#Is Another Stock Market Crash Coming?
When the stock markets crashed in Mar 2020 nobody knew that they will bounce back so sharply.
Many investors even the experienced ones kept saying this is a bear market rally and one should avoid it.
Ideally it should have been a bear market rally but the opening of liquidity tap by US Federal Reserve has caught most investors on the wrong foot.
In fact when I saw an across the board rally in almost all stocks from smallcap space in my watchlist it did not appear to be a bear market rally.
The most important thing about the markets is that they are unpredictable by nature. It’s like guessing in summer season whether it is going to rain tomorrow or not?
No matter how much we pretend to know it all, I think beyond a point no one knows what is going to happen tomorrow. Still deep down inside even I am cautious as this is rally based on cheap liquidity and no one knows where or when it will stop.
In such a weird market what should be our strategy. Should you sell all your stocks right now because the market veterans are saying that dooms day is near? Should you buy the beaten down stocks of companies in leisure and travel related sector?
Folks. In this article I will try to answer some very important questions running in the mind of most investors. I will share with you a simple yet tough strategy to ride the wild waves of this highly volatile stock market.
The reason I say it is tough is that it requires courage and the ability to suffer short term pain.
In this blog we will look at the facts on the ground, take cues from them and decide the right course of action related to our investments. I decided to frame this article in Questions & Answers format.
Q1. Is Another Stock Market Crash Coming?
I think the way markets have moved up since Mar 2020, another stock market correction could occur. No body knows if there is going to be a sharp decline of 40-50% or a 10-15% correction or just a consolidation.
I think the point is that we need to get the fear of a market crash out of our head as an investor. While fear is good to a certain extent as it helps you raise cash but too much fear will make sure you keep sitting on the sidelines in an era of ultra-low interest rates.
After all how many options do you have to grow your capital when banks provide zero to no interest on our funds. May be stocks, gold, silver or even real estate.
Q2. Market Veterans Are Saying This Rally Is Driven By Amateur Investors. Is This A Sucker's Rally?
I think a lot of new demat accounts have been opened during lockdown across the globe and people with no experience in trading or investing may have bought shares of companies that had fallen a lot.
If you are buying stocks left and right with no idea what the company does or how it is doing financially then it is indeed a recipe for disaster.
Even if you do make money from a penny stock or even a bankrupt company like Hertz (as mentioned in the article my friend shared) you are bound to lose money in a future trade.
This is because you will feel invincible and a wrong approach led to a positive outcome this one time. So you will come around next time with the same flawed approach and at some point of time you are bound to lose money in companies with no fundamentals.
Again for me it does not matter whether this is a sucker’s rally or not. All that matters is whether the company you bought has sound fundamentals and has perpetual demand for its products or its a junk company with hardly any cash flows that is bound to crash at some point in time.
We will talk more about this later.
Q3. Does This Mean Everyone Who Bought Shares During The Rally From March Lows Is A Fool?
Well the article that my friend shared did raise a doubt in my mind for a second. Could I be a fool, may be an amateur who is seeing things from glasses tainted with Ego?
I don’t think so. Here is my logic which seems rational to me.
I am an investor who loves to invest in smallcaps and midcaps in Indian stock market.
Starting from 2013 until Jan 2018, NIFTY smallcap index had gone up like a rocket and it was bound to crash. After having participated in this bull run I have been waiting on the sidelines in cash since late 2017 for a market crash.
During these painful two years I have been making a watchlist of stocks and studying individual companies to buy during a market crash.
If we see the chart of smallcap index one can see that the index has corrected sharply since Jan 2018 until Mar 2020 from a high of 9656 to lows of 3500 in Mar 2020. That is a massive decline for sure.
In fact smallcaps had already started to rally in Nov 2019 but the covid crash brought the final blow. Therefore I was able to see stocks of good companies in single digit PE ratio or available close to book value.
After all these are companies in agrochemicals, auto, pharma, chemicals space and some of them had fallen below or close to their book value with negligible debt on their balance sheet and lot of cash and investments as assets to ride the storm created by covid induced lockdown.
At such point there is hardly anything to loose. Therefore I ignored all noises that kept saying this is a bear market rally and I bought shares.
All I knew was that my watchlist of good stocks was ready and I was getting them at dirt cheap valuations. Therefore it was time to start nibbling these shares.
