My Top 3 Tips to Navigate the Market Crash - The 5 Minute WrapUp by Equitymaster
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My Top 3 Tips to Navigate the Market Crash

Oct 8, 2018

Ankit Shah, Research analyst

With many of India's macro factors turning hostile, stock markets have been in a sharp correction recently.

Do you recall that less than a month and a half back, on 31 August 2018, the BSE Sensex had closed at 38,645.

On that day, the total market capitalisation of all listed companies on the BSE was Rs 159.3 lakh crore (1 lakh crore = 1 trillion). As per my study, this was the highest aggregate market cap level ever.

Over the 22 trading sessions that followed since then, the Sensex lost 4,268 points (down 11%).

The total market cap of all BSE companies fell to Rs 136.6 lakh crore (down 14% since 31 Aug).

In other words, Rs 22.7 lakh crore worth of shareholder wealth has been destroyed in just 22 days! You will see the true extent of the market correction in today's Chart of the Day.

To be honest, such steep corrections are never easy to handle even if you're an ardent Warren Buffett follower. It's very discomforting to see the value of your shares drop substantially.

Unless you're a saint, the turbulence in the markets is going to shake your confidence. It's going to trigger emotions of fear and panic, anger and frustration...and it will test your patience.

You may be filled with doubts and confusion about what's going on...

Are we nearing the end of the correction? Or will it get worse?

Should you sell your shares now and wait to re-enter later?

Or should you hold on and sit tight?

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What about new investing opportunities? Should you actively scour for them?

In an editorial that I had penned two weeks ago, I wrote to you about macro headwinds that are taking the wind out of the Indian bull run - surging crude oil prices, tumbling rupee, rising interest rates, trade war tensions, the mess in the Indian banks and NBFCs, and the uncertainties of an election year.

I urged readers to focus on what was within their control - the price you pay for stocks, and the way you react to the market volatility.

Now, before I offer you some more practical investing tips, here's what you must know about human emotions and reaction tendencies...

Our brain is wired in such a way that when faced with stress or danger, it shifts from its relaxed, rational thinking and decision-making mode to the 'fight-or-flight' mode.

The emotional pain is so strong that the instinctive reaction of the brain is to get rid of the unpleasant feeling.

When panic sets in, market participants either rush to the exit by dumping all their shares, or they freeze into inaction and simply blind themselves to the market.

Now, the problem with both these impulsive reactions is that the primary objective is to eliminate the emotional pain.

Often, this comes at the cost of missing out great investment opportunities.

So, here are my top 3 practical tips about how you must navigate through the current market crash...

  1. Don't try to predict the direction of the market

    It is impossible to tell what will happen 3 months...6 months... even 12 months from now. Maybe the market correction gets deeper... or maybe not. But history does teach us that though stock markets go through bouts of extreme volatility from time to time, over the long run they tend to outperform all other financial asset classes.

  2. Don't liquidate your portfolio in panic

    The recent carnage in the stock markets may have rekindled memories of the 2008 market crash. Fearing a deeper crash, some of you may be tempted to liquidate your entire portfolio.

    The problem with this strategy is that it assumes that markets fall in a straight, linear manner, and that it is possible to predict market bottoms.

    The truth is that stock prices move in a non-linear manner. What if your stocks bounce back after you sell everything? How long will you wait before reentering again? How will you know when the markets are at rock bottom? These questions are easier to answer in hindsight than in the present.

    It also ignores the fact that the changing macro factors do not have the same impact on the fundamentals of each company. For instance, a falling rupee may hurt importers, but it benefits exporters.

    Having said that, I don't mean to say that you must not sell any of your stocks. On the contrary, you may want to reevaluate all your positions. Check for the extent to which the fundamentals have been adversely impacted by the ongoing macro headwinds. If the impact on growth, earnings, and financial health is significant and long-lasting, then you may want to bite the bullet and exit, either partially or fully.

  3. Everything that falls isn't necessarily cheap

    Several stocks that had been market darlings last year are now trading significantly below their 52-week highs.

