Chartered Accountant and Market Analyst
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.
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 :-
- On an average we have one correction in a year.
- Corrections aren’t rare, and in most cases do not last long
- Corrections are inevitable.
- 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.
- Corrections matter to Short Term traders who are are leveraged.
- It is a great time to buy quality stocks.
- We can not predict corrections but once it happens we assign a reason to it immediately which may or may not be correct.
- . 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 :-
- Those investors who think India will continue to do well for many years to come.
- 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.
- I do think we should stick to shares listed in the Nifty 500 Index. Penny stock always end up being the biggest loss makers.
- 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)
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
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
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.