Have you ever panicked in stock market due to a sudden decline in the value of shares?
Did you rush for the exit door and press the sell button?
Well folks. Welcome to stock market. One cannot become a true investor if he/she hasn’t ever experienced a sudden fall in stock price sometime or the other. It happens with almost everyone. Every great investor has faced this scenario many times over.
The essential thing to know when a stock falls rapidly is the reason behind the fall. Do not panic in stock market and sell your shares just because the price fell sharply.
In this article I am going to highlight the importance of knowing the facts behind the fall before you panic in stock market.
Through this post I will share my experience on how I panicked when the stock of a pharmaceutical drug manufacturer fell from 100 to 65 Rupees in just a few days. How desperately I tried to sell my shares without knowing the facts and how a wonderful stroke of luck saved me from selling them. Do read the complete article to find out what happened to the stock price eventually.
I hope you can learn from my mistakes and avoid panic selling in future.
Panic Is A Natural Response: Just Chose To React Differently
I can easily write here that one should not panic in stock market but in reality if your stock goes down it is only natural to feel so.
Remember it is not that a great leader or an investor does not have emotions of fear. It is just that they chose to react differently.
I would not classify panic in stock market to a certain degree as bad as it helps in preparing for a situation in advance.
Certain amount of fear and panic keeps you on your toes and you are better prepared for adverse outcomes in investing or life. It is when it shuts down all rational thinking that it becomes bad.
Therefore before you panic you should thoroughly evaluate the situation you are in, ascertain all facts and then take the best possible decision. Let me share my experience.
1. Year 2012: Searching For A Pharma Drug Manufacturer
In 2012, I was just a beginner in the field of investing. I wanted to find a few companies in the pharmaceutical space as I thought that such companies are quite reselient and there products are always in demand.
So while searching I zeroed in on a API manufacturer. API is also known as Active Pharmaceutical Ingredient and is primarily responsible for intended effects a medicine is used for. For example, the active ingredient in “Crocin” is Paracetamol which is responsible to bring down fever.
The reason I selected the stock was increase in company’s sales from 496 crores in Mar 2011 to 659 crores in Mar 2012 (32.86% increase in sales) while the Profit remained the same around 22 crores.
As I said I was new to the field of investing, my stock selection criteria was pretty simple. Increasing sales growth and a profitable company. That’s all i cared for because I did not know what else to look at.
2. Time To Buy The Stock
Finally it was time to act after having done a little research about the company. I started buying a few shares around the price of 76 Rs on a daily basis starting Sep, 2012. Stock was trading in the range of 90 to 110 for sometime where I kept buying more shares. Stock started to gain momentum and soon hit a high of 120 in Jan 2013. I was happy and buying shares on a daily basis with my average purchase price hovering around 100.
Post Jan 2013, the stock had started to decline and was falling gradually, quoting at 96 by 11 Mar 2013. So by now I was actually sitting on minor paper loss. As my investment period has always been long I am not bothered by price fluctuations on a daily basis. I was in fact quite content with my purchase as the company was doing well financially totally unaware of what was coming next.
3. Panic Sets In
Everything was going great until one day on 25th Mar 2013, the share of the company opened 10% lower at 85 Rs. On quickly glancing through the news I found out that a plant of the company had caught fire on 23rd Mar 2013. The market was closed for the weekend so the stock reacted on 25th Mar.
As an investor this was my first encounter with a disruption that came out of nowhere and hit me hard.
My heart was pacing. I had no clue about what my next step should be. Fear and Panic had overwhelmed my mind. I shut the door of my room and sat inside, extremely tensed, not talking to anyone.
I thought that the company which I considered to be a gem in my portfolio was actually worth nothing. I had this fear that the entire amount I had invested could be wiped out.
This is how we think when we can’t see the road ahead. Has this happened with you as well?
4. My Response To Fear & Panic In Stock Market
I logged in to my trading account with a lot of fear. I was not even ready to see the stock price but I had to see it. There it was. Falling like nine pins. Stock had hit a low of 84 Rs down from my average purchase price of 100 Rs (that’s a 26% gut wrenching fall) in just a day.
