate the taxes I need to pay on profits. If still comfortable I see else I don’t even if the stock is giving a good profit.

When you are buying a stock you are buying a part of a business. Give it some time to grow. In other words you do not buy a stock, you bought a part of that business.

Think long to avoid paying huge brokerage commission fees and short-term capital gains taxes.

Ignore short term fluctuations which is natural and enjoy the dividends over time and long term profits without paying any taxes.

Recommended Reading:

Page 1 of Learn Warren Buffett Investing Style.

Robert G. Hagstrom in 1999 wrote a book on legendary investor Warren Buffett. The book was titled “The Warren Buffett Portfolio.”

This book explains how the Warren Buffett used to pick stocks to buy and when. You will learn about “Focus Investing” too. Focus investing is study of management, how they work and the companies’ financial position compared with other companies in the same business and most importantly their stock price. If the economics of the company is strong he believed it will bring great returns. Once this stock is discovered to invest he called it a stock with great Stock Moat.

Warren Buffett rarely averaged his stocks. Once he decided to invest, he used to buy it in huge quantity and average time holding was five years. Once the company lost its Stock Moat he used to sell.

Focus investing is good for long term investors. The books also deeply studies psychological mindset of Warren Buffett while researching a stock.

Psychology before we trade like greed, fear, planning works to a great extend while researching a stock, option or futures to invest.

I will try to discuss the important suggestions and points to remember from the book. All topics may not be covered but the most important topics are covered below.

Stocks is Not Just A Stock It’s a Business

Most people buy stock to make money fast without thinking that they are actually investing in a business. When you buy a stock you actually become part owner of the company. If the company performs well the stock goes up you make a profit. If it does not perform well, the stock value goes down and you make a loss if you sell.

The point is think about the company before you invest your money, not to invest because you think this stock will go up, instead you must ask yourself will this company perform better over the long term?

To help you learn the best possible investment decisions I have designed a new course on How To Invest Well And Retire Peacefully. It will help you to chose good stocks and mutual funds. Every detail is there like how to chose, when to average, when to sell etc. If interested please contact me.

Size of Your Investment Does Matter

Warren Buffett never invested in too many companies because he believed over diversification may hamper returns. He never invested in just one or two companies either. He had a well balanced portfolio.

How to create a well balanced portfolio is also written in my investment course.

Size allocation, risk management, when to invest and sell, everything is there. This is known as doing your home work before investing in a stock. Buffett use to do his home work properly before investing in any stocks. How to do this home work is there in the investing well course.

Allocation in some good companies over the years may bring amazing returns if the stocks you chose are good and well managed companies. In fact if stock investing is done well you may retire with crores of rupees.

Invest in companies with favorable long-term prospects.

Recommended Reading:

Page 2 of Learn Warren Buffett Investing Style.

A lot of traders get confused on what kinds of stop loss orders to take. Experienced traders put limit orders and watch the markets while new traders watch the markets and take normal stop loss when they see the stock is moving against their trade.
When things can be automated we should automate the process of stop loss orders. This is the Stop Loss Limit Orders. Once the trade is taken a trader can decide where to take a stop loss and keep that order in the system.

If the stock comes near it and breaks the level, the stop loss limit order gets triggered.

Do not get confused Stop Order does not mean that it is just the stop loss order, it can be placed to book profits as well.
However to place a stop loss or stop profit order in the system there is a problem.

When you put the first stop system either the profit taking or the loss, no extra margin money is blocked as the system knows it is only to close the order so nothing extra is required.

But when you place the second stop or profit taking order it is considered a new trade and more margin is required.
Why?

Let say you bought a stock for 100 and want to take profit out at 105. But you are in a hurry and leave your system but want to make sure you want to take a SL at 95. You are first worried about stopping the loss so keep 95 in the system as sell the stock at 95. Now as soon as you want to keep the profit booking stop at 105 this will be treated as a new trade. Your system does not care about your profit or loss. It does not have any brains. All it knows till now is that you bought the stock at 100 and want to sell it for 95, so no more margin is required. But as soon as you keep another stop sell at 105 it treats as a new trade as it considers the first one as the final stop, the second one as a new trade.

So as soon as you keep another sell at 105 it will ask for new margin.

There is another problem. Let say you had the margin and kept the stop loss at 95 and profit stop at 105 and left your system for the urgent work. Let us assume after 1 hour the stop loss is hit at 95 and the order is not complete, but the sell the stock at 105 is still alive in the system.

Why?

Because the system treat edit as a new trade so why should it close that?

