Originally, it was a trio partnership for Warren Buffet.
Whilst everyone knows Warren Buffet &, Charlie Munger, hardly anyone remembers Rick Guerin. In the words of Buffet, “Rick was a very smart man. But unlike Warren and Charlie, Rick wanted to get rich quick, so he was borrowing money using margin loans to invest in the stock market.” Ultimately, Rick had to cave in to the margin calls & had to sell his stakes & end the partnership.
While market is going up, everyone wants to buy the stocks.
Not only does everyone likes to buy the stocks but they want to do it with their own money, family’s money, neighbors money & the bankers money. In finance, it’s called leverage.
It’s like bitting more than you can eat. That’s when the problem starts.
Buying stocks on the way up with leverage is risky because if you have taken 2x leverage, on the way down you lose money at 2x speed.
A 50% correction in stocks can wipe you out completely kicking you on to the streets because for ₹1 of fall in share price, you end up losing ₹2.
Far more dangerous position are the guys whose portfolio are let’s say worth ₹5 Lakh but have Futures positions worth ₹10 lakh (1 lot of Futures roughly costs ₹7-₹10 lakhs today but can be bought on initial margin of around ₹2 lakhs or so).
To summarise, Bull Market rallies are to enjoy the rising tide in stocks bought earlier during downturns. Leverage buyings and F&O looks good gateway to quick profits but have also resulted into many smart investors blowing their portfolios.
Do Read: Tips For Bull Market
