What do you do when market keeps running up but you don't have valuation comfort for investment?
What is valuation comfort?
Without going into fundamental details, put it simply when you have to pay Rs 100 to buy something that was available for Rs 40-70 just few days back, you feel lack of valuation comfort since the cost of acquisition of the same asset has become way more expensive than what it was just few days back.
Why consider investing without valuation comfort?
Without going into technical details, in another few days you might have to pay Rs 120-130 if you decide to purchase the same asset that you can buy today for Rs 100.
Why consider "not" investing without valuation comfort?
Because something that is expensive has low or negative margin of safety and if the macro factors driving the run up changes, it can lead to huge capital loss
Trade-off's
You don't invest and miss the capital gain while others who invested get richer by the day
VS
You invest and take the risk of a huge capital loss and become poorer compared to those who didn't invest
When there are trade-offs the best path is the middle path
The middle path here is hot money investing and yes this is a great time and setup to practice hot money investing. One of the most exciting and thrilling phases for proactive money managers. The idea is to use fairly large chunk of money for capturing large profits from volatile stock price movements but keeping the money in the trade for a really short time to minimize the risk and repeating this multiple times in different trades to capture maximum number of opportunities.
What is hot money investing?
Hot money refers to money with high velocity that rotates in and out at high speed. To understand how hot money can be used to profit we need to understand what kind of market is suitable for hot money trading. Put it simply a highly volatile market with overreaction both on the up and down side is the kind of market we are looking at. Usually such markets happen after a stable trend run has completed and the market is trying to decide the future direction whether to reverse or continue in the direction of the previous trend. So usually things run up fast and come down fast and they overshoot in either direction and they keep repeating this cycle again and again. Huge money can be made by either trying to position yourself aligned to the run and ride the wave or by contra-positioning yourself once the overshoot happens. The gains are amplified due to overshooting of prices which happens due to high velocity. In either case a trader would typically make these bets with a large chunk of money w.r.t a normal trade and move in and out pretty fast with 10-30% movement in the stock price within few days or even intraday. Sounds exciting?
Strategy & Risk management
Off-course hot money investing is high risk but also comes with a great reward. Typically a good trader would make profits equal to his annual profits in just a couple of months doubling up on his profits for the year. But our goal is to make this strategy "low risk high gain" from "high risk high gain". How to do that? Few tips given below:
Why do all this?
Well like I said, if you perfect the art, you can make a year worth of gains in just couple of months. Besides you will have extra something independent of the impact of the larger trend on your stable portfolio that can act as a buffer or moral booster to ride out short term adverse impact on your larger portfolio. This gives you an edge over others who might panic due to lack of buffer, plan B, hedging and large exposure to a single market direction. If you are doing good on both this can be treated just as a double income that can be splurged on anything you like but are holding off due to the expense involved. For me it's pure fun & thrill :)
Note
Not an easy thing at all, will take lot of practice and experience. Typically for a person trying it on his own, his hot money capital will get wiped out for the first few times. Once you get a hang of it, it is a smooth ride .. pretty easy and off-course .. very hot !
What is valuation comfort?
Without going into fundamental details, put it simply when you have to pay Rs 100 to buy something that was available for Rs 40-70 just few days back, you feel lack of valuation comfort since the cost of acquisition of the same asset has become way more expensive than what it was just few days back.
Why consider investing without valuation comfort?
Without going into technical details, in another few days you might have to pay Rs 120-130 if you decide to purchase the same asset that you can buy today for Rs 100.
Why consider "not" investing without valuation comfort?
Because something that is expensive has low or negative margin of safety and if the macro factors driving the run up changes, it can lead to huge capital loss
Trade-off's
You don't invest and miss the capital gain while others who invested get richer by the day
VS
You invest and take the risk of a huge capital loss and become poorer compared to those who didn't invest
When there are trade-offs the best path is the middle path
The middle path here is hot money investing and yes this is a great time and setup to practice hot money investing. One of the most exciting and thrilling phases for proactive money managers. The idea is to use fairly large chunk of money for capturing large profits from volatile stock price movements but keeping the money in the trade for a really short time to minimize the risk and repeating this multiple times in different trades to capture maximum number of opportunities.
What is hot money investing?
Hot money refers to money with high velocity that rotates in and out at high speed. To understand how hot money can be used to profit we need to understand what kind of market is suitable for hot money trading. Put it simply a highly volatile market with overreaction both on the up and down side is the kind of market we are looking at. Usually such markets happen after a stable trend run has completed and the market is trying to decide the future direction whether to reverse or continue in the direction of the previous trend. So usually things run up fast and come down fast and they overshoot in either direction and they keep repeating this cycle again and again. Huge money can be made by either trying to position yourself aligned to the run and ride the wave or by contra-positioning yourself once the overshoot happens. The gains are amplified due to overshooting of prices which happens due to high velocity. In either case a trader would typically make these bets with a large chunk of money w.r.t a normal trade and move in and out pretty fast with 10-30% movement in the stock price within few days or even intraday. Sounds exciting?
Strategy & Risk management
Off-course hot money investing is high risk but also comes with a great reward. Typically a good trader would make profits equal to his annual profits in just a couple of months doubling up on his profits for the year. But our goal is to make this strategy "low risk high gain" from "high risk high gain". How to do that? Few tips given below:
- Allocate a fixed capital for hot money trading and stay within those limits
- Low capital (say 1% - 10% max of your portfolio size) reduces the risk
- To gain high rewards using low capital you need to focus on two things number of iterations of hot money trades and capturing maximum part of the stock price spikes in either direction
- Fix maximum time for a trade and follow the discipline to exit the trade with profit or loss within that time (this could be intraday, to few days at max). If the trade doesn't work then just exit and look for other opportunities. This will help you to maximize the number of iterations and also reduce the time risk
- Look for opportunities that can lead to price volatility as well as overshooting. In a volatile market stock price reactions to news based triggers are fairly predictable, frequent and amplified .. things like results, bonus, sales numbers, management interviews, corporate restructuring, mergers & acquisitions, credit rating, policy actions, commodity prices, IPO, fund raising, business deals, anything that will create news.
- Position yourself before the price movement and wait for it to play out by using easy forecasting techniques. This will help you capture maximum part of the stock price movement. Typically after the news is out 50-70% of the stock price movement will happen within seconds leaving little to trade with. However in such cases you can look for overshooting of prices and contra-position yourself.
- Don't fall in love with your trades, have targets and exit once your targets are met or if the price turns adverse to your trade.
Why do all this?
Well like I said, if you perfect the art, you can make a year worth of gains in just couple of months. Besides you will have extra something independent of the impact of the larger trend on your stable portfolio that can act as a buffer or moral booster to ride out short term adverse impact on your larger portfolio. This gives you an edge over others who might panic due to lack of buffer, plan B, hedging and large exposure to a single market direction. If you are doing good on both this can be treated just as a double income that can be splurged on anything you like but are holding off due to the expense involved. For me it's pure fun & thrill :)
Note
Not an easy thing at all, will take lot of practice and experience. Typically for a person trying it on his own, his hot money capital will get wiped out for the first few times. Once you get a hang of it, it is a smooth ride .. pretty easy and off-course .. very hot !
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