Sell in panic, repent at leisure
Feb 21 2016
Tags: Stock Market, Market Research
It is tough to stay calm amidst negative news flows, but history shows markets rebound with a vengeance
Markets are driven by three essential emotions: hope, fear and greed. It is true of any asset class. Be it debt, gold, equity or real estate, they all go through bouts of these feelings. The Indian equity market has entered a cycle of fear, it seems. What trigged the slide from hope to fear? The prime reason was the decline in broader markets and midcap stocks since the start of the new year.
On January 21, the Nifty 50 Index completed the critical 20 per cent correction, from its all-time high of 9,119 points on March 4, 2015. Soon enough, voices were heard that a bear market had started. The term “bear market” struck-like lightning and sent retail investors, especially the recent entrants, into utter panic.
They can’t be blamed. Controlling emotional response to a heavy flow of negative news is easier said than done. It is extremely tough to control fears when headlines scream with nuggets like the global economy is heading to a slowdown, China is deep in trouble, foreign investors are selling as they move out of emerging markets and skeletons are stored in the domestic banking system.
This takes us to another point. Who said that making money is an easy job? Making money was always and will always be a tough job. A major part, probably the toughest part, of investing or trading in equity involves controlling one’s emotions when it is extremely difficult to do so.
In today’s environment, it is tough not to feel negative about the equity market. After remaining robust for almost 18 months, flows to even systematic investment plans (SIPs) of mutual funds have slowed down in the past one month, an indicator that hope is giving way to fear.
Two things can help investors detach emotions from decision-making. The first is to understand the real meaning of a bear market. The second is to have a look at the new flows that came with the earlier so-called bear markets and also look at historical performance of both broader markets and indices a few years after that phase of extreme negative news flows.
Let’s understand the bear market. Essentially, a bear market is a condition where prices of certain asset classes are falling with each passing week. In the case of equities, when stock prices are falling, it is called a bear market. Normally, the first reaction of an investor would be that if it is a bear market then I should sell because prices are gonna fall more. When this thought comes in, an investor should ask himself two questions. First, do I require the fund for any alternative use, either for consumption or investment in another asset class? Second, after selling, should I buy the same stock at a lower level, if yes, at what level? If there is no clarity on why to sell the stock, prices are falling is not a reason to sell, because prices are not going to fall for all the time and could revert in a matter of time. So, if you don’t need the money, sit back and stop looking at the ticker scrolling below the television screens, so that the temptation to sell is taken care of.
Now comes the second issue of the news flows that hit the earlier bear markets. The first serious up-move in the market, with domestic and foreign investors participating, came in 1996. Soon thereafter, the Asian markets were hit by a currency crisis. The Indian economy was then seeing its first much-publicised slowdown. Sale of heavy commercial vehicles, a much-relied on gauge of the economy then, were slipping. On January 1, 1996, the Nifty was at 908. It went on to touch a high of 1,203 on June 17 and then started to slip, touching a low of 788 on December 4, before moving back and ending the year 1996 at 899.
Now technically, it was a perfect bear market, as the Nifty had surrendered all its gains of the year and formed a new low that year. Just three years later, in 1999, the Nifty was quoting at 1,505 on October 14, 1999, almost a gain of 100 per cent in three years.
This was just about the Nifty. What happened to technology and other stocks is well known. Now, in 1996, any investor who sold his stock because the Nifty had fallen to certain points or retraced to a certain technical level, suffered a huge opportunity loss three years down the line.
Similarly, in 2000, the whole world seemed to be coming to at end. Technology stocks had gone through their worst correction; the global economy was in recession; the US was hit by the worst ever attack on its soil; for India, global crude oil prices had started to move up in 2001. Probably, in 2000 and 2001, global markets were hit by negative news from all sides.
This time too, the Nifty’s moves were very similar to the earlier ones. After touching a high of 1,818 on February 23, 2000, the index slipped to a low of 1,108 points on October 19, 2000–again a bear market technically. But whoever sold then from panic was again came out as a loser, because in January 2004, the Nifty was again on the verge of an unprecedented bull run the Indian market had seen.
Similarly, in 2008, the world came to end again. The US economy slipped into a recession; commodity prices tanked; the currency market went into upheaval; and a reset happened in every asset class, right from gold to real estate. Now, whosoever sold in that panic again came out as a loser in just two years, as all losses were literally covered at the index level.
In 2013 again, the Indian economy was probably hit by the worst possible news flow; a sharp decline in stocks; a period of double-digit inflation, a high interest regime and incidents of corporate default. But just one year down the line, the index touched an all-time high and stocks made sharp gains.
Today, again the situation is the same. Everything now looks bleak, internationally and domestically. Probably, the saying “this too shall pass” was coined for the stock market. But investors should not forget one basic tenet; time can take care of the stock price of only good companies. If one had invested in Infosys at the height of the technology bull market, one would still have made money over the years. But had one invested in a company where promoters had a bad track record, the money was lost forever, never to retun.
