hi all,
I have been receiving many emails from various guys on how to face a market correction… What my experiences were during earlier corrections and how I went about it.
Its always painful facing a market correction of the type and magnitude we are facing especially for those who have not faced it before or for those who have a high percentage of their networth into equities and their chosen stock picks are going down with markets…
There is no fixed holy grail for facing these corrections…
Just to put the chronology of the current market in perspective…
First of all there was a strong rally from around 08-09 which was punctuated by some sharp corrections off and on. Most of the guys made good money in the initial phase of this rally… Post initial rallies, most of the stocks that ran on the general bull market stalled and often corrected… e.g stocks of real estate, metals, infra, power etc where those who managed to pick the bottom or near bottom prices made huge gains and now these gains seems to be getting wiped out.
Next phase of rally was a stock picker’s delight where we at valuepickr had our own share of multibaggers like astral, ajanta, kaveri, accelya, avanti, oriental carbon, balkrishna, mayur, to name a few… But this phase of market is characterised by a very selective few stocks outperforming the indices significantly… If you look at MF returns they would be negligible to nil during this period…
Next came the euphoria phase where the cyclicals like oriental and small caps like muthoot capital and atul auto and things like those ran up very sharply… That should have been a warning sign for us of impending doom… But that is in hindsight…
And then since around Nov 12 or so it seems the markets were held up artificially by manipulating a few stocks like itc, HUL, infy, tcs etc where these went up or rested and most of other stocks stalled or corrected…
And since past couple of months there have been all kinds of scams, bad news, dollar woes, interest rate fears, govt policy decisions …to compound the problems and provide impetus to the sharp correction… Which seems to be going on and on…
There was a similar correction somewhere in May-June 06 which was very very sharp and cut a lot of guys very badly…This was a very very short lived but damaging correction and the current market reminds me of that kind of correction… But look what followed…A dream bull run from 06-08…
Coming to the current correction and where it can end or where it is still headed, one has to think that we are in a bear market and make a strategy to face it… None of the corrections are one sided…there will always be periods of counter trend rallies post these corrections…
Next question is whether one is fully invested, partially invested or totally in cash.
If one is fully invested, one has to adopt a strategy of selective selling on rallies. Selling after 4-6 weeks of sharp correction may not make sense… If at all one wants to sell, try to sell on rallies… These rallies usually are in the high beta stocks like metals, banks, and future and option stocks due to oversold nature of markets. Usually there is a period of rally of 2-4 weeks post a correction of 8-10-12 weeks of sharp cut… This usually happens in typical bear market.
The other and saner alternative and which is advocated by most investment gurus is to bear the pain and remain fully invested.
If you are partially in cash then try to add more to stocks u like at different levels…
If you are in a happy state of being fully or near fully in cash, try to buy dips, book partial profits and wait for next dip to buy again…or else build a strong multi year portfolio of high conviction stocks…
What I did in 08-09 when I was a very newbie investor and got very very lucky was concentrate on only three stocks which I had identified as those I liked…Parekh aluminex… I bought first tranche at 175 after reading a hidden treasure recommendation and watched the stock go down to 40 odd levels and even managed to buy at those levels…was enthused by promoter buying at each level which increased my confidence… Plus business was simple, results every quarter was fantastic… Next was TTK prestige which I bought around 120-140 levels …I was perplexed how such a stock was stuck in such a tight range of 115-120 on downside and 140-160 on upside for such a long time… (similar feeling is there for kaveri…) …Third stock was lakshmi overseas or lakshmi energy and foods…i managed to latch on to it at around 70 and kept buying it… By this time I had sold off all my loss positions and kept buying these three stocks… Post the election results in 09 and upper circuit etc… these stocks gradually rose and gave multibagger returns… In hindsight ttk was a great business to own and parekh aluminex and lakshmi energy were below average businesses… But I was looking only at quarterly results which kept on coming good… And I was plain lucky to get great returns on my bets…
After that came the period of stock picking which I described earlier and the learning on TED and valuepickr from guys like basant maheshwari, donald francis , ayush mittal, vinod ms, and many other valuepickr and TED friends… That was followed by a very satisfying stock picking and profiting journey…
Where one should buy and where markets will form bottom or how long this correction will last is anybody’s guess…QUOTING LATEST UPDATE FROM VIVEK PATIL…HE SAYS MARKETS WILL CORRECT TILL FEB-MARCH 14 IN THIS DOWNWAVE… AND LEVELS HE SAYS ARE SOMEHWERE CLOSE TO 15000. From Nov 12 till now he has got things right but there is no guarantee that he will always be right…Nobody can consistently predict markets correctly…
The only thing thats left for us is to pick good stocks and stick to them or keep buying dips if u have money. everyone is scared…darr sabhi ko lagta hai…Even i Feel scared when I see good banks like hdfc bank being hit hard…
Coming to what to buy … I am bullish on kaveri seeds, unichem, hawkins, hdfc bank, indusind, gruh, PI inds, polymedicure etc at current levels and page, astral , other compounders etc on corrections… There will be lots of other good stock stories to be picked up…
Most sharp corrections are fertile grounds for picking and nurturing multibaggers… Most of the times these will come out from relatively unsung and unknown good companies which have kept showing good growth inspite of great balance sheets and adverse circumstances…
One advise is to do good homework before zeroing on to a stock pick and try and understand what the company does, how it is going to grow etc etc… and develop one’s own confidence and conviction in the stock … and then all that remains is to buy them right and sit tight and pray…
Best of luck to all … Hope this longish write up helps …
regards
hitesh.
