As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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Welcome to Ministry of Wealth!

This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

"For the things we have to learn before we can do them, we learn by doing them." - Aristotle

It is here where I share with you how I did it! FREE Education in stock market wisdom.

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Value Investing
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Sunday, 15 February 2009

Negative Equity - Can you can survive out of it?

Your brokers love you most if you use leverages and margins for trading. Why? The rules are there to protect them but definitely not you. If you got it wrong, you are wiped out due to your own greediness. Your brokers WILL NEVER LOSE. Your BROKERS ARE NOT YOUR FATHER OR MOTHER!. They exist to make money for themselves, but they always seem to be there to HELP you to make money. They also appear to be your GOD OF FORTUNE. At least, some of them will behave like your friends or personal financial consultants.

When you use your own to make money, if you got it wrong, you only lose what you intentionally put in. For example, you earn and save up to $50K, and you have decided to go into trading and unfortunately, you got it all wrong. How much will you lose? You probably sitting on paper loss UP TO $50K and with the hope of some recovery if you decided to hang on or take back some money if you decided to cut losses. Maximum loss UP TO $50K. You lost what you intended to lose i.e. $50K at most.

What if you do margin or leverage? Now you put in $50K in margin account to trade. For leverage trading, you need to implement stop losses mechanism due to the leverage of 5 or 10 times. As you lose , the losses multiplied by 5 or 10. What if you keep losing? It is a matter of time, you will hit the stage of Negative Equity, then you will be asked by your broker to top up or liquidate?

When you are forced to top up, it means that you now are forced to potentially LOSE MORE THAN what you have intended i.e. up to $50K. NOW YOU ARE FORCED TO POTENTIALLY LOSE MORE THAN $50K. Furthermore, you can't be sure what is the LIMIT of Potential Losses like. You are cornered to continue the Game of Trading with more money or GET OUT.

What if you liquidate your positions as you do not want to add more capital or have no more capital, your equity level will drop more and you have lesser ability to recover with a smaller equity.

So using MARGIN OR LEVERAGE is not only about controlling and understanding RISKS, people DO NOT often think hard enough about it. ARE YOU PREPARED TO ADD MORE MONEY TO CONTINUE THIS GAME? If yes, then margin or leverage, is not a bad idea too.

Experience in the market is not measured by years, but by decades of experiences of watching and hearing those horrible life stories of those (especially friends and relatives) under-capitalized market players without Angels supporting them got wiped due to listening or getting advices from those BIG BROTHERS or BROKERS. If you are forced OUT OF THE MARKET, then there is virtually NO way for you to recover. To recover your losses or paper losses, you have to be in the MARKET in time to ride on the recovery.

Think how you will survive if you LOSE, and not thinking how much you can MAKE.

As the Market is naturally UPWARD BIAS, the Market will ALWAYS RECOVER, but you make sure those COUNTERS you have are part of the MARKET. Your counters MUST be part of the Market.

Be wise, be brave and control your emotion, at the time of market depression, it will also present you with better opportunity for you to swap counters that will be part of the MARKET at current reasonable price level.
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