Markets go bottomless and investors clueless
7.30 am: mouth wash
9.30 am: white wash
8.30 am: expert calls
2.30 pm: margin calls
Oh, dear! Everybody’s sailing in the same boat through hot waters, and unfortunately, there’s no shore in sight. And, like that of a mysterious ocean, the bottom of this market seems unfathomable at present.
Now that panic selling has been causing havoc in the markets, it’s natural to get tensed and make some mistakes which otherwise you won’t. Avoid these 4 mistakes.
Mistake 1: Investing in stocks that have fallen to multi-year low thinking that they will recover
Our analysis suggests that 157 of Nifty 500 companies are trading at least 70% below their all-time highs. Many of them are off their all-time highs for the last 8-10 years now. We are not even counting companies such as Yes Bank, Jain Irrigation, DHFL and Vodafone-Idea amongst others which have been in the limelight for their persistent problems.
Still no light at the end of the tunnel?
Another interesting observation is companies that have had 70% (or more) shaved off from their top, usually earn poor Return on Equity (RoE). They are either low growth or highly cyclical or poorly managed companies that fail to generate enough returns on shareholders’ funds. Many a time, their fundamentals are affected to such an extent that the market doesn’t anticipate any turnaround in their situation.
That doesn’t mean you shouldn’t invest in turnaround stories. But wait until there are clear indications of it and well perceived by the market and reflected in prices.
Mistake 2: Selling off stocks that have fallen the least
Buying a stock which has fallen more than 70% or selling a strong stock (which has fallen less than 20%) in a falling market is like telling the market that you know the trade better than it does. Out of Nifty 500 companies, 45 companies have fallen 20% or less from their all-time high.
Evergreen stocks that compound shareholders’ wealth year after year are often the ones that withstand even the craziest market falls and bounce back. You see, when you pop off a strong stock mindlessly just because it’s offering you the highest salvage value, you are perhaps uprooting a potential gainer.
Interestingly, stocks that fall less than 20% from their all-time high when the markets are in a firm bear grip, often generate impressive RoE.
It’s noteworthy, buying a stock that has fallen the least isn’t a surefire strategy unless you know the fundamental reasons that are salvaging the stock from the bear attack.
Mistake 3: Waiting for the market bottom
In the aftermath of the financial crisis of 2008-09, markets rose without giving any prior notice. To be precise, the levels seen in the first week of March 2009 have never been seen thereafter. Those who kept waiting for the ultimate bottom couldn’t buy for a long time as Nifty rallied 25% within a month by April 2009. Many investors repeated the same mistakes when markets fell close to 25% between February 2015 and February 2016.
Mistake 4: Leveraging to take advantage of market weakness
This could be the biggest of all mistakes. Markets can stay down in the dumps longer than you can stay afloat. Even if markets fall and become cheaper there’s no guarantee they will recover fast. Markets tanked more than 25% between January 2008 and March 2008 and surely became reasonably valued as compared to the peak valuations. Those who took leveraged positions in April 2008 as markets started recovering paid a heavy price later. If you recollect Lehman crisis knocked off markets in October 2008.
Time to revisit strategy (and also the portfolio)?
Yes! Certainly. How?
- First off, don’t panic.
- Take investment decisions dispassionately, avoiding behavioural biases (though it’s easier said than done).
- Revisit asset allocation and ensure it’s in line with your investment objectives.
- Within your equity portfolio, ensure all your investments are consistent with your risk appetite
- Moreover, while assessing your equity portfolio pay close attention to stock price movement, quality of management, return-ratios and its vulnerabilities under the changed business conditions.
It’s time to change investing habits to avoid mistakes and truly make the most of this market weakness.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.