NSE EOD as on Thursday, 07-Oct-2021

In the last one year, Nifty rallied from 11669 to 17790 as of 07-Oct-21 closing. That’s a growth of almost 52%.

Now ask yourself this question – has your trading account gained 52% in the last one year? Or even 25% (half of it)?

Or has it lost money?

If you lost money then what mistakes you did?

Do you repeat this mistake?

Maybe yes.

But do you want to repeat this mistake again and again? If yes the results will be the same.

Therefore you must learn how to trade correctly with a proper plan. A losing trade loses because there is no proper planning. After doing my courses you will become a disciplined trader.

You will learn when to enter and when to exit. There is no hope strategy.

Moreover, hedging will reduce the stress that you are currently having trading because you will know that loss will be limited and under control.

I can understand that there are many online courses available in the market now so it’s hard for you to take a decision.

All the testimonials you see here are genuine:
https://www.theoptioncourse.com/what-traders-say-about-this-course/

Here is snapshot of my course content:

Course 1: Nifty Conservative Options Course

Strategy 1: Non-directional strategy with 80% success rate – minimum 50k required
Strategy 2: Adjustments to Strategy 1
Strategy 3: Conservative Stock Equity Options Strategy – Equity with options hedging strategy
Strategy 4 & 5: Conservative Future Hedge Buy & Sell Strategy – 1 lakh required

Bonus Strategy for Reversal Benefit of Nifty.

Course 2: Bank Nifty Weekly Options Course

Strategy 1: A very unique way to hedge futures with options – but aggressive strategy. Min 25000 required. Success rate 60%.
Strategy 2: Creating Spreads on Weekly Options. 70% success rate. You will make 1.5-2% A WEEK.

To learn the strategies you will get my support to understand the strategies for one year.

After payment, I will send 6 PDFs where I have explained the strategies like a video with screenshots of Nifty/BN and then the explanation – STEP by STEP of what exactly you need to do. You can ask me questions on WhatsApp, email or phone for one year the doubts on the strategies in LIVE markets.

You can pay the course fee here:
../course-fees/

First what is India VIX Index?

Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc.

Source:
https://www1.nseindia.com/products/content/equities/indices/india_vix.htm

After a lot of months INDIA VIX has come to a normal level. Normal level of INDIA VIX is considered between 10 and 15. Anything above 15 is considered high.

Look at INDIA VIX on 02-Aug-21 at 7.50 pm:

India VIX 02-Aug-21

And then look at how it remained near 25 for last 1 year which is considered high:

India VIX Aug 20 to Aug 21

Look at Max chart of India VIX – you can clearly see that it remains below 15 most of the times except for Mar-Apr 2020 to June 2021. I think the reason is coronavirus scare.

Max chart India VIX Aug 21

Now that the vaccine is available the stock markets have gone up and the INDIA VIX has gone down.

INDIA VIX an stock markets are inversely proportion to each other. See how in the last one year BSE SENSEX has gone up while INDIA VIX has gone down.

BSE Sensex Aug 20 to Aug 21

More in INDIA VIX

If you do not know, option premiums are heavily dependent on INDIA VIX.

You can see India VIX here:

https://www.moneycontrol.com/indian-indices/india-vix-36.html

Or just Google INDIA VIX.

What happens if INDIA VIX drops?

Volatility in the stock markets will be low but option premium will also be low. So option seller’s return on investment will decrease. To increase the return on investments you can hedge your trades.

To learn hedging and managing option selling you can do my Conservative Options Course and Bank Nifty Weekly Options Course.

You can pay the course fee here.

What happens after payment?

After payment, I will send you the strategies in your email. For any doubts, you can ask me qustions to clear your doubts via call/WhatsApp on 9051143004.

Support will be for one year from the date of payment. You will also start getting paid emails for the strategies to trade.

After payment, I will send 6 PDFs where I have explained the strategies like a video with screenshots of Nifty/BN and then the explanation – STEP by STEP of what exactly you need to do.

You can ask me questions on WhatsApp, email or phone for one year the doubts on the strategies in LIVE markets.

If you are unable to make the strategy I will make it for you to follow-through and learn.

Articles on my site on India VIX:

https://www.theoptioncourse.com/how-india-vix-is-calculated-and-what-to-expect-after-seeing-high-or-low-india-vix/
https://www.theoptioncourse.com/india-vix-over-17-what-it-means/
https://www.theoptioncourse.com/union-budget-2021-india-vix-will-crash/
https://www.theoptioncourse.com/sudden-drop-of-india-vix-means-what/
https://www.theoptioncourse.com/india-vix-surges-26-74-caution/
https://www.theoptioncourse.com/impact-on-nifty-bank-nifty-india-vix-due-to-general-elections-2019/
https://www.theoptioncourse.com/what-is-india-vix-and-why-it-changes/
https://www.theoptioncourse.com/india-vix-increasing-by-22-in-a-single-day-is-not-good/

Owner earnings is different from the company’s earnings. In this post, I will explain what is Owner earnings of a company and teach how to calculate the owner’s earnings. It’s a long post please get a cup of coffee and read full.
 
Owner earnings is a valuation method detailed by Warren Buffet in Berkshire Hathaway’s annual report in 1986. He stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings.

