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Crash course: 5 investing lessons from the rout that hit 85% of stocks

The stock market is always about ups and downs, but never devoid of opportunities.

, ETMarkets.com|
Jul 10, 2019, 12.39 PM IST
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Investors trying to capture such opportunities need to take lessons from the mistakes made during the previous bull run so that they make more money than they lose.
Investors on Dalal Street are waiting for signs of a trend reversal in the broader market despite equity benchmarks Sensex and Nifty hovering at record high levels.

Since the beginning of 2018, 85 per cent of stocks on BSE eroded up to 99 per cent of investors’ wealth till June 2019. That bear hug intensified ever since the Union Budget was unveiled on July 5.

“There are expectations that the broader market may revive in the coming months and benchmark equity indices will hit levels never seen before,” said AK Prabhakar, Head of Research, IDBI Capital Markets, who projects Nifty at 13,500 by December this year.

Gautam Duggad, Head of Research, Motilal Oswal Financial Services in a chat with ETNow said midcaps are now offering relatively better risk-reward, especially on valuation front. “I recognise the fact that midcaps need a better investment climate and market sentiments. But they are trading at a 14-15 per cent discount to largecaps, which was not the case in the entire 2017 and a large part of 2018,” he said.

The stock market is always about ups and downs, but never devoid of opportunities. Investors trying to capture such opportunities need to take lessons from the mistakes made during the previous bull run so that they make more money than they lose.

Mean reversion
What goes up must come down! This idiom came from the physical properties of gravity, but holds true for the equity market too. During calendar year 2017, BSE Smallcap index rallied nearly 60 per cent against a 28 per cent rise in the Sensex. In 2018, the rally reversed, and the BSE Smallcap index declined 23.53 per cent against a 5 per cent return on the 30-pack Sensex.

Value investor Gaurav Sud said the stock market is like a pendulum which keeps fluctuating around fair value. “Those who understand the concept of mean reversion would have sold some of their smallcap holdings in January 2018, when the outperformance was at its peak. Those who did not are suffering in this market correction,” he said.

Say no to high debt companies
One needs to understand the business model and its fundamentals before investing in a stock. This is important because whenever the market corrects, companies with high debt and limited resources are impacted the most. Therefore, one should always avoid such businesses.

High debt levels brought down companies like Reliance Communications, Jet Airways, Reliance Naval, Dewan Housing Finance Corporation (DHFL) and IL&FS Engineering to their knees in recent months, with their shares tanking up to 92 per cent since December 2017.

“Investing in high-debt companies comes with high risk. Instead, one should invest in businesses with good fundamentals and hold them with a long-term view,” said
Siddharth Sedani, Vice President - Equity Advisory, Anand Rathi Shares and Stockbrokers.

Don’t put all your eggs in one basket. Diversification is the primary means of managing risk by mixing investments like equities, gold, bonds and real estate in your portfolio.

Diversification helps in minimising risk of loss by reducing exposure in any one area, thereby lessening the impact of downturns. For example, if one part of your portfolio isn’t performing well, another asset class can pick up the slack. It is best to diversify investments among industries and asset classes to achieve the highest level of security. Those who invested only in equities in 2017 must be sitting on losses at present. In last 18 months, the broader equity market has corrected significantly, while both debt and gold have given significant positive returns to investors.

Keep faith in your skills
Market participants made a quick buck in the stocks rally of 2017 and left their full-time jobs to tap the opportunity in stocks. Those people suffered the most in the current downfall.

Sud, who knows at least two individuals who left their jobs to enter the stock market full time, said such people made quick money in good times and had a strong feeling of missing out on many investment ideas, which went on to become multibaggers.

“They felt they could enhance their opportunities and returns by quitting regular jobs, which distracted them from these money-making opportunities. What they didn’t realise was that they were making money in a bullish market, and not because of their skills. Now that the market has corrected, they have realised that their investing skills are just average. A rising tide lifts all boats, but not all come ashore when the tide recedes,” Sud said.

Staggered buying

One should keep buying fundamentally strong companies in a staggered manner for the long term to benefit from volatile market conditions.

“The cheaper you buy an asset, the higher its prospective return will likely be and vice versa. Given the difficulty in catching the market and stock moves right in the short term, it is best to stick to a long-term plan that suits your level of wealth, age, tolerance of volatility. Valuations could be a concern for benchmark indices, but individual stocks could still present a good opportunity for long-term wealth creation,” said Sedani.

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