It’s only been 9 weeks since I had written my 1st post (read here: http://t.in.com/0Zgs) on how the steep returns in several stocks had intrigued me and had started ringing my alarm bells. Honestly, I had NO clue that the market would correct this way, especially the mid and micro caps!!! Complete capitulation, even as I write this post, with several stocks falling high double digits today as well.
In this short span of time, market sentiments seems to have made a U turn – from bullish to extreme bearish ..and how! And we are not short of reasons to validate our thoughts that we are indeed in a bear market. A further meltdown in global commodities (of which crude continues to dominate headlines), a global rout in equities, USD strengthening, rising risk aversion, further softening of the Chinese economy, negative interest rates in some parts of the world et al act as serious headwinds. If this wasn’t sufficient, news flows back home do not lend any support as well. Tepid earnings from India Inc so far, expensive valuations, sharp rise in asset quality with public banks, FII exodus from the markets, margin selling accelerate with the fall every single day etc etc. Phew! Suddenly everything looks so gloomy and dull. The media brilliantly plays its part of stoking the negative sentiments (just like how they were doing on the upside), scaring the guts out of the already-clobbered investor.
That said, a million-dollar question that keeps popping on everyone’s mind now – “where are we headed?”
I would be fooling you if I told u I knew where it was headed (although I wish I actually knew :-)). I’m equally or more clueless as anyone else.
And this is that time of the market when I sit back and reminisce my previous experiences and reactions to such sharp market moves, to alter my behavior this time around. This is not the first time we have witnessed turbulence in local and global markets. The last one was witnessed in 2008, when tumbling equity prices across the globe hinted at the world coming to an end. But it didn’t. We evolved and came out of the mess (at least it seemed so) and markets rebounded brilliantly. Many stocks return brilliantly, even after considering the sharp correction witnessed recently.
Some of the lessons I learnt from such historical moves: (a) Do not panic. Keep your head firmly over your shoulders and stay away from the noise around (b) Know your positions well. Cut out of positions which don’t inspire confidence. Sometimes the best trades could be those in which we have cut our losses timely. (c) Do not try and anticipate trend changes. It’s virtually impossible to time tops and bottoms. (d) I learnt the importance of capital preservation. You never know when you end up exhausting your reserves by averaging into falling prices. And it could continue to fall for all that you know. (e) Be patient and work harder when the markets are falling to know what to buy and what valuations would comfort you the most. Remember, the market builds excesses on either sides. It’s precisely in such markets that one can manage to buy into quality stocks which get hugely mis-priced because of possible irrationality.
Almost everyone is successful in a rising market. Replicating the success in a downward market is one hell of a task. And remember, NO ONE is spared in such markets (in the near term). Not even the most glued-on and astute investor (it soothes to know that we are not alone :-)).
This is how the portfolios of some of the widely followed market gurus look like today. These are investment managers who are known to put in a lot of work before building positions. One could take something like this, as a starting point, and dig deeper into it to find an appropriate stock to buy whenever the dust settles. Do not buy just because prices have corrected steeply or because these gurus have bought. Remember, each of these managers have different investment styles and temperaments. Borrowed conviction doesn’t pay.
P.S.: I do not vouch for the accuracy of these portfolios as I have sourced it from the web. They may not constitute the complete portfolio. As also, I am not aware if some of these yet exist as their holdings or what price would they have bought into. So kindly do your due diligence. I am just sharing my thoughts.