Falling markets: What to do? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Falling markets: What to do?

Mar 15, 2007

Investors who would have thought of some relief after the broad sell off over the previous few days, must have been indeed left perplexed over the carnage yesterday. The hope of a revival that had once again started to build post the positive ending during the first two days of the week must have been shattered by what happened yesterday. In fact, the losses yesterday were significantly higher than the gains of the first two days put together.With yesterday's decline, the benchmark 'BSE-Sensex' has now lost nearly 15% from the highs it reached just a few weeks ago. What more, while this is just a decline on the broader index, there are individual companies that have lost much more than that. If one were to look at the BSE 'A' group, losses in the region of 20% to 30% over the past one-month are not uncommon.

With markets in such a punishing mode, retail investors tend to panic and the innumerable contrasting views around by the so-called 'experts' further add to the confusion. Hence, here we have made an attempt to answer the same questions of 'why the markets are falling' and 'what to do next' but by not trying to be too complex and sticking to the basics.

Why are the markets falling? Some call it the 'Yen' factor while still others call it the 'reduced appetite for risk in the global markets'. Confused? So are we! Not to worry, let us try and arrive at the solution with a different viewpoint. If we were asked to point out one major difference between the market levels currently and the one in around 2003 when the bull rally was about to take off, it will not take a rocket scientist to realise that price levels vis-a-vis earnings were much lower then as compared to now. Reason? Blame it on human psychology. History suggests that stock prices and earnings haven't really moved in perfect sync with each other. In other words, while on some occasions, earnings move faster than share prices, on other occasions, exactly opposite is the case.

Is your dream fading too?

Just to put things in perspective, between 2001 and 2003, the indices hardly moved while corporate earnings went on rising. This was because the ech bubble of 2000 tech bubble of 2000 had left a bitter taste in the mouth of investors and people had become skeptical of investing in equities. However, the fact remained that there were still quality companies out there that kept on growing their earnings. Slowly and steadily, earnings yield started looking better and it was being felt that stock prices should witness a rise. Please bear in mind that all this while we did not make a mention of global events that were unfolding at that time. This is because if one pays proper attention to the risk-reward ratio and ensures that it is favorable, sooner or later, people would jump on the equity bandwagon and push up the markets.

Exactly opposite seems to be happening currently. As mentioned above, by taking advantage of the favorable risk-reward dynamics, investors have bought so much into Indian equities over the last 3-4 years that stock price appreciation has run ahead of fundamentals (estimated earnings growth). Hence, the risk-reward ratio had started looking unfavorable and the markets looked ripe for some correction. However, all this while, we did not know or rather we did not bother to find out what would cause such a correction. In this case, it was the so-called 'Yen factor' that was or that is widely believed to be behind the current meltdown. The talks about an impending US slowdown have only gone towards aggravating the panic.

Thus, as is evident from the above two scenarios, if one pays close attention to the underlying fundamentals and does not swing between 'unsustainable optimism' and 'excessive pessimism', one need not worry too much about the global events unfolding around him. The only thing required is patience and loads of it.

What should I do next? We believe the current sell off presents a good opportunity to partake in the growth story that is unfolding in the country. All the factors that enable an economy to grow consistently over long periods of time are in place and these should also translate into rising corporate earnings. But the work of an investor does not stop here and company specific research should be undertaken to weed out fundamentally poorer companies from the stronger ones. Particular emphasis should be laid on sustainability of competitive advantages of companies, quality of their managements, strength of their financials and above all valuations. If properly followed, attractive returns over the long-term might be in the offing.

Equitymaster requests your view! Post a comment on "Falling markets: What to do?". Click here!

  

More Views on News

Top 5 Recent IPO Developments You Should Know (Views On News)

May 12, 2021

So far in 2021, IPOs in India have raised nearly US$ 3 bn, the best start to the year since 2018.

How Did Mindtree Perform in Q4FY21? (Company Info)

Apr 20, 2021

Here's the rundown on the company's latest quarterly results.

5 Big IPOs to Look Forward to in 2021 (Views On News)

Jun 19, 2021

A peak into the hype around the IPOs of internet companies like Zomato and Paytm

HDFC Banking and Financial Services Fund: Emphasizes on the Growing Sector (Outside View)

Jun 18, 2021

PersonalFN analyses the features of HDFC Banking and Financial Services Fund and explains the potential this fund has to offer to its investors.

Can You Make More than 100 Times Your Investment? (Profit Hunter)

Jun 18, 2021

The open secret to multiplying your money in forever stocks.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jun 18, 2021 (Close)

MARKET STATS