Stock Market Corrections are Temporary while Rises Permanent.

Author

Rahul Goela

Chartered Accountant and Market Analyst

30.5.2018

Here is a research I have done on market corrections. Each time we face a correction we loose our balance of mind and think that the correction will go much deeper. Our thoughts are supported by the negative news in media who are busy giving lower and lower support levels for Nifty or Sensex. Out of fear we end up selling and sooner than later the markets start to rise again. Similarly we end up buying stocks out of fear of missing the bus when the markets rise. Due to this  irrational behavioral   we  always buy high and sell at a loss on corrections.

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Whereas, you should face the correction if your Company continues to perform better and the underlying economic conditions based on  which you  bought the Company has not changed. In short, track your Company’s financial performance and not daily ticker prices. What is happening , over years, is,  we have becomes minute to minute traders instead of year to year investors . Nobody in this world has made wealth with short term approach. One has to give a few years to a performing company for compounding  wealth.

Timing the market entry and exit has not worked for anyone. It is about, time in the market and not timing the market. I am not saying that we should never time the market. We do need to restructure our portfolio with new investment opportunities, by exiting out of Companies not performing or where growth seems no more visible or where cyclical stocks have turned the trend. We must time, based on changes in the primary trend of the market cycle  but never on  secondary/tertiary trends.

I am putting you to the hardest of all tests because it is not easy to face corrections as your money goes down with the hour. Holding on to your  patience and conviction  during corrections, on your investments that you had thought as great multibaggers, at the time when you bought them. Doubts will crop up in your mind about your own assessment on the investment you made in.  But we must take this short term pain to create wealth over a longer period of time.

When markets are volatile, one gets tempted to time the market to encash the upsides and avoid the downside loss. In theory it sounds brilliant but in practice it does not work successfully for most investors. I have more than 30 years experience and observed that market timing has seldom made money and I know what I am talking about. This is what I have discovered in the last 30 years.

Traders using  timing on leveraged trades make up a  perfect recipe of a financial disaster. Being a contrarian is certainly the best form of timing in the long term. For investors this opportunity comes may be once in 5-8 years that is close to  the bottom of market cycle when everybody is pessimistic and are selling and then during euphoric mood of optimism which always becomes the market cycle peak.We must time  in long term as per the primary trend of the market cycle with the help of Moving Average ( DMA 200),  Dow Theory and Price Earnings Ratio of the Market ( PE Ratio). Nobody wants to loose money, yet we repeat the mistake of timing the market for short term gains and expecting different results.

Timing needs a lot of discipline and patience whereas we use emotions to time our trades and behave irrationally. Just skip the whole timing attitude for short term gains. Buy and hold policy is the only successful strategy. I have seen people using hundreds of strategies to time the market like Moving Averages, RSI, MACD, Volume and Price trends, patterns, trends, Momentum Indicators etc, nothing has worked to consistently generate wealth in the short term. Nobody is larger than the market. It is possible to predict markets over long term but impossible to predict in the short term.

Keeping patience and conviction in your selected stocks and sitting on them for few years while facing corrections  is the difference between a successful and failed investors.

Even if you are able to time the market  in the short term, to sell and the market goes down further yet it will not benefit you. When you sell you are sure markets will fall a lot more because you are in a complete bearish mood. It would not be out of place to mention that by the time you decide to sell, the market has already corrected a lot and that is why you turn  bearish. You can only get bearish from a bullish mood after a lot of correction has taken place.Which invariably turns out that you have sold at the bottom of the correction. So even as the market turns, you will not be able to change to a bullish sense so quickly, it takes time.  Yow will soon realize that price has gone  higher than what you sold at and you will not be able to buy your well researched  stocks. You will miss these good stocks for ever because it is very difficult to re enter the same stocks at higher prices.

To face correction with less stress we must understand what corrections are :-

1. On an average we have one correction in a year.
2. Corrections aren’t rare, and in most cases do not last long
3. Corrections are inevitable.
4. Stock market corrections rarely last long. Between 1945 to 2018 markets have had corrections of about on an average 12% with a average correction time of 70 days.
5. Corrections matter to Short Term traders who are are leveraged.
6. It is a great time to buy quality stocks.
7. We can not predict corrections but once it happens we assign a reason to it immediately which may or may not be correct.
8. . They come at irregular intervals and each time with a different reason. Even predicting a reason for the next correction is impossible.  Examples :-

Period                                         Reason for correction

1997                                               Asian Financial Crises

2000                                              Technology Bubble

2007                                               SubPrime Financial crises

2010                                                EU Sovereign Debt crises

However, buy and hold strategy will only work well for the following investor :-

1. Those investors who think India will continue to do well for many years  to come.
2. Those  who invest  in companies with good management, good track record of past growth in sales and profits, with moats/strengths  for it to be able to sustain good profit margins despite competition and  future visibility of growth.
3. I do think we should stick to shares listed in the Nifty 500 Index. Penny stock always end up being the biggest loss makers.
4.  Invest only your surplus money that you do not need for the next 5 years.

Here is a  chart, where all corrections have been penned down since 2004  till date to show corrections are only temporary but rises  permanent.

Sensex 30 Index ( India)

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Peak                  :              Bottom             :      %Fall   :    Duration  : Date of Return :Recovery time from

Index level     Date    :    Index Level     Date  :                   :      of fall      :  to peak level    : Peak-Bottom-Peak

_____________        _____________         ____        ______       _________     ____________

6215            14.1.2004        4227       17.5.04        32%          5 months        5.12.04                 11 months

6684             3.1.2005        6086       24.1.05         9%           21 days           14.2.05                 45 days

6929            8.3.2005         6121        19.4.05         12%          45 days          21.6.05                  3.5 months

8808           4.10.2005       7656       28.10.05       13%           15 days          28.11.05                2 months

12624         10.5.2006        8799       14.6.06         30%          30 days         10.10.06                5 months

14697          8.2.2007        12316       16.3.07         16%            45 days          1.7.07                    5 months

15812          26.7.2007      13941       21.8.07         12%             30 days        20.9.07                  2 months

21200         10.1.2008        7950        9.3.09         63%             14 months   6.11.10                   33 months

21108           5.11.2010       15190       19.12.11       28%            14 months    25.10.13                36 months

30000         29.1.2015       22976      25.2.16        23%             13 months    8.4.17                    26 months

36600        29.1.2018        32497       23.5.18       11%               2 months    Still on recovery to last peak

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The above chart clearly shows all subsequent peaks are higher and all subsequent bottoms are higher. Higher peaks and  higher bottoms, show, after each correction we move on  to make  a higher peak. In the long term the markets are permanently in a bullish mode, creating wealth for investors at a CAGR % of about 17% on the Sensex. However,if you are able to time the market in the long term, our returns could go as high as 23%

 Market Falls are always Temporary

while

Rises Permanent

if you believe in India’s growth story.

Sensex Chart 1980-2018

I, therefore, conclude, invest in  good quality Companies, invest for at least 5 years and do not time the market to take advantage of short term volatility, to be able to compound your wealth. Corrections are temporary while rise  is always permanent.

END.