Nithin Kamath and Ramesh Damani in combination offer the most important rule in trading

A user on Trading Q&A, a community platform by Zerodha for all things related to stock markets, pointed to a video of Ramesh Damani where he says, “trading is always done by slip book and not cheque book” and asked what it meant.

Zerodha’s Kamath intervened on behalf of the user and wrote to Damani to seek more explanation on the quote.

“Ramesh explains this other version of maybe the most important rule in trading and life: Cut your losers and hold on to the winners,” Kamath tweeted.

Here is the full response of Ramesh Damani to the query of Nithin Kamath:

I attribute this saying ‘speculation is done with the slip book and not the cheque book.’ to Shivkishanji Damani, father of the legendary investor and businessman Radha Kishan Damani (RKD), the D-Mart promoter.

RKD listened to the above saying, as a child from his father who repeated it over the phone many times to his friends and associates. Radha Kishan then passed the saying on to his friends and associates, as examples of a few of the ultimate truths about the markets.

Speculation is about leverage. Hard core speculators believed that when the speculative trade is marked to market (in the old days of badla trading, it was once a fortnight.) The long or short trade should show a profit to you and the broker should be giving you a check for the difference which you would then deposit, using a deposit slip, in your bank account. Conversely if you had to issue a cheque to the broker, your bet was going the wrong way. In that case reduce or terminate a position.

A lot of poorly educated speculators assume that with the power of a bank balance, they can keep riding a bleeding position. Hence they fund the position with their cheque book and bank balance. Keep paying the mark to market difference. That is dangerous and can eat large amounts of capital.

As one of many examples of this motto, that I witnessed in the early 1990’s, was ACC. The stock, a liquid market barometer, had traded between Rs 100 to Rs 300 for over 30 years. Then with economic liberalization and the Harshad Mehta bull market it rose to Rs 10,000 over the next three years. The shorts kept thinking a collapse was near, kept shorting and funding the bad trade through their ‘cheque book’. The longs feasted, because every fortnight they got to deposit their ‘mark to market’ gains through a slip book. Hence the saying. History is replete with more examples of the folly of funding trades through cheque book power.

This famous quote from Reminiscences of a Stock Operator is a useful reminder and summary of the motto for a good speculator.

‘Always sell what shows you a loss and keep what shows you a profit.’

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