BREATHE IN, BREATHE OUT

about 26 days ago

Well, all must be hunky dory for all those who had panicked over the past few days, running from pillar to post, anxious that the market’s floor was falling off completely.

Where are they now? Today, the markets are optimistically up and nothing has changed between today and last week; except of course the dates and month. So, the reasons of FIIs selling and ‘being in the overbought’ zone, everything remains as it is. Yet, now there is talk once again of bottom fishing and domestic investors having the strength to withstand even when FIIs sell.

As we have said time and again, when markets fall, there will be reasons galore and ditto for a rising market. The reality is that it’s a market and it will rise or fall; that’s how this cookie crumbles. What is unpredictable is though our behavior – panic or calm? All those doomsday procrastinators, who were shouting from rooftops that bears are coming, where are they now?

Corrections are a sign of health and they should be there. If markets rise or fall in only one direction, its shows a complete lack of depth. The worry over inflation is very real and it is bound to have an impact on aspects of our lives but also equally true is the sharp bunce back – currently demand is so high, suppliers are not able to meet it and factories are not able to produce as fast. This demand is what will drive the economy.

All this does make a lot of investment sense but the question is – when to buy? You may have bought a large chunk of shares after it had hit a new low, having the patience to sit on it for some years till moods and markets improve. But what do you do when the stock continues to fall, hitting new life time lows? It is good to catch a falling knife but how do you ensure that you do not get hurt?

A few points to keep in mind when you catch such sharp falling knives:

  • Buy only into sound companies, with no corporate governance issues. Or else, more fall is certain as more and more skeletons will tumble out of the cupboard.
  • Do not buy companies hitting new lows which have huge debt and major liquidity issues.
  • Pay attention to the sector and keep an eye on the macro factors.
  • When blue chips hit rock bottom, buy them. Today, no one is talking about fundamentals at all but this trait never goes out of fashion. Once markets improve, fundamentals will once again become a priority.
  • Sectors like infra, capital goods are down in the dumps. But there are solid stocks in this sector; keep an eye on those stocks as these sectors would be the first to bounce back as growth bounces back.
  • The right time to go bottom fishing is when markets show a few days of higher closes or even if it shows consistent weekly higher close.
  • Buy quality, high dividend paying stocks and be a long-term investor. Then such vagaries and falling knives will not hurt.
  • Simple rule of investing – stick to companies whose business you can understand and if they are into exotic forex instruments, steer clear. Balance sheet is the guiding star, follow and understand it, you will never go wrong.

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