Here is the 1986 annual report:
 
https://www.berkshirehathaway.com/letters/1986.html
 
Let me explain this in simple language with an example.              
 
In India, one business that cannot fail is selling tea/coffee in a good location.
 
Imagine that you want to start a business and find a shop in a good location. You finalize a 10 years lease for renting the property. We assume it is ₹20,000.00 a month (expenditure).
 
You design the interiors of the shop. For this about ₹500,000.00 was spent (expenditure).
 
You now have to spend money to buy a gas stove, utensils, cups and plates, coffee roasters, espresso machines, etc. For this about ₹200,000.00 was spent. Form now we assume that ₹2 lakh will have to be spent every 2 years for repairs and buying new utensils (expenditure).
 
Please note that the money spent on interiors was permanent but the machines and utensils will need regular expenditure like repairs, buying new utensils etc. So rent, repairs, utensils fall under recurring expenditure.
 
Your restaurant now looks good and is ready to take customers.
 
But wait there are more expenditures left. They are coffee beans, tea leaves, milk, sugar, water, napkins, paper cups, etc. For this expenditure is approx. ₹25,000 a month. Please note that this is a recurring expenditure. This can vary between 20 to 30k a month. So I have taken an average of ₹25,000 a month.

Finally, on Apr 01, 2020, you open the restaurant for customers.
 
Nice location, good quality tea/coffee resulted in the huge success of your restaurant.

Fast forward to Mar 31, 2021. One year passed since you opened the restaurant.
 
We assume your revenue collected was ₹24,00,000.00 (24 lakh or 2 lakh a month or ₹6666.66 per day tea/coffee+sandwiches sold per day) in the first year of business. Here is some calculation that this is possible. To get a revenue of ₹6666.66 per day you have to get just 50 customers a day with an average bill of ₹134.00. 134 * 50 = 6700. If your restaurant is open 12 hours a day from 9 am to 9 pm then to get 50 customers all you want is 4 customers on an average per hour. 50/12 = 4.1. With just 4 customers per hour, your revenue collected was ₹24,00,000.00. Calculate yourself revenue collected if 5 customers come per hour. TIP: If you want to start a business this is a great idea.

Now it’s time to calculate the profits to pay taxes.
 
Revenue: ₹24,00,000.00
 
Expenditure first year:

Rent:  20,000 * 12 = ₹240,000.00

Interior Design (including furniture): ₹500,000.00 (This will not be included from the second year of business)
Recurring expenditure for utensils, cups and plates: 8,000 (a month) * 12 = ₹100,000.00 (added 4000 to make it whole figure)
Recurring expenditure to make coffee/tea: 25,000 * 12 = ₹300,000.00

Salary for helper to make coffee and taking care of the business: 25,000 * 12 = ₹300,000.00

Total expenditure:  240000 + 500000 + 100000 + 300000 + 300000 = ₹14,40,000.00 (14 Lakh 40 Thousand)

Profit first year of business: 2400000 – 1440000 = ₹960,000.00 (Nine Lakh Sixty Thousand)
 
Note that from second year of business profit will increase to 960000 + 500000 (interior design one time expenditure) = ₹14,60,000.00 or more/less.
 
Calculating the first-year tax as per Income Tax Slabs & Rates of FY 2020-21:

Your income tax slab is between ₹7,50,001 – ₹ 10,00,000.

This you need to pay:

₹37500 + 15% of total income exceeding ₹7,50,000

960,000 – 750,000 = 210000 * 15% = ₹31,500.00

Final tax: 37500 + 31500 = ₹69,000.00

So the profit after tax in the first year (FY 2020-21) is:

960,000.00 – 69,000.00 = ₹891,000.00 (Approx. ₹74,250 per month)
 
You keep this money in a nearby SBI checking account.
 
Now, this account already had some cash before you opened an account. Assuming it was ₹500,000.00
 
So you will think that after paying taxes on 01-Apr-21, this account will have 891,000 + 500,000 = ₹13,91,000.00? Right?

NO!!!
 
Why? Because a lot of deposits and withdrawals were made during the FY 20-21. Some withdrawals were unexpected but required to run the business.

Deposits made is equal to revenue (all the cash collected from customers): ₹24,00,000.00
 
Withdrawals made are equal to expenditure: ₹14,40,000.00
 
So final balance remaining:
500000 + 2400000 – 1440000 – 69000 – 100000 = ₹12,91,000.00
 
You must be thinking from where in the expenditure 100000 came from?

These are unexpected expenditures that every business has to face. This may include but not limited to repairs that were supposed to be done once in 3 years, coffee bought at a higher price due to non-availability of coffee that was regularly used in the shop, lawyer fee for any legal issue, wear and tear of interiors, wear and tear of furniture, coffee making equipment, etc.
 
This extra expenditure can sometimes be huge and needs to be managed. It’s called depreciation.

Depreciation is unknown, however, CAs allocates the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset’s value has been used up. Depreciation comes under expenditure and the company does take the benefit of taxes on them.
 
Note that depreciation is not fixed, it keeps varying from year to year.
 
So what did you learn?

In the first year of business, your net income will be less and subsequently increase over the years.

