Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Are you sitting on the sidelines
while this small cap trend unfolds?

(Minor market corrections will not stop this)




**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a daily newsletter from Equitymaster
covering exciting investing ideas and opportunities in India.


AD

Market Crash? My Top Strategy for Investors in a Downturn

Mar 18, 2024

Editor's note: Equitymaster invites you to join our exclusive WhatsApp channel. Be in constant touch with our editors and get regular updates on their most profitable ideas and research. Join Equitymaster's WhatsApp channel here.


Market Crash? My Top Strategy for Investors in a Downturn

After a stellar 2023, I was expecting smallcaps and penny stocks to have a subdued 2024 and perhaps even witness a small correction.

Little did I know that the correction will come this fast and a pretty steep one at that.

The BSE Small Cap index touched a high of 46,821 a little over a month ago.

Well, it has taken a U-turn since then and has gone in the other direction in a big way.

As I write this, the index has come off more than 10% from its highs and is threatening to go even lower.

To be honest, the writing has been on the wall for quite some time now.

Things finally came to a head when the regulatory body came out with the notification to instruct mutual funds to go slow on midcaps and smallcaps and even outline a plan to prevent a huge market meltdown.

That a lot of the prominent investors and fund managers had been talking about the froth building up in this segment, was another warning sign.

Looks like the current correction is the aftermath of these events. Of course, the fact that a lot of the stocks had become overvalued plus the huge run up in bad quality speculative counters, also added fuel to the fire.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Rare Money-Making Trend Returns to Indian Markets

After 2 Decades

Discover more
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

Now, I can hear you all saying that in hindsight, everything looks crystal clear.

However, if I was so sure of a correction, why didn't I warn readers in advance? Better still, why didn't I recommend an exit from a lot of stocks where they were sitting on hefty profits?

Well, my answer would be that while I may have failed when it came to executing the tactics, our long-term strategy is still spot on. Hence, we are in a better position than most other investors.

Strategy vs tactics? Allow me to explain.

In the game of cricket, batting is all about keeping your head still. Since head is the heaviest part of the body, your body will move in the direction of the head.

Hence, it's very important to keep your head still and take it in the direction of the ball while executing a shot.

This should be your strategy while batting and should not be compromised with. If your head is misaligned or wobbles a bit, there is a strong chance you may lose your wicket.

So, a still head is a strategy. Your initial trigger movement can however be called your tactic.

Depending on the pitch or your comfort level, you either have a front foot trigger movement or a back foot one. Each has its advantages and disadvantages and can make you a strong front foot or a strong back foot player.

So, while your strategy of keeping your head still may help you survive on the wicket, your tactic of having your preferred trigger movement, can help you score quick runs and increase your strike rate.

Similarly, across most of my services, I have both a strategy as well as a tactic.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Want to Grow Your Wealth With Safe Stocks?

Access Our Premium 'Low Risk, High Return Potential' Stock Research at Rs 2,050 Off

Full Details Here
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

Our strategy is to keep 25% invested in stocks as well as fixed deposits at all times.

This is non-negotiable. At no point will we be in 100% stocks or 100% fixed deposits. There will be a minimum 25% allocation in each of the asset classes.

For the remaining 50%, we may deploy the tactic of either keeping it entirely in stocks or fixed deposits or even split 50:50 between the two asset classes.

Thus, when we feel that the markets are attractive and small stocks may do well over the next 12 months, we can employ the tactic of allocating the maximum 75% to stocks and the remaining 25% in fixed deposits.

Likewise, if we feel that the markets are expensive, we can take the fixed deposit allocation to as high as 75% and have only 25% in small stocks.

Therefore, like in cricket, the strategy to keep at least 25% in each asset class is to ensure our survival during a market crash.

Allocating the remaining 50% based on the market valuations can be termed as our tactic to help us earn market beating returns over the long term.

Now, you can argue that before the current crash, we should have exited our stocks and should have been 75% in fixed deposits and only 25% in stocks.

Well, I can say the opposite too. I can say that thank god, we were nearly 50:50 in both the asset classes and did not have as much as 75% in stocks.

If our stock allocation would have been as high as 75%, we would have been sitting on even bigger losses currently.

Discover: How to Grow Your Wealth in a Stress-Free Way

Therefore, I believe that there is no need to panic in view of the current decline, especially in small and mid-caps. Our strategy of having a fixed deposit allocation has been designed for precisely such occasions.

It has not only allowed us to lose less than the broader index but also keep some cash handy to buy beaten down stocks at attractive valuations.

Whether to have 50% allocation or the minimum 25% allocation to stocks is individual skill, judgement or even luck.

However, as long as we are following the long-term strategy of having at least 25% in both asset classes, it will allow us to profit from market fluctuations like the current one and emerge stronger at the other end.

Therefore, our course of action right now is to keep a close eye on the stock market and see where it goes from here.

If we believe that a few stocks from our services are still in good profits and can be exited, we will certainly intimate our subscribers about the same.

What can be reassuring though is that most of our open positions are stocks with a sound business model and were recommended at very attractive valuations.

Hence, a steep correction if any, will prove to be temporary in my opinion and the prices should come back to normal levels once the panic selling ends.

Hence, in conclusion, we don't believe in doing damage control at the last moment.

We have a proven strategy to take care of the ups and downs in the universe of small stocks and all one needs to do is be disciplined and patient.

This is exactly what we are doing right now.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

Recent Articles

How Indian Companies Are Competing With Giants Like Google March 15, 2024
There are strong Indian companies in India's technology revolution.
Stocks to Profit from India's Semiconductor Boom March 14, 2024
These under the radar stocks are likely to benefit from India's semiconductor boom.
Market Bubble or Potential Rally in Deep Tech Stocks? March 13, 2024
Can India's top tech stocks leverage the government's US$ 1.2 billion AI fund?
Global Hedge Fund Manager Signals India Ratings Upgrade and Massive Bull Run March 12, 2024
Data from RBI Bulletins that can compel rating agencies to relook at their view on India.

Equitymaster requests your view! Post a comment on "Market Crash? My Top Strategy for Investors in a Downturn". Click here!