Four Mistakes to avoid during sea of red ink

Stock indices are falling like there is no tomorrow. Every investor seems to be in a hurry to liquidate. Even quality companies that were holding steady in the last few years have come under pressure. In one month, HDFC Bank lost 30 percent of its market cap. Bajaj Finance lost 41 percent. Asian Paints 20 percent. The list is long. Not a single company from Sensex is in green YTD. This time fall is not restricted to mid or/and small caps or few sectors. Sea of red ink is visible everywhere.

This is panic time. Panic time, investors do make mistakes they would not have made during normal time. There is a double whammy this time, unlike the 2008 Lehman crisis. In 2008 time, one need not worry about health, but this time health, as well as wealth, are under threat.

Keeping in mind present psyche of the market, I am outlining four mistakes that investors should avoid

1. Catching falling knives

Many investors would be tempted to invest in companies that fell by a good percentage in the last two months. There is nothing wrong with that logic if you feel the valuation of the company is in deep discount, and there is no change in the quality of the business the company is running. I have realized that most of the investors will not use either of the yardsticks. The only yardstick that they will put is that scrip has fallen by a certain percentage. Result investors will end up buying wrong companies like DHFL, Manpasand Beverages, CG power, Reliance Capital, and so on. I know after the 2008 crisis, many investors bought Suzlon as scrip had fallen then significantly. The rest is history.

Based on my 30 years’ experience, I have realized that the sector that loses fancy does not regain soon. IT companies did not regain fancy post Y2K boom and bust. Infra companies did not command the same premium post-2008 Lehman crises. This applies to segment leader Larsen and Toubro too. Last ten years, share price L&T moved up a mere 18 per cent-1.7 percent CAGR! Had you put money in the Fixed Deposit, you would have been better off. I have a feeling that private sector banks and NBFCs may not command the same rich valuations which they commanded till now

Hence instead of catching falling knives, look for companies whose fundamentals are sound. Look for companies that have zero debt, no promoters pledge and the company is managed by clean and efficient promoters. They will leave a happy mark on your portfolio.

2. Selling good quality stocks

The recent fall in the market has made many investors losing their rationale. Fear is now dominating minds. This is causing investors to sell even good quality companies. This is the most critical error one should avoid. I understand that many good quality companies have come under pressure. You may feel that the world is going to end and hence sell quality companies. There may also be feeling that let me sell companies now, I will buy later. This strategy often fails. My advice to hold on quality companies trading at a reasonable valuation.

Going by the past instances, as and when sentiments improve quality companies will be the first one to lead from the front. In the next 12 months down the line, you would be proud of your decision

3. Borrowing money to invest in the market

This is another mistake investor more often makes. They feel that since Sensex and Nifty have fallen by 30 percent in the first two and a half months of 2020, let me borrow money to invest in the market to make a quick kill. No need to say that is suicidal. No one knows for sure when the market will rebound. There is little clarity on how much further fall before the market will rebound. Once you borrow money, you run the danger of marked to market and interest meter running. Those who have bought on leverage in the market have lost big-time money, and hence I urge you to avoid the mistake of borrowing money to invest in this market

4. Putting emergency money into equity

There are some investors who, instead of borrowing money, put emergency money into the equity market in the hope of quick money. One should never touch the emergency market even if you feel that valuations are compelling. Emergency money is always to meet the emergency. The market is known for its extreme behavior. It can remain irrational longer than you can remain solvent

Coming back to the market, stock indices can’t fall daily by 1000-1500 points. Ultimately there would be bottom to the market, but will it remain at the bottom for some time before bouncing (that means U shape), or we will have V shape recovery is a million-dollar question. Nobody has an answer with surety

Keep calm and wait for this storm to pass.