Sunday, November 27, 2011

4 Things Not to Do in Bear Markets

"It is only when the tide goes out that you know who was swimming naked" - Warren Buffet

About a year back investors were euphoric when the Sensex hit 21,000 and when I look at the bloodbath the markets have witnessed in the last month, it's hard to believe that it is the very same market and the very same TV anchors & investors talking all about gloom and doom! In my article a few weeks ago, I had  taken the risk of making a forecast - that the markets would fall further (Click here to read the article). And I am glad that I am vindicated but what next? Will the markets fall further?
I have seen 'experts' give all sorts of predictions on TV the past week. And it is interesting to note that they are saying all this after the markets have fallen! The last 5 days, saw panic across the stock markets of the world. The truth is the reason why the stocks are falling (low growth, Euro-zone problems, US debt etc) are all still very much there. They haven't gone away and have been there since a year now. The markets have decided to take notice now! But I believe that a slow and long painful deleveraging process has started. Governments across the world are at least thinking of cutting expenditure and maintaining some sort of fiscal discipline.

One positive aspect of this market crash is that it has put out in the open, real problems being faced by companies. One example of this is that it has clearly brought out the woes of companies that have looming FCCB redemptions. When the going was good, these companies borrowed cheaply and were able to show some good growth; but now these huge looming FCCB losses threaten to take some of these companies under.

I have written a couple of articles previously on what you should be doing when the markets fall. But here are a couple of things that you should not do!

1. Do not jump in with all your surpluses at one go. Set aside a proportion of your savings towards equity investments and don't lose your nerve if the markets fall further. Remember that the only investment that can help you recoup losses suffered in equities is equity itself. 

2. Don't go overboard buying 'cheap' stocks. Follow a process. Allocate a fixed percentage for equity and do not 'bet your house' on the markets. Do not go after penny stocks. Buying blue chips may not double your money in a month but they offer far greater certainty of long-term returns. There are a lot of blue chips available at an attractive bargain.

3. Don't wait for the market to 'bottom out' if you're investing after a market fall. That is a level which is evident only in hind sight. As a long term investor, you should not make too fine a point of timing. When you hear that the Sensex has broken a key support level, don't think too much about it. These levels are meant for traders who want to make a quick buck over a week or so, & not significant to an investor who is in the market for the long term.

4. Do not try shorting stocks. Despite all the wise-sounding counsel on TV, believe me, no one has a clue on where the markets are headed in the short term. Predictions about where the market is headed over a trading day are often wrong. Shorting is a real quick way to lose your shirt in a whimsical market.

This market crash has provided an opportunity to buy some really good stocks. Do not participate in the panic, instead patiently invest in good stocks & buy in smaller lots instead of putting your entire money at one go. Couple of years later, you could look back & smile contentedly about the 'wise' move you made!

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