ഇന്‍വെസ്റ്റ്‌മെന്റ്‌ ഇക്വിറ്റി (ഭാഗം: 7: സുനില്‍ എം.എസ്‌)

സുനില്‍ എം.എസ്‌



Investment in Equity (Part 7)

The parts 5 and 6 consist of the data relating to Reliance Capital covering the period of more than eight years from January 1, 2005 till June 6, 2013. Since the Parts 5 and 6 consist of data only, and the figures are a little too long, the parts 5 and 6 have been created in Wordpress only; they have not been posted in any other sites. The parts 5 and 6 will open for your scrutiny if you click on their links given below:

Part 5

Part 6

The data given in Parts 5 and 6 are similar. The difference between them is that the workings in Part 5 are done at the 5% trigger, while those in Part 6 are done at the 10% trigger.

What is a trigger? It is explained in the preceding chapters. However, in order to refresh your memory, I will explain what a trigger is. A trigger of 5% means that when price rises 5% from the last formed bottom or low, the scrip is to be bought; when price falls 5% from the last formed top or high, the scrip is to be sold away.

The data given in the Part 5 require some explanation for its clear comprehension. Since the data in the Part 6 are similar to those in Part 5, further explanation of Part 6 will not be needed.

The first column titled ‘Low or High’ contains either the word ‘Low’ or the word ‘High’. It simply indicates whether the figure in the same row in the second column is a low or a high.
The second column, titled, “Amounts of low or high” contains the lows and highs (bottoms and tops) which Reliance Capital formed on NSE during the period from January 1, 2005 to June 6, 2013. The highs and lows were measured using the 5% trigger. It should be noted that all the figures in this column were selected from the closing figures (on NSE). Lower lows and higher highs than these, must have been formed intra-day, but these have not been taken into account for the reason that, if they are also taken into account, the calculation would become massive and cumbersome. Anyone, who is interested, can collect the figures of intraday lows and highs also from the NSE’s website, and arrive at fresh results in lieu of those given in Parts 5 and 6.

The third column, titled, “5% of the Low or High” contains the amounts which are equal to 5% of the amounts given in the preceding column. Let us take an example. The first mentioned figure in the second column (‘Amounts of low or high’) is Rs. 134.15. The amount mentioned in the same row in the third column (‘5% of the Low or High’) is Rs. 6.70. Rs. 6.70 is the 5% of Rs. 134.15.

The fourth column is titled ‘Buy or Sell’. This shows the action which was to be taken. Whether the scrip must have been bought or sold is indicated in this column.
The fifth column is titled, ‘To be bought at or to be sold at’. The first figure in this column is Rs. 140.85. This figure is equal to 105% of Rs. 134.15. The first buying was to be made at Rs. 140.85. I shall explain it a bit more. The preceding low was Rs. 134.15. When the price rose 5% from Rs. 134.15, it touched Rs. 140.85. The scrip was to be bought at this level, i.e., Rs. 140.85.

‘Quantity Bought or Sold’ is the sixth column. The first mentioned figure in this column is 7. This was arrived at by dividing the initial capital of Rs. 1000 with the buying rate of Rs. 140.85. The decimals in the figure are omitted, and the integer only is taken into account. With an initial capital of Rs. 1000, 7 shares of the scrip could have been bought (and should have been bought) at the rate of Rs. 140.85.

‘Total Amount’ in column 7 is the total amount which must have become necessary for purchasing 7 shares at the rate of Rs. 140.85. Rs. 140.85 X 7 = Rs. 985.95.
In the first row, buying was to be done. In the next row, selling was to be done. Those shares which were bought in every first row, were to be sold in the second row. The last made high of Rs. 181.90 is mentioned in the second row. Remember that the selling is to be done when the scrip falls 5% from the last made high. The last made high here was Rs. 181.90. When the price fell 5% from Rs. 181.90, it must have fallen to Rs. 172.80. When, thus, the price fell to Rs. 172.80, the whole of the shares held (all the 7 shares) were to be sold out at Rs. 172.80. The amount of sale must have thus come to Rs. 1209.60. A gross profit of Rs. 223.65 is indicated in the column 8 titled “Gross Profit or Gross Loss”. Rs. 223.65 is the surplus of the sale amount of Rs. 1209.60 over the purchase amount of Rs. 985.95 shown in the preceding row.

The brokerage of Rs. 10.98 is deducted from the gross profit. It is assumed that brokerage was charged at the rate of 0.50% when the buying was made, and again when the selling was made. Dealers charge brokerage on the same day any deal is done. However, in Parts 5 & 6 I have accounted the brokerage only after every sale.
The actual percentage of brokerage may vary from dealer to dealer. For the purposes of  illustration, I have taken 0.50% as the one way brokerage. That is, 0.50% brokerage on the purchase value, and 0.50% on the sale value. For the sake of convenience, brokerage is calculated after each sale in Parts 5 & 6. Thus, after the first sale, the total brokerage on the purchase amount of Rs. 985.95 and the sale amount of Rs. 1209.60 at the rate of 0.50% came to Rs. 10.98.

