The Market Podcast: Overleveraging led to fall of Harshad Mehta; 5 trading rules to cut 90% of losses: Umesh Mehta of Samco Group

If you are a new-age investor who joined D-Street in 2020, Umesh Mehta of Samco Group has few ruled which one should consider while trading, he elaborated on them in the Market Podcast with Moneycontrol.

The last year might have felt like a breeze as the only direction in which the market went was on the upside especially for someone who started trading in April. Well, things might not remain the same as the market goes through up and down cycles.

Legendary investor once said that “Only when the tide goes out do you discover who's been swimming naked”.

This was one reason which led to the fall of Harshad Mehta, a registered broker, back in ’90s. Harshad Mehta used the loopholes in the Indian Banking system & Bombay Stock Exchange transaction system to rig prices of dubious companies and defrauded Rs 5,000 crore from financial markets.

A new Bollywood movie on Harshad Mehta with actor Abhishek Bachchan ‘The Big Bull’ is set to make its debut on April 8.

“Harshad Mehta was a Street smart guy who was bullish on the economy, but with greed taking control, he overleveraged largely borrowed from financial institutions which led to the fall,” explains Umesh.

Avoid over-leveraging is one key rule out 5 which investors should take note of while trading which could reduce your losses by 90%:

1) Overtrading/Leverage: The number 1 reason why traders across the globe are ruined is overtrading. Harshad Mehta is one example. Even large corporates have not been able to make up due to large amounts of debt in their balance sheet. Ideally, 1% of capital should be the loss he should bear, and for the seasoned player, it is 2%.

2) Don’t Mix Trading with Investment: Investors should avoid mixing trading with investments. If you lose in a trade it is better to book losses and move out rather than staying with the stock.

3) Black Swan Events: Yes, there will be events that might not be in our control, but as a trader, one should cover their open positions every day with a trailing exit or a stop loss.

4) Never average a loss: Investors should avoid averaging a loss. Averaging a loss is the biggest mistake.

5) Knee-jerk Reaction: There will be knee-jerk reactions to events such as news, earnings, etc. Sometimes the reactions are favourable while most of the time it might go the other way. It is best to avoid knee-jerk trading.

(Tune in to the podcast for more)

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