Markets are crashing. Here's what you should do

Aug 24, 2015

In this issue:
» How should investors tread the PSU stake sales?
» Market round-up...
» ...and more!


Fear has replaced euphoria. The more than 1,600-point fall in the Sensex today has left a lot of investors shell shocked. And it may not be over. Such things acquire a momentum of their own. And who knows, markets may well go down a good deal more.

If it does, be prepared to see a lot more BUY recommendations from us.

Why do we want to recommend more stocks when prices are falling and fear is in the air? Well, if we've had any success in the market, it's because we've stuck to one very important investing rule: To be fearful when others are greedy and greedy when others are fearful.

And fear certainly seems to be prevalent today, affecting even the most experienced investors . To be fair, they are right to steer clear of businesses with unproven fundamentals yet rising based on expectations that something good might eventually happen.

However, being fearful of a lot of fundamentally strong companies makes little sense to us. We believe these businesses might suffer the odd hiccups or two, but there's no doubt in our minds that their earnings are going to be much higher five and 10 years from now.

A small clarification, though: Trust us, we don't have the faintest of idea of what the stock markets will do in the near term. We couldn't tell you whether the stock markets will be up or down in a few months. What we do know is that if you keep waiting for either the sentiments to turn positive again or for the economy to improve, it could be too late.

A small peep into the history might help here. Remember March 2009, when the stock market bottomed after the sub-prime crisis? Anyone who would have waited for green shoots to emerge would have missed one of the best buying opportunities of his life. Why? Simply because the fundamentals turned positive long after the stock prices began to go up.

Similarly, take your mind back to early 2014. Markets were cheap and buying opportunities were plenty. But by the time Modi government came to power and people waited for more clarity to emerge, the markets had already run up a good deal. The point we are making is simple. Investing when bad news is still around us pays. It lets us buy a slice of India's future at a discounted price.

Over the long term, stock markets will no doubt do well. Please note the Sensex was at 100 back in 1979-80 and is at around 26,400 at the time of writing, a compounded gain of around 17% per annum. All of this despite the several difficulties we faced on the macro front.

And this might lead you to believe that it would have been next to impossible for investors to lose money during such a period. However, note that some of them did indeed lose money. And we can tell which ones. The ones that bought only after the good news started emerging and sold as soon as the headlines turned negative.

So the point we are making is simple. You either get good news or good prices but never both. And if you want to make the maximum out of investing in equities over the next 5-10 years, you certainly need to buy in a fearful environment.

We, of course, agree that there's no widespread fear yet. Besides, the recent correction in the Sensex by no means makes the valuations very attractive.

But should the markets continue to fall in the months to come, you would do well to prepare yourself to act on opportunities to buy some of the safest stocks.

Well, there's one more thing you need to do well. You need to identify stocks from your portfolio that are nothing but ticking time bombs. Stocks where fundamentals are deteriorating and are virtually defenseless against a market wide correction like we saw today. And if we persist with them for long enough, they can virtually make your entire portfolio come crashing down.

What if we tell you that we've identified a method that helps you weed out such troublemakers from your portfolio well before they start poisoning it? You may certainly want to know about it, isn't it?

Well, you won't have to wait for long as we are making this report available to you right away. All you have to do is click here in order to grab a free copy of what we are calling The "Crash Score" Report.

Are you ready to be a 'greedy' investor if the stock markets show more and more signs of fear and panic? Let us know your comments or share your views in the Equitymaster Club.

 Chart of the day
Indian PSUs! With major strategic advantages such as control on natural resources, first mover advantage, economies of scale and so on, these companies could have been front runners in India's growth story, but for Government's unhealthy interference. Or neglect.

Now, as the Government opts to gradually divest its holdings in PSUs, one has good reason to hope for better business prospects. It is this good faith that has perhaps led retail investors to oversubscribe the government's offer for sale (OFS), especially now when the Modi government is in power. As more offers get lined up, one should know what to expect. The chart of the day compares the performance of BSE PSU index with that of the BSE-Sensex across various time frames. As one can see, the BSE PSU index has underperformed the BSE-Sensex across all time frames. One must keep in mind that Sensex already has some of the major PSUs under it. It just underscores that the government has no business being in business.

PSU Stocks: A History Of Underperformance

The Government has raised Rs 33 bn so far this year through partial stake sale in three PSUs. With Indian Oil Corporation's (IOC) share sale, it expects to get Rs 93 bn more. As an article in Business Standard suggests, this could be the best 'first-half' in seven years. With huge disinvestment target ahead, dozens of PSUs are lined up. Should you invest?

We believe there are two key aspects one must consider.

Disinvestment, by itself, is not the antidote to inefficiency in PSUs. Post divestment too, the Government will own majority stake. Unless the disinvestment comes along with more autonomy and fair regulations for these companies, the long term prospects are unlikely to become better.

Lastly, the valuations at which the government offers its partial stake sales will be the key criterion for investors. And this is the tricky part. The government is most likely to divest when it feels it can fetch good valuations. This may not align well with value investors looking for bargains.

In the meanwhile, the Indian stock markets continued to languish at lower levels after witnessing a heavy sell-off in the morning. At the time of writing, the BSE-Sensex was trading lower by 1.456 points (-5.32%). All the sectoral indices were in the red with realty, power and oil & gas indices leading the losses. It must be noted that the steep fall in the Indian markets was triggered amid a global sell-off in equities following weak cues from China. The Shangai index nosedived more than 8%. All major Asian markets witnessed significant selling pressure.

 Today's investing mantra
"You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K." - Warren Buffett.

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate priced are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Richa Agarwal (Research Analyst).

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Equitymaster requests your view! Post a comment on "Markets are crashing. Here's what you should do". Click here!

2 Responses to "Markets are crashing. Here's what you should do"

Shamal Parab

Aug 24, 2015

I believe that the long term story of India and China are still intact. It is the domestic purchasing power which will rule the economy as what had happened in USA. I fully agree with you that one should be greedy when others are fearful. I learned my lessons during 2009 crash. However, personal emotions and control over our patience is a key factor. Nobody knows where the market will move next and which news will remain for how long. Past trends states that the 'bottom' will not stay for long and the 'top' will always move ahead over the period.

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Aug 24, 2015

Is it wise to sell at current rates which ever in profit and buy at lower rate if we feel the market go further down.

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Equitymaster requests your view! Post a comment on "Markets are crashing. Here's what you should do". Click here!
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Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
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