I could not take it any more and panic had gripped me entirely. So I decided to sell all the shares at whatever price possible.
Just Imagine. A fundamentally sound API manufacturer with global pharmaceuticals majors as its clients. Until yesterday it was a gold mine for me and now suddenly my perception had changed. Company had become a destroyer of wealth for me due to fire at a plant. This is how perspective changes in the investing world. It’s so quick.
Anyways I tried to sell all my shares but the stock had hit a lower circuit limit and there were only sellers in the stock.
A lower circuit limit is a measure deployed by exchange to curb excess volatility during a single day. For example, a lower circuit limit of 20% for a stock means that if a stock closed at a price of 100 on previous day then it can go down to a minimum price of 80 Rs the next day and not below that for that particular day.
Seeing no buyers my heart began to sink, thinking that I would lose all my capital.
Can you look at how irrational you can become when you see loss of capital at such quick rate? As if the company will not exist tomorrow.
5. A Wonderful Stroke Of Luck
As there were no buyers for my shares, my sell order was not executed on 25th Mar. In stock market there can be instances when a stock has only buyers or only sellers. In my case there were only sellers and so I cursed myself for finding such a bad investment.
For me the story was over but life had something else in store for me. My shares not getting sold due to lack of buyers turned out to be a wonderful stroke of luck.
By next day a bit of sanity had returned. I somehow decided to stay put. So on 26th, stock opened 10% lower at 75.75 and then finally touched 65 over next few days. It was painful but I held on.
On 2nd April 2013 price jumped around 5% putting an end to the decline once and for all. Smart investors bought a lot shares at a price of 65 Rs as they saw value in the company’s shares.
Have a look the big green volume bar inside the box at 65 Rs below. That’s a sign someone scooped up the shares from the sellers happily.
6. Getting To Know The Facts
With a little research like checking the website of the company or checking the annual report of the company one could have found that company had many manufacturing units and as per the news on 22nd Mar 2013 only one of their plant had caught fire.
Here is a snapshot from company's website stating the number of facilities it has
Checking The Annual Report
One could have also looked at the annual report of the company which is also shared on its website. Have a look at the annual report submitted for year ending Mar 2012. I could not have checked annual report for Mar 2013 as the annual report was not submitted to the exchange when fire broke out in one of the plants.
All listed company’s have to submit an annual report for each financial year to the stock exchange.
Look at the excerpt from the annual report for Mar 2012. Company seems to have plants on different plot numbers. So it has more than one plant. In fact counting the plot numbers suggests that it has 8 – 9 manufacturing units.
That’s all one had to do. It just took me 5 minutes to do all this while writing this blog. So it’s definitely not a lot of work if money is involved.
Secondly most of the big listed companies always insure their plants. I never knew this. I came to know this for the first time in my life.
Company’s clarification also submitted a note to exchange on 2nd April, 2013 stating that
“It has nine manufacturing units and there was an explosion in one of the plants. This plant manufactured APIs which contribute to 13% of total sales of the company on a yearly basis. Company has taken efforts to procure the affected intermediate from outside and supplies would be restored within a month. Assets of the plant are adequately insured”
Having known these facts, I would have also bought more shares in 65 – 70 Rs price range rather than attempting to sell them all.
Therefore one should never invest in stock market without research as it makes you aware of the facts and helps in avoiding panic.
7. Benefit Of Not Selling My Shares : Stock Zoomed from 65 to 650
Luck was on my side when i was not able to sell my shares in fear due to absence of buyers. I thank the buyers for being absent. Had they been present I could not have believed that stocks can go so high. Look at the chart from 65 in 2013 to 650 2015. Now that’s some serious wealth creation.
On a personal note this incident taught me a very important life lesson. We as humans have a very limited vision. We cannot look beyond our present circumstances. That fall from 100 to 65 looks like a blip on the radar on the stock chart today. Just like life where difficult times when reflected back in time are just memories and experiences which you eventually survive.
So don’t panic. When faced with difficult situations get a sense of the facts and take the best way forward. This seems to be the best and most pragmatic approach.
Hope You liked this article. Please feel free to share any such experience. You can also share your views in the comments section below. I will be happy to hear from you.
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