A rising stock price is seductive and investors have to learn to not give in to the temptation is a lesson which generally comes at a heavy price to most investors
The year 2008-09 will go down in the history of global capital markets as a watershed year – a year that witnesses mayhem, which is generally a once in a few decades event.
The aftershocks were swift and far-reaching as there was a huge cascading effect on markets across the globe, and the US lost almost five lakh jobs in October 2008.
Most global markets plunged, US financials and banking stocks sold off heavily. The Indian markets too felt the impact and saw a huge drop between September 2008 and March 2009.
There was blood on the street – investors’ wealth built over several years eroded in a few months and many investors swore that they would not touch equities ever again.
Well, my personal experience says that markets are the best teachers.
They teach you what cannot be taught in the classrooms and in the best business schools. The positive thing that market correction does to investors is that it makes them think and rethink their investment process, realise their mistakes and make them more sober and mature.
The year 2008 reminded us that unpredictable things called ‘Black Swans’ do happen and your stock portfolio could look extremely ugly many a times leaving you a lot poorer.
Here are four big lessons for Investors:
Hot Stocks in hot sectors - a big NO
Avoid hot stocks in hot sectors - whether it is Lehman in 2008 or ‘Dot Com’ bust of 2000. The hottest stocks have not been able to recover even after years - blue chips like Infosys and Wipro took years to regain the heights reached in 2,000.
But the hottest stocks of the rally of 2000 - HFCL, Global Tele, Pentafour, Silverline etc. have gone into oblivion and are unlikely to ever reach those levels in their lifetime.
The same holds good for the infrastructure and real estate stocks in 2007 and post-Lehman most of the stocks in the sector were down 90 percent to 99 percent. Most of the stocks, even after 10 years, are far away from their 2007 highs.
Focus on valuations: The price you pay really matters
A rising stock price is seductive and investors have to learn to not give in to the temptation is a lesson which generally comes at a heavy price to most investors.
Infrastructure and Real estate stocks in 2007 were quoting at valuations which signified all good things that were possible will happen to these companies and that nothing could go wrong.
It is important to understand that the price one is paying for the business, risks, and possibilities – this applies even to the best of businesses managed by the best of management.
Buy and hold works
While panic had set in the market post-Lehman, there was one set of investors who sold off in the plunge. But, the ones who held on despite the panic and negativity prevailing or put in more money were the ones who actually made a killing.
The markets saw a sharp recovery between March 2009 and September 2010. The Sensex rose from a low of 8,200 in March 2009 to over 20,000 in October 2010 which translate into a gain of 150 percent in about 19 months.
Many stocks went up between five to 10 times from their 2009 lows in the same period.
Focus on businesses: Control your emotions
Corrections and market plunges are an integral part of investing and can’t be separated from investing. One has to be mentally prepared for such occurrences (investing is a mind game afterall) and in such a scenario, one should focus on the businesses they are invested into.
Investors should look at the future and potential of the business they are investing into along with valuations rather than get too swayed by the pessimism and negative sentiment and sell shares at bottom prices.Disclaimer: The author is an investor based in Delhi and a Director of Hidden Gems Advisory. The views and investment tips expressed by investment experts on moneycontrol.com are his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.