It does not matter that the stock market is now in a tailspin or in other words a bear market: you have to pick up what’s left over and move on. Keep in mind that investing in this market is fraught with risk – in fact the risk has only escalated. So if you cannot stomach the risk, sit on the fence.
Stocks are now reacting to the liquidity squeeze, and this time it will take a while before things settle down. Businesses are not able to raise money from the banks, and mutual funds. Capital is getting scarcer. So your first job as an investor is to protect your capital, and avoid playing this market recklessly.
A great advice investors should use is to set an automatic stop loss in your portfolio when the value of the stocks go down by say 8 percent. This ‘stop loss’ can go a long way in protecting your capital. Many a times, investors pray for a rebound, and end up losing even more money in a down market. It’s time to keep the losses to the minimum.
EXPECT THE WORSE
It is important to consider what is going to be the worst possible price for the price given that this bear market can linger for a while. You should discount the price-earnings multiple by at least about 50 percent in this market to be able to get a truer price. It’s only then you can hold on to the stock for the long haul. Make your own ‘yardstick’ of how much you want to pay for the stock. If it’s over the current market price, avoid buying the stock.
Keep your margin of safety tight, but flexible. While some businesses can remain stable, the price in uncertain times of even the good companies can go for a toss. Keep this in mind when making investments.
DIVIDEND YIELDERS NEED TO SUSTAIN DIVIDENDS
Dividend yield stocks can act as a cushion in a bear market. However, ensure that the dividend these stocks pay is going to be sustained. For instance, if the dividends are cut due to lower profits, dividend yields could reduce putting pressure on the stock. So keep your eyes open for companies that will be able raise dividends even in tight market conditions. Stock prices of companies with dividend yields of 5 percent or more are likely to remain stable in a bear market.
However, most other stocks tend to react sharply, and sometimes more than 90 percent of stocks tend to fall and lose value for investors. So you will have to be ultra-selective with your stock picking.
PLAYING THE DEAD CAT BOUNCE
When the stocks are beaten down too much, they usually tend to rebound. But if you cannot play the rebound quickly, and exit the position, such ‘dead cat’ bounces may not sustain. Hence, keep one foot on the exit door of any investment.
But the good news is that bear markets in India historically have lasted for 7-12 months. Sooner or later, this one too will be behind.
So, pay attention to the cycles, and wait for the bull market to emerge. You must be ready to grab your chances when things are on the upswing.