For example, FlipKart.com started in October 2007 took several years to just breakeven:

https://www.livemint.com/Companies/xRKMBufiZd8XSyn0ZbuZzM/Flipkart-aims-to-break-even-this-year-by-paring-discounts-o.html
 
Overhead expenditures are a major issue for big businesses. Owners cannot even know what kind of unexpected expenditure may occur in future, so big business keeps some percentage of the revenue separately for unexpected expenditures.
 
Here we have taken the example of a simple shop kind of business where not much monitoring is required for overhead expenditures but for big businesses, if not managed well, these unexpected/overhead expenses can lead to the fall of a business.

Here is one big company that failed partly due to this reason and other reasons. Lehman Brothers Collapse:

In 2008, it had $639 billion in assets, technically more than enough to cover its $613 billion in debt. However, the assets were difficult to sell. 5 As a result, Lehman Brothers couldn’t sell them to raise sufficient funds. That cash flow problem is what led to its bankruptcy.
Source: https://www.thebalance.com/lehman-brothers-collapse-causes-impact-4842338
 
So if you too want to start a business you must learn the difference between “net income” and “operating cash flow”. Operating cash flow must include unexpected expenditures. Operating cash flow is the life of a business. Without sufficient operating cash flow, a business will collapse.
 
Now another question:

You started this business to make money to run your family right?

So how much can you withdraw from ₹12,91,000.00 in that year for your own personal expenditures? Please note that you cannot withdraw 100% as this will finish the business. Withdrawing even 90% can hurt the business.

This is what you can withdraw:
 
As a thumb rule, you can withdraw any amount over and above 3-4 months of “operating cash flow” which must include an average of 3 months of normal expenditure.
 
And you must also include inflation in mind. Say for example if in 2020 your 3 months operating cash flow is 100,000.00 then in 2021 it will be 105,000.00.
 
It does not end here. Remember every two years there is expenditure on buying new parts/entire machine to make coffee. Now what you spent in 2020 to get the same machines will cost more, about 10% more.
 
This must be included in the operating cash flow which you cannot withdraw.
 
10% of 3 lakh is 330,000. So you have to keep at least a third of this in the operating cash flow because this expense may come anytime.

Do not forget that you may need 50% of the money that you spent on furniture every 10 years. This is for changing or replacing the damaged furniture.
 
Or you may want to change the entire furniture and replace them with better-looking ones in a few years time especially if your business has grown. This will be a major expense. You must have noticed in one of your favourite restaurants suddenly one day that they have changed all the furniture.
 
This expense maybe 20% more than what you spent for the first time.
 
Since you may need this money in 10 years’ time, you have to calculate and keep this amount too in the operating cash flow. If you will not keep it now then in the 10th year you may find it difficult to manage the cash flow.

Now coming back to your account. It has ₹13,91,000.00.

Note that now when you want to withdraw you have entered the second year of business where you are likely to make ₹14,60,000.00.
 
We assume every month expenditure * 3 months plus other overhead operating cash flow and future expenditures comes to ₹144,000.00. So 144000 * 3 = ₹4,32,000.00

So you can withdraw: 1391000 – 432000 = ₹959,000.00
 
₹959,000.00 is the Owners Earnings
 
What do you conclude from this?
 
That money lying with the bank of the company is not what is “owned” by the owners. What matters for the owner is how much cash they can withdraw from this account for personal use without hurting the business in the short as well in the long term.

Lesson learned:
 
If you plan to buy a stock you must think like an owner. You should see the financials especially the debt of the company. Try to figure out how much the company can give dividends without disturbing their business.
 
And currently what you are paying to get one stock. Does that make sense?
 
Conclusion:
 
Owners earnings is not the net income of the company, not the profit of the company but it’s the total money lying with the company minus debts if any minus money needed to run the company for the next few months i.e “operating cash flow”. For big companies, it has to be the next few years and for small it’s the next few months. For a small shop that you see in your area Owners earning (shopkeeper’s earning) for one month is total revenue made minus expenditures to buy products for the next one month minus bills to be paid like electricity minus three months of cash reserved as a deposit to run the shop.
 
I hope you can understand that finding out the exact owners earnings is not possible but the owner can get an approximate figure based on the above-written points and take out the money to his/her personal account.
 
With that, I end this long article and hope you have understood how to calculate the owner’s earnings.
 
If you want to add/ask something do write in the comments section below.

P.S: I have written a detailed PDF on how to choose stocks for investing. Plus I have named 21 such stocks that you can start investing from today. How you can get it? Click here register and open an account in India’s No1 discount broker ZERODHA – stock buy and sell is FREE. Please inform me once your account is opened.

If you already have an account in ZERODHA, you can click here and open an account in UPSTOX and get the PDF. UPSTOX is also a good discount broker.

What you will learn from this course?

1. 14 stocks to invest in now for the long term until you retire.
2. How to keep booking partial profits in them and reinvest is across the 14 stocks – rotation of profits to take the DOUBLE compounding benefit.
3. 7 more stocks that you can invest in if you are an HNI and want to diversify your portfolio.
4. A simple and logical explanation of why I chose these stocks and how you can also do.
5. How to start investing in these stocks.
6. The Ocean Wave Profit Booking System – an approach no one teaches.
7. What to do with the profits booked – comes under meeting financial goals.

I have written earlier in my blog on managing the personal financial portfolio and asset allocation which I follow personally, you can read it here. But I am no genius, so writing this post to help you understand a very popular stock investment, asset allocation and money management strategy known as “The Kelly Criterion”.

