Have markets bottomed out? The honest answer is that we can’t say for sure. That a bottom or a top has been made can only be ascertained only after a considerable period of time has elapsed post the event.
Now, if the question is – “can stocks be bought now?” –it then is relatively simpler to answer.
While it is customary for experts to advice buying on dips, the answer is actually more nuanced. When market falls, it may mean different things to different people. For someone who is sitting on cash it comes as a rare buying opportunity. For an investor who is fully invested, these are trying times and those who have leveraged in futures, ground could be slipping under their feet.
Strategies for long term -“Buy & Hold” Investors.
If you are a ‘Buy and Hold’ type long-term investor, near-term uncertainty should not come in your way of nibbling at stocks. If you have a horizon of, say three years, and are willing to bear the short-term pain, than this market is for you.
For long-term investors who are picking up stocks on their own and investing directly – it is more important to decide ‘what’ to buy than ‘when’ to buy. Even if you are completely convinced that the index has reached nadir and it is headed higher, it does not mean that you will make money if you happen to choose the wrong stock. In a slower economic growth environment, many weak and marginal companies will not survive. If you happen to get into a right company at a wrong price, be ready to hold on for a really long term for a profitable exit.
The Nifty is multiple times of what it was at the lows of 2,250 – the level it was at in 2008. If you compare the stock prices prevalent then and now, you will find complete contrast in their performances. There are around hundred companies who stock prices have multiplied many-fold and have generated tremendous wealth for their owners. At the same time, there are scores of companies who have folded-up. There are 302, or around 30% of the top 1,000 companies, which survived and still trade on the exchanges. Albeit, their stocks prices are mere fraction of their lowest prices back in 2008.
If you were brave enough to pull the trigger at the right price at the right time, do not be greedy. If you think the volatility and uncertainty will end soon, you are sadly mistaken. Keep booking profits when you make extraordinary gains in short period of time. Get back again if the stock prices dips again.
How to choose the right stock?
There will be some stocks in all sectors that will do well. For a stock price to appreciate, it needs earnings growth and reasonable valuations. Do check and avoid stocks with problems of high debt, promoter pledging or corporate governance. Just avoid these pitfalls and you will do reasonable well.
If you buy high quality business that has growth potential, then do not bother about short-term stock price fluctuations. These stocks will eventually rise as and when the tide turns. What is important is the underlying quality of the business remains intact and company remains on the growth track.
How to determine the quality of the underlying business of the company?
Businesses that can deliver growth without taking in more capital is a good company. If quality of growth is reasonable in terms of incremental returns on capital, then it will add to per share value for stockholders over the long term.
So, if non-financial company requires high amount of capital to expand the business, than it is not very attractive business. Capital can be raised by issuing new shares or taking bigger loans – both are very dangerous for the longer term prospects. So, avoid companies that keep doing frequent rights issues, qualified institutional placements (QIPs), or keep issuing high amount of debt.
Another strategies investors can adopt is to buy high dividend yield stocks. Do not buy the stock just because you calculate high yield based on historic dividends and current low prices. Many companies will not be able to repeat their dividend and the current fall in their stocks prices are rightly discounting their deteriorated fundamental prospects. So, a thorough due diligence before taking a plunge in these or similar stocks may be in order.
Strategies for traders
In a market that shoots first and asks questions later, decisions have to be taken at the spur of the moment. It's pretty easy to preach after the event has happened. On March 13, 2020, the Nifty hit 10 per cent lower circuit in just 7 minutes after opening. Many stocks fell like nine pins.
Risk management is very important to stay in the game for traders. Ability to book a loss separates the traders who escape with minor bruises and those that get really butchered. Reduce the size of the bets to minimise the changes of large losses. Your immediate concern should be to protect capital. At the same time, if you have the spare capital and risk appetite, it is also important to summon the courage and put money at risk in such chaotic times. There are some days that offer extraordinary opportunities to brave hearts. A quick analysis of the price movement on March 13, 2020 reveals that the top 500 stocks that are traded daily closed 20 per cent higher on average from their low price of the same day. There are score of examples of the well-known, blue chip companies whose share prices have risen by 50% from the manic lows seen earlier in the day.
We are passing through unconventionally volatile times and witnessing history being made right in front of our eyes. Extraordinary times demand extraordinary strategies. Choose well. Whatever you chose to do next, I hope it is profitable!
Disclaimer: Devarsh Vakil is head of advisory at HDFC Securities. Views are his own.