Today, if an investor really needs to sell, he should sell in companies where promoter reputation is feeble and corporate governance is in doubt.
rajivnagpal@mydigitalfc.com
(Rajiv Nagpal is consulting editor, Financial Chronicle, and director at stockbroking firm Elan Equity)
On January 21, the Nifty 50 Index completed the critical 20 per cent correction, from its all-time high of 9,119 points on March 4, 2015. Soon enough, voices were heard that a bear market had started. The term “bear market” struck-like lightning and sent retail investors, especially the recent entrants, into utter panic.
They can’t be blamed. Controlling emotional response to a heavy flow of negative news is easier said than done. It is extremely tough to control fears when headlines scream with nuggets like the global economy is heading to a slowdown, China is deep in trouble, foreign investors are selling as they move out of emerging markets and skeletons are stored in the domestic banking system.
This takes us to another point. Who said that making money is an easy job? Making money was always and will always be a tough job. A major part, probably the toughest part, of investing or trading in equity involves controlling one’s emotions when it is extremely difficult to do so.
In today’s environment, it is tough not to feel negative about the equity market. After remaining robust for almost 18 months, flows to even systematic investment plans (SIPs) of mutual funds have slowed down in the past one month, an indicator that hope is giving way to fear.
Two things can help investors detach emotions from decision-making. The first is to understand the real meaning of a bear market. The second is to have a look at the new flows that came with the earlier so-called bear markets and also look at historical performance of both broader markets and indices a few years after that phase of extreme negative news flows.
Let’s understand the bear market. Essentially, a bear market is a condition where prices of certain asset classes are falling with each passing week. In the case of equities, when stock prices are falling, it is called a bear market. Normally, the first reaction of an investor would be that if it is a bear market then I should sell because prices are gonna fall more. When this thought comes in, an investor should ask himself two questions. First, do I require the fund for any alternative use, either for consumption or investment in another asset class? Second, after selling, should I buy the same stock at a lower level, if yes, at what level? If there is no clarity on why to sell the stock, prices are falling is not a reason to sell, because prices are not going to fall for all the time and could revert in a matter of time. So, if you don’t need the money, sit back and stop looking at the ticker scrolling below the television screens, so that the temptation to sell is taken care of.
Now comes the second issue of the news flows that hit the earlier bear markets. The first serious up-move in the market, with domestic and foreign investors participating, came in 1996. Soon thereafter, the Asian markets were hit by a currency crisis. The Indian economy was then seeing its first much-publicised slowdown. Sale of heavy commercial vehicles, a much-relied on gauge of the economy then, were slipping. On January 1, 1996, the Nifty was at 908. It went on to touch a high of 1,203 on June 17 and then started to slip, touching a low of 788 on December 4, before moving back and ending the year 1996 at 899.
Now technically, it was a perfect bear market, as the Nifty had surrendered all its gains of the year and formed a new low that year. Just three years later, in 1999, the Nifty was quoting at 1,505 on October 14, 1999, almost a gain of 100 per cent in three years.
This was just about the Nifty. What happened to technology and other stocks is well known. Now, in 1996, any investor who sold his stock because the Nifty had fallen to certain points or retraced to a certain technical level, suffered a huge opportunity loss three years down the line.
Similarly, in 2000, the whole world seemed to be coming to at end. Technology stocks had gone through their worst correction; the global economy was in recession; the US was hit by the worst ever attack on its soil; for India, global crude oil prices had started to move up in 2001. Probably, in 2000 and 2001, global markets were hit by negative news from all sides.
This time too, the Nifty’s moves were very similar to the earlier ones. After touching a high of 1,818 on February 23, 2000, the index slipped to a low of 1,108 points on October 19, 2000–again a bear market technically. But whoever sold then from panic was again came out as a loser, because in January 2004, the Nifty was again on the verge of an unprecedented bull run the Indian market had seen.
Similarly, in 2008, the world came to end again. The US economy slipped into a recession; commodity prices tanked; the currency market went into upheaval; and a reset happened in every asset class, right from gold to real estate. Now, whosoever sold in that panic again came out as a loser in just two years, as all losses were literally covered at the index level.
In 2013 again, the Indian economy was probably hit by the worst possible news flow; a sharp decline in stocks; a period of double-digit inflation, a high interest regime and incidents of corporate default. But just one year down the line, the index touched an all-time high and stocks made sharp gains.
Today, again the situation is the same. Everything now looks bleak, internationally and domestically. Probably, the saying “this too shall pass” was coined for the stock market. But investors should not forget one basic tenet; time can take care of the stock price of only good companies. If one had invested in Infosys at the height of the technology bull market, one would still have made money over the years. But had one invested in a company where promoters had a bad track record, the money was lost forever, never to retun.
Today, if an investor really needs to sell, he should sell in companies where promoter reputation is feeble and corporate governance is in doubt.
rajivnagpal@mydigitalfc.com
(Rajiv Nagpal is consulting editor, Financial Chronicle, and director at stockbroking firm Elan Equity)