First a word on who is Kelly?

John Kelly was a physicist working with AT&T’s Bell Laboratory. He developed the Kelly Criterion to assist long-distance telephone signal noise issues in AT&T. In 1956, John Kelly published a paper titled A New Interpretation of Information Rate, now available as a book – Bet Smart: The Kelly System for Gambling and Investing. In the paper, he draws an analogy between the outcomes of a gambling game and the transmission of symbols over a communications channel. This is basically an allocation technique also called the Kelly strategy, Kelly formula, or Kelly bet, that we can follow in our investments that you will read in this article. Kelly’s original paper can be found here ( not easy to understand, lots of mathematics there). In the paper, Kelly described a simple and elegant way for investors to strategically allocate capital in the face of uncertainty. This is what is now known as the Kelly Criterion.

There are a lot of writings on how much to diversify money into each stock, how many stocks to invest, for how long etc. This comes under asset diversification and money management. The thumb rule should be – “too much diversification is bad – so stick to a few chosen stocks for the long term”.

Side note: I do have a course on How to Choose Stocks and Invest for Short Term and Long Term profits. You can get the course free if you open a ZERODHA Demat account mapped to me. Click here to register and start the process. Once done I will send the strategy to your email. I have chosen 21 stocks to invest which I will reveal in the course, plus I have also written how to chose stocks yourself for investing. 

In this article, you will learn how the Kelly strategy works and how you can use the formula to help in asset allocation and money management. The Kelly Criterion is a mathematical formula that helps investors and gamblers calculate what percentage of their money they should allocate to each investment or bet.

With time the gamblers too started using The Kelly strategy to maximize their chances to win in horse racing. Today investors, as well as gamblers, use this formula to maximize their profits. They calculate what percentage of their money they should allocate to each investment or bet.

In fact, The Kelly Criterion strategy is used by HNI investors like Berkshire Hathaway‘s Warren Buffett and Charlie Munger, along with legendary bond trader Bill Gross.

Now let me discuss “The Kelly Strategy”. I will have to start with an example to help you understand.

Suppose you are a novice investor, you just opened an account to invest in the share market and ready to invest.

You do not want to risk too much capital to start with. So you search for a good stock, but then you realize that good stocks are costly and so search for a mid or small-cap stock. By chance, you stumble upon a stock priced at 10 (let’s call it ABCD stock) but found that it is a highly volatile stock. It either halves or doubles in value in one month but there is no way to predict the future. Since the amount you want to invest is low you take your chances and invest in that stock. You just buy 100 stocks by paying Rs.1000/-. Not too much risk right?

At the start if each month you can re-balance your portfolio. Re-balancing means you can buy more of the same stock if you have the cash but just a few like 10 stocks or something. By buying 10 stocks your life will not turn to hell. Its a minuscule amount that you can easily invest.

IMP TIP: What is written above is a very important advise. If you want to keep a stock for 10 years and above then make sure to re-balance it every month. Just buy few more do not buy too much in greed. With time you will get the best average price. After 5 years of investing if you need some money and the stock is in good profit you may sell some and take cash out for emergencies.

After a long time. Long time is 10 to 20 years you will need to sell all of the holding of the stock to liquidate and get cash. Nowadays it can be done with the [press of a button.

You will want the stock to give you the max profit.

I have written above that you need to re-balance the stock holding. Now here is where “The Kelly Criterion For Stock Investment And Money Management” comes into place.

Here is your re-balancing strategy:

Imagine this is the first month, means 30 days have passed since you invested. It is time for re-balancing. Since the stock ABCD is highly volatile in 30 days, it can either double or half or may be 10% or more up or down.

Lets assume ABCD stock either doubles or halves in a month. So for each ₹10 invested you get either ₹20 or ₹5 at the end of the month. Note that in real world this may not be possible, but the logic is good for a highly volatile stock.

Here is the average of what you will get at the end of the month: (₹20(double) + ₹5(half))/2 = ₹12.50.

Lets calculate the return:

(2.50/10) * 100 = 25%

That’s an average of 25% monthly return on whatever money you invest in ABCD stock.

This looks great right? So the best approach is to invest whatever you can at the start of the 10-20 years of investment right? No as the stock WILL not double every month. Well this is also not a bad investment idea especially you can find out a fundamentally strong company that will remain fundamentally strong over the next 20 years. Read this article to know how an investment of ₹10,000 became over 800 crores in 30 years.

Assuming someone actually does that in the ABCD stock we are discussing. I mean invest once for 20 years. Lets see the return after 20 years.

Best case: ABCD stock doubles every month. Impossible scenario yet for calculation part the result will be thousand of crores.

Worst case: ABCD stock gets halved every month. Return is less than 1 paisa.

As you can understand, neither the best case nor the worst case are remotely likely. The outcome will be something in between.

IMP TIP: Read the above scenarios again. You either make good money investing or lose it all. Therefore you must invest the money that you can afford to lose in stock markets. This can be 5% of your take home salary. Of course worst case scenario will happen only if you take unnecessary risks like greedy trades. However if you become a conservative trader you will make upwards of 2% a month. This is a great return. My conservative option course will help you learn less risky option strategies.

Coming back to our topic The Kelly Criterion Strategy we have to do some analysis on the outcome.