    But should you just go and buy stocks that are available at a steep discount to their recent highs?

    Let me tell you that this can be a very risky gamble. Don't judge the cheapness of a stock purely on the basis of the correction in the stock price.

    It's important to judge the value of the underlying business (as well as management quality, corporate governance) for the price you are paying.

    That said, I must say that the valuations of several companies now look quite attractive. This is a good time to go bargain hunting.

    But remember, stocks will not instantly start rising again after you buy them. The correction could get deeper if the macro fundamentals deteriorate further.

    So, the best buying strategy to follow in a correcting market is to make staggered investments over a period, instead of buying stocks at one go.

As such, if stock prices correct further, this strategy will ensure that you get the benefit of the further fall in the stock price.

What are your top worries right now? How do you plan to navigate through the ongoing market correction?

Join me at my premium newsletter Insider and I'll do my best to guide you through this period of extreme volatility.

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Chart of the Day

As I mentioned earlier, the total market capitalisation of all listed companies on the BSE on 31 August 2018 was Rs 159.3 lakh crore (1 lakh crore = 1 trillion). As per my study, this was the highest aggregate market cap level ever.

Over the 22 trading sessions that followed since then, the total market cap of all BSE companies declined by 14% to Rs 136.6 lakh crore. Rs 22.7 lakh crore worth of shareholder wealth has been destroyed in just 22 days.

During this period, foreign investors sold Indian equities worth Rs 17,919 crore.

I want to show you the extent of correction that stocks have faced from their respective 52-week highs.

Over the weekend, I compiled the stock price data of 2,733 listed companies on the BSE. I wanted to know how much each stock had fallen from its respective 52-week high.

The Average Stock Has Crashed 46% From Its 52-Week High

Here's what I found out...

  • 688 stocks (25% of the active stock universe) have crashed 61% or more from their respective 52-week highs.
  • On average (in both mean and median terms), Indian stocks have corrected 46% from their 52-week high.
  • There are just 112 stocks (4% of the active stock universe) that have corrected 10% or less.

While the recent market crash and the macro uncertainty is a big cause of worry for investors, it must be recalled that Indian stocks were driven to unsustainably expensive valuations on the back of a flood of domestic liquidity.

The ongoing market crash has brought down stock valuations to more reasonable levels. This may be a good time to scoop up great long-term investing opportunities.

Of course, this doesn't mean that stocks couldn't crash further if things get worse.

The correction could last longer.

But looking at the history of equity returns, I can tell you that this would be just a passing correction phase.

Despite all the volatility and periodic crashes, equities are still one of the most rewarding and safe asset classes over the long run.

Happy Investing,

Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Every day the markets are open, Ankit Shah, editor of Equitymaster Insider, cherry picks one investing idea from our 8 premium publications. This is the one idea he considers the best moneymaking opportunity. He shares this idea with an exclusive group of readers on his insider list. Join this exclusive group by clicking here.

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3 Responses to "My Top 3 Tips to Navigate the Market Crash"

Sudhir Mahale

Oct 8, 2018

Falling or rising I follow set policy
1) check pivot levels. If stock is in portfolio, then put sell stop loss at mean of S1 & S2.
2) Simultaneously it's R1 level is set in watch list.
3)For stock not purchased also R1 level is set in watch list.
4) For 2 & 3 above alarm level will be shifted to mean of R1&R2.
5) when price cross above limit, then place buy order just above R1. It will be multi price order with second order for market value at closing.
With this strategy I hope to minimise the loss.
6) For rapidly falling stock place margin order for short sale with relevant stop loss and profit target for exit.
It's exciting game and I enjoy it .

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Bibhas Kumar

Oct 8, 2018

Ankit,

An informative article. The problem with retail investors like us is that we are more or less fully invested, so even if the markets are at mouth watering levels we do not have any funds to buy. what do we do?

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S.K.LIMAYE

Oct 8, 2018

Very informative article , especially the Chart of the day.

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