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Excessive caution? Listen to Buffett, look at stock gyration as your friend

Most investors are in a state of panic following the sharp d..

Most investors are in a state of panic following the sharp drop in stocks, which began since August-end. The recent correction has eroded over Rs 20 lakh crore from investors wealth during August 31 and October 9.

While the market attempted a rebound over the past two weeks, but disaster struck again on Wednesday when a default rating for a realtor sparked a major selloff.

Legendary investor Warren Buffett has a suggestion on how to handle such market fluctuation. One should be able to look at market fluctuations as their friend, rather than an enemy, says he. They should profit from the folly rather than participate in it.

Independent investor and investing coach Vishal Khandelwal says calm and sensible investors usually see opportunities in market fluctuations. They buy when the prices dip below business values and hold on as long as the underlying businesses remain good.

When you are looking to invest your hard-earned savings in stocks – whether for the first or tenth time – know how well prepared you are to face short-term corrections and fluctuations.

Thomas Phelps wrote in his book 100 to 1 in the Stock Market: “To make money in stocks, you must have the vision to see them, the courage to buy them and the patience to hold them.”

“Patience is the rarest of the three. But it pays off in the long run. Thats how fortunes are created in the stock market,” said Khandelwal.

Difficult situation usually helps separate the wheat from the chaff. This time, too, it is not looking any different.

“You only find out who is swimming naked when the tide goes out,” goes one famous Buffett speak.

Value investor Gaurav Sud says one can only see a head in a high tide. It means everything looks fine in a bull market, while a bear market differentiates robust companies from the ones that have done something wrong, accounting fraud, balance sheet forgery, anything.

Sud cites another famous Buffett quote: “A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.”

Explaining the saying, Sud says a single trigger can burst high valuations in the market. For instance, the macro setup was precariously poised for a perfect storm in the form of a falling rupee and rising crude oil prices. It just needed a trigger for meltdown, and the IL&FS default provided that in the recent past.

“When a trigger hit the valuation bubble, a new category of investors learnt some very old lessons. After making easy money in 2017, people were selling anything to investors showing historical movement of their products. The recent sharp correction shows that one should always stay cautious in equities. In 2017, when most shares were going up, that was the sign that things are going to get tough in the market,” he said.

Buffett also says the fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable. This means such emotions will remain dominant in the market one day or the other. For instance, greed ruled the market in run up to the February 2018 peak. After some consolidation till August, the market has slipped into fear.

Folly happens when everyone jumps the gun and put money in a rising market, ignoring alarming valuations. Its the case of bigger fools theory, where everyone buys to sell at higher level and the same applies on the downside as well.

And not to forget, Buffet once said it is most profitable to be “Fearful when others are greedy and greedy when others are fearful.”

Considering the prevailing market scenario, this is the time to show some greed on Dalal Street.

Mangalore-based investor Prabhakar Kudva says, “We always hear that the stock market is driven by greed and fear. When the market environment is in healthy balance, a tug-of-war takes place between optimists focussed on the future growth and pessimists seeking to avoid potential losses from the uncertain news-flow. However, the market is rarely in balance between the two forces.”

At any given point, the market is driven by either by greed or fear. Markets have witnessed greed in action several times viz the tech boom in 1999 and the infrastructure boom in 2007. Invariably, booms are followed by steep corrections like we saw in 2000 and 2008, when the mood shifts from greed to fear.

“The environment of fear sets the stage for the next bull run,” says Kudva.

He says the Indian market is currently going through a similar phase of fear. People arent worried about missing opportunities, but are worried about losing money. Irrational exuberance is replaced by excessive caution.

Original Article


ET Markets


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