Please note that you may consult about this from your broker as well. Some brokers have this facility to cancel any other trade in the same stock or option if one of the stop got triggered. However the second stop has to be in of same type and same stock same number of shares.

For example if the stock was XYZ, then the second stop should be also be of XYZ. If the shares bought was 10 then the second stop should also ne 10 only. If the stock was bought for Intraday then the second stop should also be for Intraday not positional.

Hope you got the point, everything – the type of trade, the indices, the number of shares all should be same only then the second stop will also get cancelled.

But please make sure that your broker allows this or not. As far as I know most brokers only allow one stop else, they treat the second stop as a new order and ask for more margin plus they will not cancel the second order automatically, you will have to manually cancel the second order.

That is the reason it is always better to hedge the trade as soon as you take the original trade. There is no tension there is no extra margin required.

How to hedge the trades is properly explained in my course.

After impulsive trading and intraday trading the biggest mistake traders commit is a no plan in trading. Learn why planning is important in trading.

This series in continuation to the mistake traders to while trading or investing in stock markets.

No Plan In Trading:

After impulsive trading and intraday trading one of the biggest mistake traders do is no plan in trading. Traders trade just to make money, when you ask them how much they want to make in that trade, they fail to answer that question. When you ask them where you will take a loss, again they say they do not know, but then if pressured they will say they are absolutely sure that they will make a profit. This is am amazing traders psychology that ever experts fail to understand.

The above is a clear case of no plan trading.

They do not know where to take a profit or where to take a loss. This obviously leads to losses and then they turn to tips providers, for of course, more losses.

If the path to your destination is not clear, how will you ever reach there? You can’t.

My Advise:

Plan your trader well. Before you trade, ask yourself why are you trading this? What is the reason? What is your profit target? What is the maximum your loss you are willing to take? If all these are not answered, do not trade because you are trading without a plan.

Trading Without A Plan Is Dangerous.

No Goals or Objectives of Trading or Investing:

Yes we trade to make money. But just making money is not enough, you must know the following also:

• Why do you want to make more money?
• How much money you need and in how much time?
• If you are investing as a retirement planning then what is your target every month so that you reach your goals in time?
• What is the maximum risk you ate willing to take?
• What will you do if the maximum risk you are willing to take is lost while trading?

The above comes under goals and objectives of investing and trading. If you are not trading with any goals and objectives in mind your goals may not be met. It is not just money which is important, the time to achieve it is also important.

If you need 10 lakhs for your kids higher education and time left is 5 years, then you must ensure that you make and save at least 2 lakhs a year. This is 16,000 a month.

If you are losing money trading forget about reaching your goals, you may not be able to meet daily expenses after a few years.

If you are planning for retirement then you must be able to save and make at least one crore by the age of 60 to live a peaceful retired life. You read my retirement planning book to achieve that goal.

You can easily calculate how much you need to save every month to reach that goal according to your age. If you are not meeting your goal you are trading without a target.

My Advise:

Trade with a target and goal in mind. Trading without a target is like working hard to get something that you do not know you will ever get or not, and when.

Learn about common mistakes traders do while trading or investing in stock markets, options or futures trading. I have already emphasized a lot of times common mistakes stock investors and traders do while investing in stocks markets. However these are some very common and basic mistakes investors do:

1. Impulsive Trading:

This is the most common mistake traders do. For example today Nifty is falling. I can assure that Puts will be bought today more than Calls.

NSE 3-Feb-2017 at 11.19 am

Impulsive trading or investing is just like impulsive buying. Both are waste of money and time.

Without doing any research traders invest their money in either a stock, option or a future.

For example if they have decided to trade SBI, they will see its going up or down. If going down short the stock or buy a put as per their comfort strike price or sell a future. If that stock is going up, then they will buy it, or buy any strike call, or buy a future.

No plan nothing, just impulsive trading.

What happens after that is a different story. What is more important is that there is no plan in this trading. It is obvious that impulse traders never make money.

Impulsive Trading is emotional trading – a must avoid in stock markets.

Do not let emotions rule your trading style.

2. Intraday Trading:

In India Intraday Trading also known as Day trading all over the world is the most popular form of trading. From equities, to options to futures they try everything and keep losing. After a few lakhs of rupees lost these kind of traders either stop trading or try some other type of trading.
Forget stock markets for some time now.

In the real world who are day or Intraday traders?

Labours, rickshaw pullers, street shop owners, dhobis. But are doctors, engineers and top executives day traders? No. They all look at monthly income or yearly income. They are least bothered about how much they will earn is a single day. All they look at is yearly package before taking a job. Once they get it they do not even calculate total yearly income divided by 365 to get the figure of what they earn in a day. It’s actually foolish.

