On This Day - 5 OCTOBER 2018
Don't Panic in This Falling Market... Do This Instead
Have you seen a colony of ants?
Their wisdom as a group far outpaces that of an individual ant.
You won't see a solitary ant doing anything on its own. They always move and work in groups.
Typically, the leader orders the colony members to perform specified tasks.
This works well for the ant colony. They're successful in building a safe home for themselves.
However, there are times when the leader makes a mistake.
But no ant ever questions the leader because their job is to trust the group's wisdom.
Right or wrong, trusting the 'wisdom of crowds' is natural to animals and humans.
Yes, we humans fall prey to wisdom of crowds all the time.
Our first instinct is to react and follow what everyone else does.
This instinct comes naturally because during the stone ages, the best way to protect ourselves from dangerous animals, was to move and act in crowds.
However, this can be a very dangerous thing to do in the stock market.
In fact, history tells us to do the exact opposite.
As Warren Buffett puts it - 'Be greedy when others are fearful and be fearful when other are greedy'.
In the last few years, the Indian stock markets have moved just in one direction: Up.
And the crowd thought it could go only in that direction.
The crowd never questioned the valuations before buying any stock.
However, ever since start of 2018, the so-called 'wisdom of crowds' has proved false.
The market has taken a U-turn.
The overwhelming optimism in the markets have turned into pessimism now.
The IL&FS fiasco is being compared with the Satyam scam.
Rising oil prices and the falling rupee are being seen as the end of the world.
More than 600 companies have fallen more than 50%. In last week, that number would have increased.
Don't Follow the Crowd in the Stock Market
The crowd will tell you - It's time to be fearful. Sell everything and stay away from the market.
The crowd believes, the market can only go south from here.
I'm not interested in what the crowd says. As editor of Smart Money Secrets, the level of the headline index doesn't matter to me that much.
I strongly believe, in the long run, the fundamentals of individual companies will prevail over the current broad sell-off.
Yes, there can be further correction even in good quality businesses.
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The best way to deal with it is with a staggered buying approach.
I've seen some great businesses, falling below their long-term valuations.
These stocks rarely give this kind of buying opportunity.
I believe this is the time when you should not be part of the crowd.
Instead you should be busy in finding great companies with long-term durable moats, which are falling just because other stocks are falling too.
I'm keeping a keen eye on these stocks and will consider them for my next Smart Money Secrets recommendation.
Chart of the Day
Talking about the wisdom of crowds. right now, the so-called wisdom is suggesting a massive sell off. Many good companies are correcting quite a bit.
While there is a legitimate fear about the bleak macro environment along with the liquidity in the NBFC space, I believe this fear is being extended too far... to some very strong business.
The chart below shows the current mood of the market. Headline indices have corrected significantly from their peaks in 2018.
Are These Deep Corrections a Buying Signal?
These corrections are a clear sign of fear across sectors and individual stocks.
While considering stocks for Smart Money Secrets, I believe these deep corrections are a buying signal for select quality companies.
And for strong business you've already bought, this can be a good time to add more.
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets
PS: Kunal Thanvi, editor of Smart Money Secrets, is the Sherlock Holmes of investing. He is on a mission to reveal the top picks of India's best investors to you. For clean, high quality stock recommendations that won't put your wealth at risk, subscribe to Kunal's Smart Money Secrets.
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