IT WAS greed that got the BSE Sensex to 21,000 points. Investors were willing to pay any price for a stock expecting that stocks would go up forever. They turned a deaf ear to any sane advice. Now, this greed is replaced by fear. There is so much of fear that the investors have become loss averse. They want to get out of stocks. Why a sudden change in sentiment?
First, it is due to margin trading. Investors had become so greedy that they bought beyond their capacity through the futures and options. The brokers encouraged this and now when the client cannot pay the margin calls and they are liquidating the positions at a substantial loss.
Second, investors borrowed from banks against shares. Now, since the value of shares is going down, banks are selling stocks in the market to reduce their losses.
Third, investors are stuck with declining or non-saleable stocks. To nurse their losses, they need to liquidate. Most of the stocks being unsaleable due to price circuits, investors are forced to sell good stocks.
Fourth, loss-averse investors are going for their mutual fund redemptions, forcing mutual funds to sell good stocks as the other stocks in the portfolio are not saleable due to circuits.
What does one do in such times? Is it the right time to buy? Yes. Buy value stocks with caution. Some stocks are available at good valuations. A stock, which was Rs 500 and now available at Rs 200, is not to be confused as value. Valuation of a stock is all about understanding its business, whether it is run by credible management, whether it has sustainable business model, a sustainable flow of earnings and the price one has to pay for those earnings.
Investors’ next choice would be to go for mutual funds. Here is a word of caution. The NAV is calculated on the closing prices of stocks. We have so many stocks which are in selling circuits and not saleable. An investor could end up paying for stocks, which would again go down the next day or are unsaleable. Choosing a mutual fund in these times is very important. Looking at a fund’s portfolio will tell you a lot. Investors need to be cautious and optimistic about the future. B u l l and bear markets follow each other. Control over your emotions and learning from your mistakes is important.
First, it is due to margin trading. Investors had become so greedy that they bought beyond their capacity through the futures and options. The brokers encouraged this and now when the client cannot pay the margin calls and they are liquidating the positions at a substantial loss.
Second, investors borrowed from banks against shares. Now, since the value of shares is going down, banks are selling stocks in the market to reduce their losses.
Third, investors are stuck with declining or non-saleable stocks. To nurse their losses, they need to liquidate. Most of the stocks being unsaleable due to price circuits, investors are forced to sell good stocks.
Fourth, loss-averse investors are going for their mutual fund redemptions, forcing mutual funds to sell good stocks as the other stocks in the portfolio are not saleable due to circuits.
What does one do in such times? Is it the right time to buy? Yes. Buy value stocks with caution. Some stocks are available at good valuations. A stock, which was Rs 500 and now available at Rs 200, is not to be confused as value. Valuation of a stock is all about understanding its business, whether it is run by credible management, whether it has sustainable business model, a sustainable flow of earnings and the price one has to pay for those earnings.
Investors’ next choice would be to go for mutual funds. Here is a word of caution. The NAV is calculated on the closing prices of stocks. We have so many stocks which are in selling circuits and not saleable. An investor could end up paying for stocks, which would again go down the next day or are unsaleable. Choosing a mutual fund in these times is very important. Looking at a fund’s portfolio will tell you a lot. Investors need to be cautious and optimistic about the future. B u l l and bear markets follow each other. Control over your emotions and learning from your mistakes is important.