Here is assuming the outcome of 10-20 years of investment – please note that dividends, bonus shares all are included:

Almost all money wiped out = 35%
10% yearly return = 50%
15% yearly return = 10%
20% yearly return = 3%
21% or more yearly return = 2%

I hope you can guess now, if you invest in 10 such stocks very small amount every month only 3 will wipe out all money nor just give you back what you invested, but 4-5 will give 10% and 2-3 will give stellar returns of more than 15% a year.

All in all you will be in good profit.

Now here is some mathematics.

Assuming Mr. Ashok chooses 10 stocks to invest every month of ₹10 each. He invests ₹1000 in each stock that’s an investment of ₹10k a month. Very much possible in today’s world. If any stock price reaches ₹1000 he will buy just 1 share a month so that he never invests more than ₹10k a month.

Total investment made in 20 years: 10000 * 12 * 20 years = ₹24,00,000.00 (Twenty Four Lakh)

In each stock he invested = 1000 * 12 * 20 = ₹2,40,000.00 (Two Lakh Forty Thousand)

Now the math of the returns:

In 3 stocks he lost 50% of his investment: (2,40,000/2) * 3 = ₹3,60,000.00 (Three Lakh Sixty Thousand Loss)

In 4 stocks he made an average of 10% yearly return.
Final value = 7,59,368.84. Profit = 7,59,368.84 – 2,40,000 = ₹5,19,368.84
Total profit in 4 stocks = 5,19,368.84 * 4 = ₹20,77,475.36 (Twenty Lakh 77,475.36)
(Calculated from this website)

In 3 stocks he made an average of 18% yearly return.
Final value = 1,900,361.23. Profit = 1,900,361.23 – 2,40,000 = ₹16,60,361.23
Total profit in 3 stocks = 16,60,361.23 * 3 = ₹49,81,083.69 (₹ Forty Nine Lakh 39,946.92)

Now lets calculate the FINAL PROFIT:
49,81,083.69 + 20,77,475.36 – 3,60,000.00 = ₹66,98,559.05 (₹ Sixty Six Lakh 98,559.05)

What did you notice?

Even if 50% of the stocks outperform they will skew the average and beat the losses made form the other dud stocks by far over the long term. Note that loses are limited to the amount invested but profits are unlimited. That’s the genius of Kelly – he found that strategy.

So the final question – How to find 10 stocks that may give stellar returns over the long term?

I can help you or at least give you an idea of how to find.

All you have to do is click here and register – the most trusted, honest and No.1 Discount Broker in India. They do not charge any brokerage to buy and sell stocks. However I may get a percentage of the brokerage that is generated by you if you open an account mapped to me.

Contact me after your account is opened I will teach you how to find good stocks to invest for the long term.

Hope this article has helped you to learn something about stock investing. If you have any doubts please ask in the comments section below.

First lets see the fall of NSE in Mar 2021:

Source: https://money.rediff.com/index.html

On 03-Mar-2021 NSE closed at 15,245.60, and on 26-Mar-2021 closing, its 14,507.30. That is 700+ points fall.

Why Indian stock markets are falling in March 2021?

Disclaimer: This is my personal view not written or told by experts anywhere. Most experts are saying that it is due to resurgence of the Novel Coronavirus (COVID-19) in India. Sudden spike has spooked investors. Well that is also true. I am just adding one more reason of the fall written below.

Indian stock markets are falling because of the state elections in 5 states in the coming month – April 21. Apprehension (fear) is there as central ruling party (BJP) wants to win West Bengal and the fight is very tight between BJP & TMC. Read below for more details.

For some strange reason given below other than West Bengal results neither the stock market investors nor the politicians and general public of India are interested in the results because other than WB the results are clear. Let me explain:

1. Assam – It doesn’t matter if BJP wins or loses in Assam. 90% chance that BJP will form the government in Assam. It is very popular here and there is no alternative so a win for BJP is sure. Markets have already taken this into consideration. For stock market investors the result is irrelevant here.

2. Kerala – Well BJP has zero presence here. For stock market investors the result is irrelevant in Kerala except if BJP wins. However, they will not win. Currently there is only one MLA in Kerala. BJP did not even did any marketing here – why waste money 🙂 So only a miracle can make BJP for the government here. Kerala has over 90% literacy so chances are nil. Indian Stock Markets have already taken this into consideration.

3. Puducherry – Totally irrelevant whoever wins here. There is President’s rule here now. The Chief Minister seat is Vacant since 22 February 2021.

4. Tamil Nadu – AIADMK along with the National Democratic Alliance parties is ruling here and chances are that they will again. So markets have taken this account and not bothered. Even if AIADMK loses, this will not damage the image of BJP. So for markets the results of Tamil Nadu 2021 elections are irrelevant.

5. West Bengal – Did you notice even in the 2019 General Elections BJP did not advertise and market themselves so aggressively as they are doing in West Bengal? In fact, such aggressive marketing to win an election General or State is historic. I have never seen in my life such an election battle. More than election it is an ego battle between Modi & Mamta Banerjee. The fight is not between BJP & TMC, it is between the ego of Modi & Mamta. Stock market investors know this. So they are booking profits or taking stop losses. Action will happen after May 2, 2021 – the results day.

