Thursday, November 13, 2008

Surviving the stock market crash

Seen on a Business channel:
Someone calls the expert on phone and says : “I’d bought x No. of Jet Airways shares at Rs 950. Now it has fallen to Rs 190- Should I hold or should I take losses and exit?

The so called expert on the channel speaks about the aviation industry for one minutes and pulls some statistics on various moving averages of jet Airways and finally says-“I think one should exit this stock at any small rally

We’re all aware of the situation- most of our stocks have lost more than 50% of their value in past 11 months and some worst ones are at 80-90% loss. It is really painful to see our money melt like ice in front of our eyes and it is nothing but natural that common investor panics at such a crash and desperately looks for advice on what to do. The so called experts could never give a slightest hint to the retail investors about the possible crash (at various stages they said “market seems to have found a bottom- when SENSEX was around 17k, then at 14k, then at 11k etc”) and I do not think taking advise from them (and following it too) is a good idea.

Then what should a small investor do? How do we survive this crash?

This is what I feel:
Yes, the sensex has fallen 60% from its all time high and most of us are running our portfolio at anywhere between 40% to 90% loss, depending on the fate of individual shares in our kitty. But as long as we hold it, the loss is only Book Loss, i.e. it indicates the loss you will suffer at this point of time, if you sell off your shares. In other words, unless you sell, the values will automatically increase, if the market recovers, without any additional effort/investment from your side. Selling a stock at a huge loss, just because the market has crashed, looks stupid idea to me. Once you invest in a stock and prices fall heavily your objective will be to recover your investment (break even) and if possible even make a gain too. Exiting at lower price will not facilitate that. In my opinion, one should sell at a loss, only under following situations:

1 You anticipate further dip in the price. Say current value is Rs 180 and you expect it to fall further to say Rs 90 in near future (either due to fundamental or technical reasons). In this case it makes sense to sell of now, hold the cash and buy later at lower price.

2 You see a better alternative-You’ve invested Rs 950, hoping to earn a profit of Rs 50 (or say 10% approx)- But current price is 80% lower than purchase price and under current situation market may take about 2 years to recover and let you take a profit. (2 years is my estimate-for the economies world over to recover properly and markets to reach Jan 2008 levels- Let us hope it recovers much faster). If you sense any other investment opportunity (shares of company B or Gold or something else) wherein you are confident you can earn Rs 1000 by investing Rs 200 now, in less than 2 years, then it makes sense to sell off and invest in the new opportunity. But if you don’t have such an alternative, selling at a loss, collecting cash and exiting is not a good idea. Conventional options like Bank deposits/bonds or Gold cannot give a return of Rs 1000 on an investment of Rs 200 within 2-3 years. With almost all good stocks available at attractive prices, identifying and shifting to a better scrip with stronger fundamentals and higher probability of faster recovery can be considered, provided one has what it takes to identify the right pick. Both ways, holding to the stock market, hoping that it will recover within an year or two, seems like a better bet for those who have decent risk appetite. Investment on land can be a good alternative which has a potential to give huge returns, but buying land would mean investing several lakhs- an option ruled out for those who don’t have that much cash.

3 You’ve a severe liquidity crunch-you need some money urgently and selling stocks at 80% loss is the only option (or seems to be best option compared to other alternatives like-cashing a FD/personal loan or other unsecured borrowing/Using credit cards/mortgage etc)

So, when the so called market experts advise investors to sell off at a huge loss and exit, I expect them to suggest an alternative wherein people can make up their losses. But unfortunately none of them care to do that (whose money is it anyway!). Yes, there is a risk of further fall when you chose to hold, but a long term investor shouldn’t be deterred by it, if you ask me (It’s too late to ask me anyway!)

Averaging at the bottom is another good option, but we often fail to decide on the bottom- If one had bought 10 shares at Rs 950, he would have pumped another 5k to buy another 10 shares when prices were down at Rs 400-500 levels. Now the price is again down at Rs 200, will he have liquidity to pump in more money? Even if some cash is available people will not be in a mood to divert it to stock market (already lost a lot- don’t want to pump in more, even for averaging- what if it goes down to Rs 100 again?) We all have limited amount of money, so can’t always think of averaging. 

The image above shows the mistakes done by retail investors of stock market- who always enter at a wrong time (when the prices are at a high and they finally overcome their fears of losses and gather enough courage to invest in the market) and sell at a wrong time (when the market falls, sheer panic forces them to take loss and exit) (Image was forwarded by Sandesh long back and is also found at couple of places in the web-exact owner/creator of this image not known)
Another image which shows investor mentality, is also very much reasonable. It is easy to swim downstream and most of us fall for the pressure or sentiments and burn our fingers. Only those who can manage to survive the currents and swim upstream can survive in the market.

CJ George, MD, Geojit Financial Services has shared with his customers the below table, which shows the highs and lows of BSE SENSEX (Sensitive Index of Share Prices)-Turbulence is not new to markets and after every low, there has been a new high. So I feel holding against the current will be a wise decision, than swimming downstream. What do you think?

Second photo from Similar posts: Market Analyst's job is very easy * My early investment experiences * Ways to make credit cards safer * My new investment strategy (Humor) *

Disclaimer: Author’s personal opinion only. Implementation at readers’ discretion and risk. Author doesn’t accept any responsibility in the event of investors suffering a loss due to contents of this post. In particular, the name of Jet Airways share is used only as an example and we do not assure that holding it for 2 years will fetch you Rs 1000+ per share.


magiceye said...

well said!

mridula said...
This comment has been removed by the author.
Mridula said...

I agree I put such a small percentage of my savings in Mutual Funds that I can hold for quite sometime and wait for another two years till markets hopefully recover.

Sandeep said...

good summary of what's happening in Indian Stock market right now. I personally believe that one should hold if possible for some more time if the stock is good(if you really know) ..if you don't know whether the stock is good or not then hire a fee based consultant(not the one shown on TV!). And get your financial situation reviewed professionally rather than depending on some stupid guy sitting in front of camera speaking some numbers.

Avg out only if you more cash to spare...don't go over-board just because the stock is 80% down and looks attractive.


Shrinidhi Hande said...

@ Magic EYE



yes, all the best for your MF investment

@ sandeep

Couldn't agree more.
Thanks all.