Why we fear equity market corrections -

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Asset bubbles have been around for centuries. Although we humans have grown in leaps and bounds in areas of science and technology, when it comes to stock market behavior our instincts are as primitive as ever. As always the ongoing correction and volatility have started sending blood pressures soaring. Investors want to know, to what level will the market correct? How long will the trend last? , will FII dump stocks like they did in the 2008 meltdown? Unfortunately I don’t have the answers .Neither do the gaggle of fundamental and technical analysts offering you their expert views on various market channels .

Corrections are only a mechanism to purge the market of all imperfections and excesses. It is a friend of the value picker and long term investor. Then why do we fear market corrections?

1) We are not sure of the real ‘value ‘of the equity we hold. Let take a little example here. Let’s say you and your friend found two beautiful teak wood tables at 'Chor Bazaar' for Rs.10000. You both realize that this solid wood table is a steal at the quoted price, and that you can easily sell the tables at Rs.30000. You buy one each. You friend unfortunately realizes that he needs the money for an urgent errand and due to his urgent need agrees to sell at Rs.8000. What do you do at this stage?
    1. Panic and put your table to sale too
    2. Offer to buy his table and plan to sell both at Rs.30000
    3. Do nothing , but look to selling your table at Rs.30000
While most of us would choose option b and c, in stock markets we rush to do ‘a’ i.e. sell in panic .Its probably because many investors aren’t sure about the true ‘value’ of their investments. A price quoted on the ticker is not necessarily the right price of your equity and unless in distress there is no reason for you to sell or panic about portfolio losses.

2) We have no asset allocation plan – We can’t time markets peaks and lows. In the absence of an asset allocation plan it is unlikely that you will sell when prices are high. Consequently when the cycle reverses you find yourself unable to buy low because you may be fully invested with little cash available to buy afresh.

3) We were speculating – Sadly many investors may not even believe that they are speculating. Speculation is not only about short term trading, F &O or day trading. Not doing your due diligence before buying a stock and relying entirely on a friend/dealer’s tip even if you intend to keep it for the long haul, is speculating.

5) We Over-expect Returns and Underestimate TIME – Returns from equity do not follow a linear pattern in the short term. If your portfolio grows at 15% to 18 % CAGR over reasonable periods of time (5 years plus) you are on your way to great wealth. You cannot earn 100 % every year, nor can you save your portfolio from losing 20 %-30 % in some years. . If you make ‘reasonable returns in reasonable time ‘your mantra, then market movements will stop bothering you.

So here’s the bottom-line - switch off the market news channel , get an asset allocation plan, reassess the portfolio (take the help of a equity advisor if you must), sell the stocks you bought for speculation and use the correction to switch into quality companies backed by improving fundamentals. For keeping things simple, a SIP with a good mutual fund/stock is never a bad idea. And stop looking at your equity portfolio daily. It never helps  

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