Not just investors the entire country is looking at this election – I mean the election results in West Bengal. Why? Because the results in West Bengal will decide the faith in this government or not. BJP did very well in the 2019 General Election in West Bengal, so the results here matter.

May 2, 2021, will decide the future direction of the stock markets. Till then unless a sudden reduction of coronavirus cases in India happens, the markets will not be able to cross 15,600.

If BJP wins – obviously its a joy for investors as they will know that the Modi brand is still intact and BJP cannot be defeated in the 2024 General Elections even if they do 100 mistakes more. They are doing a lot of mistakes, if you do not follow TV news channels a.k.a Godi Media, you may know 🙂

If TMC wins – the Modi brand will take a hit and obviously, investors will fear putting their money on the line at least till the results of UP elections are out. Which is next year. Stock markets may fall by at least 7-10% from 15,000. So it may test 13,600 and then bounce back.

If BJP wins then 16,000 is on the cards, of course if the situation of coronavirus also improves by May 2, 2021.

So invest as per your risk and manage accordingly. Do not forget to hedge your option and future trades.

Lots of investors are still confused when they hear XYZ company is buying back its shares from the public. They do not understand what exactly is Share/Stock Buyback/Repurchase. 

Please note that all these mean the same thing:

– Share Buyback
– Share Repurchase
– Stock Buyback Share or Stock Buyback or Explained
– Stock Repurchase

Let me first explain in short what exactly is Share Buyback.

A share buyback happens when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. Once this happens the owners of the public and private investors decrease in the shareholding pattern. One immediate and short term effect of this is that the EPS (Earning Per Share) increases of the company. This increases the valuation of the company in the stock market and may take the price of its share a tad higher.

Since 2010, share buybacks have overtaken dividends as a preferred way to return cash to shareholders. This usually happens with cash-rich companies. 

Here a few reasons why companies do share buybacks:

• After huge profits sometimes financial/management restructuring is required. According to stock market laws the management has to declare dividends for their shareholders. If the management sees more benefits in buying back of shares looking at future dividends they do so to keep money with themselves. 
• By buying back the shares Earning Per Share (EPS) will increase which is floating in the free market. This leads to an equity value increase, thus more demand for the company shares as the share looks financially attractive. Do not forget that with the share price increase the profit of the management also goes up. 
• If you look at indirect effect – more money with management means in future they can expand the company. This generates employment which is good for the economy of the country. 

Is there any downside of share buybacks?

Yes, mostly share buybacks are financed via a loan or debt. This can affect cash flow in a negative way. However, this is short term as the management does due diligence before announcing a share buyback.

Most Important Question that keeps worried a novice investor. Will I be forced to sell my shares to the management?

Answer: No. Who sells a stock and who buys happens at the market place. Suppose in a day 1000 shares were bought and sold of a company then it just that. It’s not one to one selling or buying. It is just that 1000 stockholders sold their stocks to 1000 investors who were interested in buying the shares of that company. Similarly, when news of share buyback is released in the public domain via media/social media by the company in most cases the share prices jumps and investors who are making a profit selling their holdings. So assuming in the above case when other days 1000 shares were sold by investors and bought by the investors, on the share buyback day 1000 shares were sold by investors but out of that let’s say 100 was bought by the management of the company and 900 was bought by the retail investors. Of course just like normal trading days where we do not know who sold and who bought the shares, on this day too it happens in the market place. So no one is forced to sell their shares. If you are not interested in selling just do not place your stocks for a selling order. 

What happens after the share buyback?

Suppose only 1000 shares of a company XYZ were floating in the stock markets and 100 shares were bought back by the management then from the T-1 day after the share buyback day, the free float of that company’s shares in the open market will be only 900.

Let me explain in details the share buyback.

Suppose there are 10 people who plan to start a business. They find a place in a good location and start a restaurant. Assuming that they put the same amount of money to open the restaurant, in that case, each one will get 10% of the share of the profits made. Now suppose in the first year of business they made a profit of 10 lakh. 10% of 10 lakh is 1 lakh. Each owner will get 1 lakh at the end of the first profitable financial year. 

Similarly in future years also profit’s share will be equally divided among all owners of the restaurant. This is called dividend policy. Each owner gets a dividend as per their shareholding (ownership). No one can claim more or deny the dividend. 

Of course, if any owner is not interested in the dividend they can reinvest the money received to buy more shares of the company if they foresee better growth of the company and dividends in the future. How this is done? For the time being, just imagine that every owner got a legal paper stating that the owner will get 10% of the profits every year. Now suppose one owner “A” talks to another owner “B” and offers him some money in return for the ownership of his percentage of share of profits for the rest of the term till the business exists. “B” is interested as he needs money for some work and sells his share to “A”. This is a “buyback policy“.

As you can understand, there are 9 owners of the company now. “A” and “other 8”. Henceforth the “other 8” will get 10% of the profits from the company each year whereas “A” will get 20% of the profits. Likewise, owners who don’t need money when a dividend is declared can do a *share buyback* in exchange for a greater percentage of profit made in the future.

To illustrate this with an example lets now take the same example above. After the share buyback done by “A” the “other 8” owners of the company will still get 1 lakh each but now “A” will get 20% which is 2 lakh. If the company makes more profit in the future “A” will get more profit share than the “other 8”.

