The risky half: leverage and derivatives

When people tell the story of Rakesh Jhunjhunwala, they usually tell the happy half: he found good businesses and held them patiently for years. That half is real, and it is the safer half to learn from. But there was another half, and honesty means we must look at it too.

Alongside his long, calm holdings, Jhunjhunwala was also an active, aggressive trader. He used two dangerous tools that most ordinary people should never touch: leverage and derivatives. In plain words, leverage means using borrowed money to make bigger bets than your own money allows. Derivatives are complex side-bets on which way a price will move - you can win or lose a lot without ever owning the actual business. Both can multiply a small win into a big one. But both can also turn a small loss into a total wipeout.

This study exists to show you the whole investor, not a polished statue. The patient business-reading half is worth learning. The borrowed-and-complex trading half is worth understanding so you can stay away from it. This is the study where we say, as clearly as we can: these tools are dangerous, and they are not for ordinary people to copy.

Let us make leverage simple with a small story. Suppose Kabir has ₹1 lakh of his own. He wants to bet on a share, so he borrows another ₹1 lakh and buys ₹2 lakh worth. Now every move in that share hits him twice as hard, because he is playing with twice his own money. If the share rises 20%, he gains ₹40,000 - a huge 40% return on his own ₹1 lakh. Wonderful. But if the share falls 20%, he loses ₹40,000 - and that is 40% of his own money gone, plus he still owes back the borrowed ₹1 lakh. Borrowing did not make him smarter. It just made every outcome bigger, up and down.

A derivative is a different kind of risky tool. Instead of buying the share itself, you make a bet about the share's price - for example, a bet that pays if the price rises above a certain level by a certain date, and pays nothing if it does not. These bets are cheap to enter and can multiply money quickly, which makes them exciting. But many of them can expire completely worthless. You can be right about the business and still lose everything on the derivative because your timing was slightly off. They are complicated, fast, and unforgiving.

Look carefully at the two lines. They start together and fall together when the market dips - the same small fall for both. But watch what happens next. The investor using only their own money dips, holds on, and recovers when the market comes back. The investor using heavy borrowing falls much faster, hits zero, and stays there. Once you are wiped out, you are out of the game - there is nothing left to recover with. That is the cruel maths of leverage: a fall that is merely painful for one person is fatal for another, only because of the borrowing.

The reading skill here is mostly a warning skill. When you see someone make spectacular fast money, ask quietly: were they using borrowed money or complex bets? If so, the same tools that made the fast money can, on a different day, make a fast total loss. Understanding this keeps you from being dazzled - and keeps you from copying the most dangerous part of a hero's method.

illustrative Let us put numbers on the danger. Two friends, Aarav and Rohan, each have ₹2 lakh of their own. The market is about to fall 15% and then, months later, recover.

Aarav uses only his own ₹2 lakh. Rohan borrows an extra ₹6 lakh and controls ₹8 lakh in total - that is four times his own money, a heavy use of leverage. Watch the 15% fall hit them.

The very same 15% fall costs Aarav ₹30,000 and costs Rohan ₹1,20,000 - four times as much - because Rohan was playing with four times the money. Aarav still has ₹1.7 lakh and simply waits; when the market recovers, he is fine. Rohan has lost more than half his own money, and here is the hidden trap: when you borrow, the lender can demand their money back if your bet drops too far. This is called a margin call. Rohan may be forced to sell at the very bottom to repay the loan - locking in his loss forever and never seeing the recovery. Aarav's worst case was a scary dip. Rohan's worst case was ruin, from the exact same market move.

Now imagine the fall had been 30% or 40%, as markets sometimes do fall. Aarav is shaken but survives. Rohan's own money is entirely gone, and he may still owe the lender. That is why borrowing turns a survivable event into a fatal one. The market did nothing unusual. The leverage did all the damage.

The wins are loud; the wipeouts are silent. When leverage and derivatives work, people brag about them, and the stories spread. When they fail, people go quiet, and often lose everything they had. So these tools look far more successful than they are, because you only hear one side. Do not judge them by the exciting stories; judge them by what happens on a bad day.

Even experts get badly hurt. Jhunjhunwala himself, with decades of experience and deep knowledge, had periods where his trading bets went against him and cost a great deal. If a master can be hurt by these tools, an ordinary person with far less skill and far less cushion can be destroyed by them. Skill reduces the danger; it does not remove it.

"It worked last time" is the trap. Leverage rewards you again and again - until the one time it does not, and that single time can erase every earlier gain and more. Because the good times come often and the disaster comes rarely, people grow careless and bet bigger, right before the fall arrives. A method that works nine times and ruins you on the tenth is not a good method for anyone who cannot afford to be ruined.

In India, borrowing to trade and dealing in derivatives are heavily marketed. Apps and brokers make it easy - a few taps and you are controlling far more money than you have, or buying complex bets you may not fully understand. Studies by our own market regulator have shown that a very large share of ordinary people who trade these fast, borrowed, and complex products lose money. This is not a rare accident; for most non-experts it is the usual result.

So here is the honest transfer from Jhunjhunwala's story. Learn the safe half of his method - reading good businesses and holding them patiently. Understand the risky half only well enough to recognise it and stay away from it. He could take those risks because he was a full-time professional with vast experience and money he could afford to lose. You almost certainly are not in that position. The tools that helped make him famous can quietly ruin an ordinary family. Knowing what leverage and derivatives are is useful; using them, for most people, is not.

• Ask if borrowed money is involved. If a bet uses money you do not actually have, every loss is magnified and a big enough fall can wipe you out. Treat that as a bright red flag.
• Understand a product fully before touching it. If you cannot explain in plain words exactly how a derivative pays and how it can go to zero, you do not understand it well enough to risk money on it.
• Look for the margin-call trap. Borrowing lets a lender force you to sell at the worst moment. Ask whether a fall could force you out before any recovery.
• Judge risky tools by the bad day, not the good story. The wins are advertised and the wipeouts are hidden. Weigh what happens when the bet goes against you.
• Separate the two halves of a hero. Copy the patient business-reading; do not copy the borrowed, complex trading just because the same person did both.
• Know your own cushion. Professionals use these tools with money they can afford to lose entirely. If you cannot, the honest choice is to stay out.