Handling volatility in the equity market

?Equity markets have been hugely volatile in the last few days. Many investors find it challenging to handle the sharp ups and downs of the markets and stocks. Well-defined investment philosophy and strategy are essential to earning robust and sustained returns. It also helps to sail through the rough weather.?

The investment philosophy and strategy construct should be as per the investor's risk appetite. The following narrative may help to devise the same.

Philosophy:?To deploy all surplus funds into direct equities with a very long-term horizon. Avoid short-term investing and trading. The portfolio constructs preferably be focused and concentrated, and investible companies' must be selected after thorough and deep research. Funds should be invested when those opportunities are available at a considerable discount to the estimated value. In other words, always look for value buys.

Strategy:?Shares should be sold in a staggered manner on becoming overvalued to significantly overvalued, and companies available at a discount must be invested in simultaneously. More funds may be invested on corrections to higher discounted businesses depending upon the availability of funds and the weight of companies in the portfolio. Also, there might be a few companies in the portfolio which were bought due to shallow research; for these companies' the best way is to exit in a few days without considering losses.

?One of the most important facts is that, by nature, markets are volatile. For investors, it depends upon three variables to sail through the down patch in the market-

1) Don't overstretch at the time of investing by putting in short-term or leveraged funds

2) Try to build conviction about businesses or MF schemes?

3) Avoid noises and think long-term

?There are two big myths about the markets. First, if markets are bullish, all the stocks are at a premium, and when the markets are bearish, all the stocks are at a discount. It is normal to find discounted shares in bull markets and shares at a premium in bear markets. It means churning (buying shares of one company and selling shares of another company) may be done simultaneously in both types of markets, i.e. bull markets and bear markets depending upon the discount and premium of shares.?

Second, a discount on shares doesn't mean the current price v/s the highest price achieved by the company. It is the current price v/s the intrinsic value calculated or assessed.

?A few crucial points, facts, and tenets for successful execution;

?1) Never get panicky. Emotional control is equally critical as the selection of companies/businesses.

2) Going wrong in about 20-30% of companies is typical.?

3) Leveraging is seriously dangerous.

4) Market noises harm your ability to generate robust returns; always look at fundamentals to stay on course.?

5) Ups and downs in the markets are a natural phenomenon. Train yourself to glide through.

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