Note that company is now making same profit but “A’s” profit share has increased by 100%. So, share buyback helps the owners return increase at a rate higher than what the business is growing at. This must have given you an idea on why owners go for share buybacks.

You must have noticed that 9 out of 10 times share buybacks are done only when a company is performing very well over time and is expected to grow at a faster pace in near future. This is the time owners buyback a portion of shares from retail traders. In other words a share buyback is owners investing in their own company for enjoying more profits in the future.

However the above example is simplified way of share buybacks, with public companies its a bit more complicated. With public companies the process is long – they have to inform to SEBI, check financials, future growth assumption, check the after effects of buyback, free cash flow availability of the company, capital allocation, dilution, and multiple expansion/contraction. Note that the after effect of buybacks in a public company may be different than what they assume therefore share buybacks are done after a lot of research in big companions.

Free Cash Flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet. Free cash flow is an important measurement since it shows how efficient a company is at generating cash. Free Cash Flow (FCF) is also a major indication of the future price of the stock.

Benefits of Free Cash Flow (FCF): Helps in share buybacks, pay dividends to all stock owners, make acquisitions (of a fast growing company which may become so big in future that it may be a threat to the survival of the company or just another good company), or simply pile up cash on the balance sheet. The management decides how to allocate Free Cash Flow to the possible activates.

Dilution: Dilution occurs when a company issues new shares. This results in a decrease in existing shareholders ownership of the company. For example if a company has 100 shares in the market and issues 10 more shares, then the value of each share goes down by 10%, making each share less valuable.

Stock dilution can also occur when holders of stock options, such as company employees, or holders of other option-able securities exercise their options. It is now possible in India too. Buyback is exactly opposite. The purpose of buybacks is to increase shareholder returns by reducing the number of shares outstanding over time.

But many companies negate a lot of this benefit by simultaneously issuing vast amounts of stock to employees, via share based compensation (SBC). This is also important to retain good employees in the company.

Now the million dollar question – is it wise to invest in a company for the long term (min 10 years) which has a good FCF (Free Cash Flow) and does share buybacks often?

Answer: YES. In my experience a 10% increase YOY in FCF (Free Cash Flow) of the company will lead to approx 15-18% CAGR (Compound Annual Growth Rate) at the end of 10 years. This will make a good investment.

Berkshire Hathaway (CEO: Warren Buffett) uses this formula to chose company to invest for the long term. He has explained in details about this in a letter to the Shareholders of Berkshire Hathaway Inc. on February 25, 2012 – Berkshire’s Corporate Performance vs. the S&P 500.

In short, yes you can invest in company that goes for share buybacks often and has good Free Cash Flow (FCF) and are increasing the FCF year on year.

Hope this post will help you understand share buybacks in a better way. If you have any doubts please do write in the comments section below.

This post was sent to my email subscribers on Mar 1, 2021. If you want to receive such info in your email please subscribe above.

I hope you know by now that the margin blocked for Intraday trades is increasing in a phased manner from Dec 2020 and will go on till September 2021.

This circular was put out by SEBI in Jul 20, 2020. It basically says to increase intraday margins in a phased manner from Dec 2020 to Sep 2021.

Here is the details of the margin increase in 4 phases. The new changes will take effect in 4 phases:

Phase 1 (Dec 2020 to Feb 2021) – The minimum margin the broker has to collect while entering a position is 25% of the prescribed limit.

Phase 2 (Mar 2021 to May 2021) – (As on the date this post was written – we are in this phase now) The minimum margin the broker has to collect while entering a position is 50% of the prescribed limit.

Phase 3 (Jun 2021 to Aug 2021) – The minimum margin the broker has to collect while entering a position is 75% of the prescribed limit.

Phase 4 (Sep 2021 onward) – The minimum margin the broker has to collect while entering a position is 100% of the prescribed limit.

So what’s the bad news?

For Future and Options (sellers), for intraday trades under MIS, from 01-Sep-21 onward, all brokers will block 100% of the margin that is blocked now (Mar 2021) for NRML (overnight) positions. So technically as far as margin blocked is concerned there will be NO difference between MIS and NRML trades for F&O positions.

However for equity trading, 50% on applicable VAR + ELM or 20% of trade value whichever is lower will be blocked for equity intraday trading. Example: If you trade stock worth 5 lakhs, your broker will block 20% of 5 lakhs, which is 1 lakh. This means you will get 5x leverage, not more. Gone are the days when we used to get 10x or more leverage. 🙁

What you can do?

If you are good at intraday trading just bring more money to your account. Your returns in percentage terms will reduce but you will still make some money.

If you are average at intraday trading, want to practice more and be perfect, then your only option will be to hedge the trade to get a reduced margin.

The benefit of a hedged trade is that suppose your position is at a loss at 3 pm – you can convert it to an overnight position (MIS to NRML) and wait for the next few days to make a profit. You will be allowed to convert MIS positions to CNC/NRML only if you have sufficient margins in your account. Since from Sep 01, 2021, in the MIS positions margin blocked will be the same as NRML, you can convert them to NRML whenever you want.

In a hedged trade, margin blocked is less, so you can easily convert them to NRML and when you get some experience you can trade more lots.

Here is an example:

Suppose today is Wednesday, 01-Sep-2021.

The intraday 100% margin block rule is in place.

