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The #1 Secret to Winning Big When Stocks Are Rebounding

Jan 27, 2020

Ankit Shah, Research analyst

Since a while, I've been talking about the rebound in small and midcap stocks.

And as you've seen, the rebound has accelerated since the start of 2020.

But how do you make the best of the market rebound?

Today I'm going to continue from where I left the discussion last time... (Read: Avoid this Mistake Today to Make Big Profits in the Market).

If you recall, I narrated the story of a friend of mine who has been investing in the stock markets for the long-term.

But like many investors, he sold his winners prematurely. Much of his stock portfolio is now filled with beaten down small and midcap stocks.

The crash in the broader markets since 2018 left his portfolio deeply in the red. The bearishness in the market had severely dented his confidence.

As a result, he completely stopped making fresh investments even when stocks were trading at attractive valuations.

In fact, he even stopped regularly tracking his stocks. This kind of reaction is very common. The human tendency is to simply shut down information that's going to cause pain.

So, you will notice that when your stocks are doing badly, you don't track them very actively.

But when markets are bullish and stock prices are trending higher, investors tend to watch the stock prices very closely. Every gain is like a pleasant "kick" to the brain.

So, when I spoke with my friend recently, he sounded much better than last year.

The recent rally in small and midcaps had revived his investing spirit. He was hopeful that the rally would continue through 2020 and that he would be able to "recover his cost".

This whole point about "recovering the cost" was the main reason I started writing about it to you. I'm sure many investors out there are waiting to see their stocks back to the levels where they purchased them.

Now, I'm not saying this is a bad thing at all.

It would be great if the stock prices rebound to the level where you bought them. Then, at least, you wouldn't be losing any money.

But let me remind you once again why you invested in the stock markets.

You came here to make big money. Not to get burnt in a bear market and then just wait to exit once you're able to recover the value of your investments.

As I'd said, based on how you think and act now, you could either just make average gains or you could make the gains of a lifetime which lift you into a much higher financial orbit.


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I want you to ride the next big wave that will not just make you some incremental gains, but transform your fortunes completely.

The question is...

How do you do it?

How do successful investors think?

And what are these smart investors doing now that will help them make the best of what's happening in the markets currently?

There are a few secrets that differentiate the men from the boys in the game of investing.

I'm revealing the first one today.

Secret #1 - Be Courageous and Bite the Bullet

Most brokers and financial advisors will hardly ever tell you to do this. They will keep enticing you with new stock tips.

But they will not tell you to do the more important and challenging task: Clearing the junk from your portfolio.

And I know for sure that most people fail in the game of investing because they're unable to "bite the bullet" and sell junk stocks.

Why?

Because it's painful to exit a stock at a price that's below your purchase price.

We hate to book losses.

So, we simply hold on to dud stocks in the hope that the bull run will lift them higher.

But do you know what you miss out by being so focused on this kind of loss aversion?

By blocking your money in a dud investment, you're missing out on potential multibaggers that the smallcap rebound could produce.

In economics, there's a special term for this - 'opportunity cost'.

So, here's what I suggest you must do now...

Revisit your portfolio. Check the fundamentals of every company.

You see, the economic headwinds we saw over the last couple of years severely dented the fundamentals of many companies that didn't have wide moats.

Many of them are not as solid and competent as they probably were a couple of years ago. They may not deliver the kind of growth and profits they did in the past.

So, it doesn't make sense to think of their past stock price trend as a reference for the future. Many stocks will take a long, long time to rebound to their earlier highs. Some stocks will probably never return to their earlier highs.

If you find such stocks in your portfolio, it would be best to exit them and free up your capital.

Deploy it in better stocks.

I know it's easier said than done. It can be painful but that's the whole point.

Have the courage to face the pain head on and bite the bullet before it's too late.

And that's precisely what differentiates the men from the boys in the game of investing.

Now you know which side I want you to be on.

Warm regards,

Ankit Shah
Ankit Shah
Editor, Equitymaster Insider
Equitymaster Agora Research Private Limited (Research Analyst)

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