Should You Be Selling Stocks Now to Buy When the Correction Ends? - The 5 Minute WrapUp by Equitymaster
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Should You Be Selling Stocks Now to Buy When the Correction Ends?

Oct 29, 2018

Editor's note: Dear reader, the market is not offering much hope to investors like you. But whatever you may be thinking about your stocks... don't sell them, at least not if you're holding shares in solid companies. Last week, Ankit Shah, editor of Equitymaster Insider, explained the reason why. I am re-publishing his editorial today because it is important you understand why his words are so true in the market these days. Here's Ankit...

Ankit Shah, Research analyst

Recently, I was catching up with two friends over breakfast at a nearby Udupi restaurant. One of them is a serious long-term value investor.

When I asked him about how he feels about the ongoing market correction, he made an honest confession, "The value of my (stock) portfolio has slashed down significantly. Sometimes I have a strong impulse to liquidate the portfolio and enter again when the bloodbath is over."

To which, I replied, "How will we know when the market correction is over? Will Mr Market send us a WhatsApp message announcing - The correction is over. Please buy stocks now."

He laughed, "That's exactly the reason I'm not giving in to the panic and nervousness. In fact, I believe this is a good time to accumulate equities for the long run."

I responded, "Yes, I agree. Valuations are starting to look reasonable. But that doesn't mean stocks cannot fall further. It's not going to be easy for sure. In any case, who said investing is an easy game?"

So yes, dear readers, we are in a zone of heightened uncertainty. And markets hate uncertainty. So, do expect the ride to rough and edgy. It's going to be a test of your patience. But also understand that the best buying opportunities arise when others are dumping them in panic. In today's Chart of the Day I'll show you why it makes sense to accumulate equities during market crashes.

Last time, I showed you that the total market capitalisation of all listed companies on the BSE had hit an all-time high of Rs 159.3 lakh crore (1 lakh crore = 1 trillion) on 31 August 2018.

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While small and midcap stocks have been in correction mode since February 2018, the large cap universe had been relatively resilient.

But September onwards, stocks across the board have been correcting sharply.

The Sensex is down 12% from its all-time high closing level of 38,897.

What I also noticed is that the daily volatility in the markets has also gone up drastically since September.

I dug up data and found some interesting trends.

The table below shows the number of days in each month when the Sensex moved 1% or more in either direction.

Month Number of Days When Sensex
Rose/Fell 1% or More
Jan-18 1
Feb-18 5
Mar-18 6
Apr-18 2
May-18 1
Jun-18 1
Jul-18 1
Aug-18 3
Sep-18 6
Oct-18* 8
*As on 19 October 2018

As you can see, the month of January had just one day in the entire month when the Sensex moved 1%. This was also the month that benchmark index hit a high of 36,283.

Thereafter, the months of February and March reported increased volatility. This was also the period when the markets were in correction mode. From the high in January to the low in March, the Sensex corrected 10%. There was just one day during this period when the Sensex corrected more than 2% (2 Feb 18).

After this correction, the market resumed its upward move. And you can see between April and August, the Sensex didn't witness many sharp ups and downs.

Towards the end of August, the Sensex hit a life-time high of 38,897.

Then just the way we saw during the Feb-March period, the month of September and October have reported heightened volatility in the benchmark index. From the life-time high in August to Friday's closing level of 34,316, the Sensex has corrected 12%.

In comparison to the correction earlier this year, the current correction has not just been deeper, but the volatility has also increased substantially.

There have been just 13 trading sessions in October so far. In 8 out of these 13 trading sessions, the Sensex has registered movements of 1% or more. In fact, on three occasions this month, the Sensex has corrected more than -2%.

I'm sure many of you are also wondering which way the markets are heading...

Are we still in a bull market that's undergoing temporary correction?

Or are we sliding into a bear market?

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Bull corrections are generally defined as corrections of 10% or more. Such corrections are temporary events during a bull market, followed by a recovery to the prior peak within 12 months.

Bear markets, on the other hand, are characterised by corrections of 20% or more, with no recovery in the following 12 months.

Based on this definition, and taking the Sensex correction into account, it seems we're still in a bull correction.

But as I've stated on several occasions, the Sensex offers a skewed perspective of the overall market. So, I looked at a few other benchmark indices...

Index 52-Week High Current Value Change
BSE Sensex 38,989.65 34,315.63 -12%
BSE 100 12,096 10,535 -13%
BSE 500 15,938 13,705 -14%
BSE Allcap 4,573 3,925 -14%
BSE Midcap 18,321 14,058 -23%
BSE SmallCap 20,183 14,083 -30%

The BSE 100, BSE 500, and BSE All caps indices are all down 13%, 14%, and 14% from 52-week peaks.

However, the BSE Midcap and BSE SmallCap indices are down 23% and 33%, respectively, from their January 2018 peak. So, that's the contrasting trend in the markets right now.

Now, it remains to be seen if the bulls come back and the uptrend resumes, or whether the correction deepens and we enter a bear market.

Notwithstanding the macro risks and concerns, I believe that equity valuations are starting to get attractive for many stocks and the ongoing correction may open good buying opportunities for long-term investors.

Is the ongoing market correction making you nervous? Are you looking for great investing opportunities for the long run? Join me at my premium newsletter Insider and I'll do my best to guide you through this period of extreme volatility and cherry-pick the best investing ideas from the Equitymaster research vault.

Chart of the Day

I remember a conversation I had with a portfolio manager towards the end of 2017. He was worried that stocks were getting irrationally expensive and value-buying opportunities had diminished. Yet investors were flocking in droves to invest more and more money.

Let me tell you that no investor gets rich investing when the markets are irrationally expensive.

Take a look at the BSE SmallCap index chart...

The Smallcap Index Is Up Merely 1% from Its 2008 Top

On 7 January 2008, at the height of the previous bull run, the Smallcap index hit a high of 13,975. In the market crash that followed, the index hit a low of 2,867 on 9 March 2009. In other words, the Smallcap index tanked a whopping 79%!

From its 2009 low, the BSE SmallCap index has risen 391%, compounding at an annual rate of 18%.

But here's the most telling observation...

From its January 2008 peak to now, the BSE SmallCap index has gained just 0.8%.

If you factor in inflation, the returns are actually negative.

In other words, investors who bought smallcap stocks at market peaks and didn't go bargain hunting in the subsequent crashes didn't make any money.

Let me also show you how the Sensex performed during this same period.

The Dangers of Not Investing During Market Crashes

On 8 January 2008, the BSE Sensex had hit a high of 20,873. In the subsequent market crash, the Sensex plunged 61%.

Thereafter, from its 2009 low, the Sensex has risen 321%, compounding at an annual rate of 16%.

However, from its January 2008 peak, the Sensex has risen just 64% in more than a decade, compounding at a laborious rate of 5%.

The big points I'm trying to drive home are:

  1. You don't get rich buying stocks at irrationally expensive valuations during bull market peaks.
  2. You cannot expect to make superior returns if you don't invest during times of panic and uncertainty, when valuations are attractive.

So, be on the lookout for solid investing opportunities. Make staggered investments, so that if stock prices correct further, you can take advantage of lower prices.

Happy Investing,

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

PS: Tanushree Banerjee is Equitymaster's co-head of research and editor of StockSelect She has a long and illustrious track record of picking safe stocks. For over 16 years, StockSelect subscribers have received safe stock recommendations that delivered double and triple digit gains. You can receive Tanushree's safe stock recommendations by signing up here.

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