Nifty is at 16000 (assumption).

A trader assumes it’s going up and takes this debit spread.

Trade 1) SELL NIFTY 16200 CE SEP21

Once this trade is completed margin blocked will be above 1 lakh approx. in MIS or NRML. (Assuming its MIS)

Trade 2) BUY NIFTY 16100 CE SEP21 (Assuming this is also MIS)

Now due to the hedged margin rule suddenly margin reduces to 40,000 approx. or less.

I hope by this time you have understood how to reduce the margins on intraday options trade. Note that it’s an intraday trade and one option is sold but hedged and margin blocked is 40000, much less than the intraday 100% margin block rule as on Wednesday, 01-Sep-2021.

In my Nifty and Bank Nifty courses all 7 options and futures strategies are 100% hedged, so for all the strategies margin blocked has reduced (not increased) since the new margin rule has come into effect.

Click here to enroll for the course.

This post was written on 01-Feb-21 at 11.46 am.

Today, Monday, 01-Feb-21, is Union Budget 2021 day. Its live now in the Indian Parliament. Finance minister Nirmala Sitharaman is announcing the budget in the parliament now.

Whenever there is a major financial event, as a trader you should keep a track on India VIX:
https://www.moneycontrol.com/indian-indices/india-vix-36.html

As on 11.46 am it has already crashed more than 3.9% because the announced has started – the fall will be much swift from tomorrow. With time and very fast it will keep crashing irrespective of the movement of Nifty/stock markets.

India VIX 01-Feb-2021

What Will Happen?

Options buyers will suffer as the premiums will erode like ice melting, today and tomorrow especially.

If you have bought options and if in loss in such times, I suggest take a stop loss save as much as possible.

Option sellers have luck on their side on these melting India VIX days after the major event ends. Even if wrong up to some extent option sellers will benefit.

Update on 03-Feb-21 – see this graph of India VIX:

Note: India VIX was the highest one day before the budget 21 which was Friday, 29-Jan-21. It started to fall from the Budget day – 01-Feb-21. It will keep falling in future too.

Update on 04-Feb-2021 – India VIX dropped to 23.02 which is 3.07% less than previous closing:

India VIX 04-Feb-21

Conclusion:

For option traders India VIX is a very important factor to decide the future action. Its always good to buy options when India VIX is low and increasing. Which means you can buy options 3 to 4 days before a major financial event like union budget, RBI policy, state or general elections etc. And sell them just before the event day.

Once the event day is over you can start selling options.

Hope this article will help you to take a decision on when to buy and when to sell an option.

If you do my course you will be able to trade whenever you want and without too much risk as all trades are hedged. And most importantly you will not have to continuously watch the markets.

In this post, I will discuss why holding a few good stocks forever is good. What is forever? 10 years or more.
What is the likelihood of holding a share for 10 years? Well very likely. But how many investors hold even a single share for 10 years? Very few.

Well, I do have a course on how to select stocks to hold for the long term. I do not have a page on that because of the reason given above – not many investors hold a share for 10 years. If interested you can WhatsApp me.

We all know Warren Buffett is one of those who have made billions out of stock investing. I do not think anyone else will beat his returns in future. Why because we have become short-sighted as far as returns are concerned.

Here is some important information and quotes by Berkshire Hathaway CEO Warren Buffett:

• Berkshire Hathaway CEO Warren Buffett is continuously ranked as one of the richest people in the world. Berkshire Hathaway’s CEO and the sixth richest person in the world with a net worth of $78.4 billion as of August 23, 2020, on Bloomberg Billionaires Index, Buffett owns no mega-mansions, supercars, and yachts. He is among the very few super-rich who neither believes in living life king size nor engage in a splendid display of wealth. Source: https://www.financialexpress.com/industry/warren-buffett-breakfast-at-mcdonalds-flip-phone-for-calls-how-6th-richest-person-spends-his-fortune/2063096/ (recommended read)
• He is seen by some as being the best stock picker in the world, with his investment philosophies and guidelines influencing numerous investors.
• One of his most famous sayings is “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
• Another one is “If the business does well, the stock eventually follows.”
• The third is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
• And the BEST one is “Our Favourite Holding Period Is Forever.”

In this post I will discuss his best quote till date “Our Favourite Holding Period Is Forever.”

To start with let me give you an example of Reliance Industries Limited stock (NSE: RELIANCE, BSE stock: 500325, Group (A) RELIANCE, INE002A01018)

This is the most popular stock in India, and of course a fundamentally strong stock. Now let me show you the return this stock has generated from 2002 to 2020 or 18 years.

See this image on 05-Jul-2002 Reliance was trading at 53.01:

Reliance 05-Jul-2002

And on 18-Sep-2020 it was trading at 2305.70:

Reliance 18-Sep-2020

ROI: 2305 is 4349.05% of 53.

Had someone invested Rs. 2,50,000/- (Two lakh 50 thousand only) he would have now Rs. 1,08,72,625/- (One Crore Eight Lakh 72 Thousand). That’s a profit of Rs. 1,06,22,625/- (One Crore Six Lakh 22 Thousand).

This is what long term investment can do. Wait there is more. Read this post on how to make crores from the stock markets to see how our parents could have made 800+ crores on an investment of just Rs. 10,000 in ITC.