For some strange reason the same doctors or engineers when they enter the start trading business they begin stock trading as a day trader. I know how much ever the experts will write against day trading, this trend will continue and is likely to continue till stock markets lasts. Why people look at stock trading as a different business is what I fail to understand.

Stock trading is just like any other business. Do not treat stock market trading as a different business. Risk and reward both are there so you must take a balanced approach and think long term not Intraday.

Our job is to write against day trading but its not in our hands that those who read listen or not. So take your call it’s your money. If you are losing money day trading stop it today.

Recommended reading: No Plan Trading Is A Huge Mistake In Stock Investing

I got an email just now from one of my email subscribers:

Dear Dilip,

Many thanks in advance.

I replied with this:

In India there is very less liquidity in VIX future trading.

WARNING: Even if you find some liquidity there PLEASE DO NOT TRADE.

VIX future size is very big.

The intention to start VIX future trading was for HNIs and institutional investors, not retail traders.

Due to the above reason VIX lot size is kept big so that retail traders stay away from it.

VIX moves 1% easily on normal days. Tomorrow is the budget day, it is obvious the markets are going to be very volatile so will be VIX. One point against your trade, may take out a lot of money from your account and in panic you will close the trade.

Why do you think there is very less liquidity in VIX trading in India? The reason is written above.

In the US where there is good liquidity in VIX trading, still retail investors stay away. Reason is same. VIX trading is even more risky than options and futures.

Retail traders in US have more knowledge than traders our country, still they stay away.

Why VIX trading was introduced in many countries including India is a vast topic which is beyond the scope of this article.

Due to the above reasons please do not even look at the liquidity of VIX futures, you will be tempted to trade and may lose money. Even if you make money due to high risk you will exit in one point profit due to fear of losing.

What difference does it make? Nothing.

So just stay away from VIX trading not just tomorrow, but as long as the lot size is not reduced.

Please consider my emails as free knowledge, do not base your trades on them without doing thorough research.

VIX is important to see to guess options premiums and initiate a trade. VIX is an important part of my course. Delta, Gamma, Theta are not that important as the strike selection is well explained.

Once you know the strike selection Delta, Gamma and Theta are doing their job behind which is what is more important than to know what it is for a particular strike.

I know a lot of you look for Delta, Gamma and Theta to select strikes to sell or buy. In the course strike selection already takes care of that.

You must do the course primarily for the education you will get from it, the strategies themselves are bonus.

This email was sent to my newsletter subscribers on 30-Jan-2017:

This is very important message which I think i should share with all of you. It is my duty.

This is the time a lot of traders will start buying calls or puts in the hope the stock markets will move rapidly on Feb 1 2017, and Feb 2 2017, due to the budget announcement on Feb 1, 2017 instead of end of Feb every year as a usual practice.

Agreed the markets will move but there is no guarantee of who will make money.

If it goes up, call buyers will make money.
If it goes down, put buyers will make money.

Some trader will trade the long strangle or the long straddle.

So what is the problem? Here is problem:

INDIA VIX now is 16.49, that is 0.49 points up or 3.06% up from previous close.

This will increase till the budget day. Once the budget is out it will start to drop at a rapid rate.

Most option traders do not know that when VIX falls, the option premium also falls.

Now here is the problem. Even if you got the direction right, there is a chance that the Option will not be increasing in the premiums in the way you thought it will.

You will get disappointed and exit the trade in either a small loss, big loss or a very small profit.

I have said it many times in my blog and I repeat it again.

“There is no home run of money in stock markets or any business.”

Take out the history of any businessman or a businesswoman. He or she must have taken years to make a lot of money. No one ever got rich in a single business or a single trade.

Let us suppose you make 10k and exit. Will that change your life? No.

So why take the unnecessary risk?

That’s the reason I am telling you all please wait for the stock markets to stabilize, do not trade out of compulsion or fun. Please control your greed. This is the time to let fear take over and do not trade.

Of course I will email what to trade on the budget day or before that to my course subscribers. Since it is a part of my course I cannot send that email to the free subscribers.

Update on 31-Jan-2017:

The following newsletter was sent today 31-Jan-2017:

This is in continuation of my yesterdays email.

I said the VIX will increase until the budget day.

Today INDIA VIX has increased by 1.44% and is currently at 16.91 at 1.19 pm.

These are the factors that can move the markets due to General Budget 2017: