Hindustan Lever to Johny Lever All Uses Leverage – What About You?

18 November 2014

Hindustan Lever to Johny Lever All Uses Leverage – What About You?

Greetings from Hitesh! All my serious readers have appreciated our last article on “Learning from Soren Kierkegaard V/s. Rothschild”. 

They have asked – how come I read about 18^th century western guys. You need to be constantly investing your time in reading and learning while you are investing. I just do the same for myself and my readers. If you just read and follow, what I share with you, you will bless me for life.

Now let me deal with the concept of Leverage first.

What is Leverage?

In simple words, leverage means using other people’s time/money/skill for your benefit. It also means using your additional skills to support your main skills. E.g. Johny Lever is using his Comedy Skills to support his acting. He is a combination for Actor + Comedian + Character Artist to a Produce. He is 3 in one for a Film Producer and he gets more roles compared to simple Actor or comedian or Character Artist!!

How Financial Leverage Works?

Say you have Rs.1 lakh and you want to buy Reliance ind Shares. The price is Rs.990, so you can buy 100 shares of Reliance. Now, if the Reliance ind touches Rs.1050, you make a profit of Rs.60/- per share and total profit of Rs.6000.

Now, if you use the leverage and take Rs.4 lakh from somebody @2% interest and buy 500 Reliance Ind @ Rs.990 and sell the same at Rs.1050, you make Rs.30000. You pay Rs.8000 as interest for 1 month for Rs.4 lakh loan, you end up making Rs.22000/- on Rs.1 lakh in one month. 22% in a month!!

Let us see the negative side also. If the price goes down to Rs.950, you end up losing Rs.8000 as interest + Rs.20000 on shares. So, total loss would have been Rs.28000, had you bought just 100 shares, you would have lost Rs.4000 only!!

In short Leverage acts like a 2 edged sword and it should be used with lot of thinking and planning.

How Normal Guy Uses Negative Leverage?

He takes all kind of personal and consumer product loans. This loan adds to the liabilities and not the asset. Even your housing loan is your liability. As long as you stay in your house – it’s a liability as it does not generate any income for you. In fact, you end up paying property taxes and other taxes for the same apart from paying interest on Loan!!

So, it’s not that you do not use leverage – but you use the negative leverage and not positive.

When is the time to Use Leverage?

For a seasoned guy - it is anytime. As soon as he spots an opportunity, he takes the leverage and creates a position.  

For a normal guy who is (buy + hold and Sell type)- you should see the market trend and if the trend is positive, you can take leverage and buy a stock. When market is in uptrend, normally you will have more profit transactions then lose transactions.

Should You Use Leverage for Investments?  

It all depends on you and your risk taking appetite. It also depends on your ambitions how fast you want to come up in your life. It also depends on your conviction in your investment idea. In any case, it is available – if you wish you can use it.

However, you should not use the negative leverage as mentioned above. If you use leverage for assets – you may have losses as explained above but if you use it for liabilities – you will have 100% losses plus the maintenance cost!!

Make your choice.

What Next?

If you want to create assets fast, you will have to take support of Leverage. If you need help in asset building, We are open for subscription for 2014 to 2017……do not miss.

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Hitesh Parikh