Market Correction is the most trending term in Sept 2017 after Narendra Modi & North Korean Crisis. Really, this becomes a huge point of focus when markets hit an all-time high. So bad news is floating everywhere. And headline’s with words like “bloodbath”, “carnage” or “market tanks” are making it worse. Let us try to evaluate what is a market correction after all?
Is it relevant for an investor like you? What do I think of market correction? And most importantly- What do you think?
Recently one of the CIOs (Chief Investing Officer) asked the audience full of distributors, investment advisors, equity traders, and consultants this question: “How many of your clients are waiting for a correction so that they may invest”?
Imagine in an audience of about 700 people, almost everyone raised their hands. So if I were to estimate the number of investors these people handle – it will be in lakhs. This means the majority of them are waiting for markets to correct.
So everyone is waiting rather I should say praying for markets to fall down.
It is worth noting here that apart from individual investors, it is equity mutual funds, private insurance companies, the LIC of India, alternative funds, domestic retail equity investors and multiple other investor categories all waiting for markets to correct.
What for? To invest?
So answer following questions:
- Did you invest aggressively in last 2-3 days?
- Or did you invest when markets corrected by 50% in 2008 or 2002?
- Did you try calling your broker/agent and asked him to invest? Was he positive or skeptical again?
- Did the MFs or FIIs or any other institution invested heavily and made you money? You think so?
We Indians are known to have preferred fixed-income investments, land, houses, gold, and similar other investment options. And, for these preferred investments too we have a habit of checking the available discount.
In earlier days when parents had to buy gold, remember how our parents gave us the tough job of tracking the newspapers for the price of gold.
But here we are talking about equity. An asset which can wipe out capital or give a big hole. So we try to find the depth here too.
In Equity, Depth in terms of lowest price matters… it is the LOWEST VALUATION that matters.
And, valuations do not depend on corrections. The limited point, you don’t get a correction only because you have to invest. Corrections do not happen because everyone is wishing for it, waiting for it, asking for it, threatening for it or even praying for it!
So why this correction?
Market Correction happens when there is Mean Reversion. Something which is over its natural value will return to its original or real value. The mean price. Hence the contraction happens. Mean reversion happens both ways. So you make money too when there is an upward mean reversion.
But we thought corrections happen because:
- One of the strong possible reason is of some kind of global challenge emerging out of US (Fed actions) or China (increasing rumblings about glossing over very bad macros) – No Control.
- A strong threat – kind of international turmoil (WAR) resulting in selling in our markets and hence a decline in our markets – No Control Again Here.
- There are domestic fears related to how GST impact will play out, how is the rural economy actually faring, NPAs in banks and troubled corporate sector, slowdown in IT, sluggish exports etc. – No Control Sir
No doubt Economy is the Juice Making Machine, but macros are out of control for anyone.
So what should you do?
Never wait for market correction. Or any other correction to invest?
I have no agenda in the for-correction or against-correction debate. As a wealth management firm on value investing core principals, we do not take market-related calls.
We are committed to running risk-tolerant portfolios where we think on a weighted average basis the returns in the portfolio can beat the underlying benchmarks. Personally, I don’t wait for a correction and discourage everyone trying to time the markets.
Many indicators point to the beginning of a mean reversion on this front and eventually, there will be a few quarters or a year or two years or significantly higher earnings growth in the near future. And staying out of the market & waiting for dips when other asset classes are returning poorly is a bad choice.
If you have just started please note that markets have corrected many times. Sometimes more than 50% too. So this is actually time to test your value-investing learnings:
- An investment in knowledge always pays the best. Know what you are investing for. Know what you are investing in.
- Big money is not in the buying or selling but in the waiting. Buy good assets and wait.
- Use corrections only to pick good assets which greedy people have made cheap. Be fearful when others are greedy. Be greedy when others are fearful.
- Follow your investments plan. Stick to disciplined investing. This is why financial planning helps. You are out of the market zone. You sail with goals in hindsight.
- Correction should ideally hurt if you are a trader (with open positions – simply means you have eaten more than you can chew). A long-term investor never looses money in equity.
- Use correction to assess what you own. The bad asset will make itself recognized in the mental pain that it will cause.
- There is nothing wrong with buying at dips and averaging. Provided, it should be part of your long-term
When I am writing this, I am watching the movie “Khatta Meetha” and rhythming the song “Thoda hai, thodey ki jaroorat hai” (I have a few good things in life, rest will come or I will accumulate… but in all this my life is beautiful)
Hope the same goes for every one of us – including the correction seekers.
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