Some  dealers charge a lower rate of brokerage when full funds necessary for the purchase are already available with them. When full funds are not available at the time of the purchase, they might charge a higher rate of brokerage. Further, the brokerage might come down when the turn over rises beyond certain levels. For example, an investor whose daily turn over exceeds Rs. 10 lakh might be charged brokerage at a slightly lower rate than those investors who daily turn over is less than a lakh.
The net profit arrived at after deducting brokerage from the gross profit was Rs. 212.67 and is indicated in the tenth column.

When this net profit of Rs. 212.67 was added to the initial capital of Rs. 1000, the cumulative total of the capital went up to Rs. 1212.67 (please see the eleventh column). Thus, when net profit is incurred, the capital goes up and when the capital thus goes up, a greater number of shares can be bought in the next purchase. This ensures growth. However, when loss incurred, the capital balance will go down, and only a lesser number of shares can be bought. This will cause negative growth.

The same kinds of transactions were repeated in every following pair of rows. The first row in every pair of rows represents purchase, and the second row in the pair represents sale. Whatever quantity was bought in the first row of a pair, was sold in the second row of the same pair.

While reasonable care has been exercised in collecting the figures from the NSE site, in locating the lows and highs, in arriving at the levels of purchases and sales, in computing the net profit and the resultant cumulative total of capital, I do not rule out the possibility of errors in these figures and computations. These are all illustrative and not absolute. The intention is just to show how my theory works.

Let us discuss the result.

The initial capital was just Rs. 1000 in January 2005. By the time the last sale was made in June 2013, the capital had gone up to Rs. 17,96,033.55 (Rs. 17.96 lakh.). In other words, the initial capital of Rs. 1000 grew to a massive Rs. 17.96 lakh during the eight and a half years. The net accretion to the capital during this period was Rs. 17,95,033.55. This growth is equal to 179503.36% of the initial capital. If you divide this with 8 and a half years, the average yearly growth obtained was equal to 21118.04% per year. As you can see, this is an unbelievably good result. The growth is so high that even I cannot believe it. At the same time, I cannot deny it too, since all these computations were based on actual figures collected from NSE.

As mentioned earlier, the above computations do not take into account the highs and lows formed during the course of the same trading day. If they are also taken into account, the net profit can either be more than what is arrived at above, or, it can be less than these figures. In actual trading, the highs and lows touched intraday will also get reckoned automatically. However, I have not gone into it, since the computation, at this stage, will become much heavier and time consuming. Anyone who is interested can himself do those exhaustive computations.

Do not believe even for a second that you will get such huge profits every time you follow this theory. The profit you earn or the loss you incur will all depend on the actual price movement. Reliance capital had shot up from Rs. 134.15 to Rs. 2860 and had then crashed. That was why the profit too shot up. This fluctuation or the rise in this case was a huge 2031%. Such huge fluctuations may not happen all the time. Not only that, fluctuations can even be narrow, and when they are narrow, the profits are bound to be smaller, or the losses can exceed profits resulting in even negative growth.

The returns would have been more modest if the trigger applied was 10%. Please see the Part 6. The initial capital of Rs. 1000 had grown to Rs. 158512.51 at the end of the 8 and a half year period. This would have been equal to a net growth of 15751.25%. This works out to an average yearly growth of 1853%. When compared to the corresponding average yearly growth of 21118% which the 5% trigger scheme would have generated, this 1853% is very modest. However, by normal standards of capital appreciation, even this 1853% is, to put it in simple terms, huge!

5% is the trigger that had been adopted for the calculations given in Part 5. The Part 6 works on the 10% trigger. Those who are interested in other percentages as trigger, can do those computations themselves and compare the results with those of 5% and 10%. No percentage can be the most ideal for all times. If in one particular period, the 5% trigger works best, in another period, perhaps some other trigger, say 7% or even 3% might work better. There is no rule that you shouldn’t switch triggers. You can switch from one trigger to another. Instead of 5%, you can select 6%, or any other percent as the trigger. However, I believe that wavering between different triggers is not only not going to do any good, but it might also prove to be disastrous. If at all, the migration must be in the slab 5 to 10%; this is what intuition tells me. I may be wrong.

Well, you might be itching to ask me how much I had made using my theory. Did I make 179503% profit in eight and a half years?

The frank answer to the question is that I did not make either 179503% or even a fraction of it. Such an idea had never struck me at that time. I stumbled upon the idea in January only, i.e., just five months ago. For the exclusive purpose of following this system, I entered it by buying 80 shares of HDIL on January 14, 2013. On June 7 (the last Friday) when I sold it, in accordance with my theory or system, the quantity I sold was 190. In other words, within a matter of five months, the quantity had grown from 80 to 190. This growth in quantity amounts to 137.5% in just five months.
In the next few chapters, I shall deal with the topics such as the need to deal in multiple scrips, selection of scrips, stop loss orders, speculation, the risk of trigger jumping, etc.

(To continue)

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