If the market crashes again I will keep buying more of them.
Q4. As Stocks Have Fallen Should I Invest All My Savings
The answer is a straight NO. Don’t do that. It is always wise to keep emergency funds and don’t deploy these emergency funds in stock market as they are very volatile especially during these times.
A better strategy is to deploy 35-40% capital right now and keep the remaining in cash which can be deployed later. If there is a decent correction which I think can happen from the current market levels then you can deploy the remaining cash in a staggered manner.
I think the stock markets will keep giving you opportunities for investment throughout this year as sectors will keep shifting. So there is no point in going all in right now.
May be its the pharmaceutical sector in demand right now. The tide will at some point turn to automobiles, infrastructure or entertainment related stocks but these sectors will take time.
The point is while investing we should not have the fear of missing out (popularly known as FOMO). Investing must be done with a calm mindset. Believe me. Being calm yet being nimble is the way to make money in the market.
Keep a watchlist of stocks of good companies ready in different sectors and study their buisness, their financials and their conference calls. In case the market crashes don’t hesitate to buy these stocks.
Q5. Which Sectors Seem To Be Good Bets As Of Now?
From the point of view of Indian stock markets, I have identified pharmaceuticals, agrochemicals and consumer staples to be the sectors which seem promising as of now.
Wait. How did I arrive at that conclusion?
Well. By listening to conference calls of companies I realized that companies in these sectors were identified as essential commodities and their plants continued to operate or were shut for 10 days or so during the lockdown.
Some companies did mention facing logistics issues related to raw material being stuck at Indian ports but no major impact.
In fact one of the pharma companies mentioned that they were trying to address the shortage of Sartans in USA and also Azithromycin and were expecting good quarterly results.
An agrochemical company stated that due to shortage of labour during the severe lockdown in India, farmers were using more herbicides.
Secondly the major revenue earning season for this agrochemical company is the second quarter (i.e July Aug and September) and April May June quarter (period of strict lockdown in India) is a dull quarter from sales perspective of the company.
This clearly meant that this agrochemical company will not be impacted due to lockdown.
All these companies came out with strong Q4FY20 quarter results and will hopefully continue to show strong growth in the current financial year (FY21) despite the severe lockdown in India.
So even if the markets go down I can continue to hold stocks of these fundamentally sound companies in sectors least impacted by lockdown. In fact I can even buy more of them if there is a stock market crash.
Therefore the key is look at companies in sectors which are exempt from lockdown, have showed strong quarterly results and management is optimistic about future prospects despite the lockdown.
Q6. Should I Invest In Stocks Of Beaten Down Companies In Leisure & Travel Sector?
I recently came across an article which highlighted how amateur investors are buying beaten down stocks of airlines, cruise operators etc.
My take on this is that although they are beaten down and they may earn you a quick buck but the way Covid is impacting human travel I do not think companies in these sectors will be able to generate strong earnings this year.
In fact some of them may go out of business, file for bankruptcy or may post significant losses. In fact many airlines are on the verge of bankruptcy.
The way to think here is that will I be able to hold on to the shares of a company in case there is another crash. Will the company not only survive this crisis but also thrive during such times.
If the answer to this is “NO” then stay away from such stocks.
As an investor it is always better to take calculated risks and invest in companies with strong balance sheets, with negligible debt.
In fact based on current times one should invest in companies making products that people can’t do without. Keep tracking companies posting strong quarterly results and invest in them.
For Indian investors, I had shared a way to keep track of companies reporting good quarterly results in my previous blog. You can read it here (How to make a watchlist of stocks based on good quarterly results)
Q7. Should I Sell My Stocks If The Stock Market Crashes Again?
If you have chosen fundamentally sound companies in sectors with perpetual demand during covid crisis then you need not worry.
As an investor I would continue to hold all my stocks that I bought in the months beginning April 2020 until now.
In fact I have been building my positions in pharma and agrochemical companies gradually and plan to buy more of them if there is a crash. So I am keeping approximately 40% to 50% cash to be deployed during a sharp decline or correction.
This strategy ensures that once the job of finding the company is done correctly you hold on to these stocks whether there is a crash or not.
Companies with strong fundamentals will usually not fall much and are quick to bounce back. This takes out the constant worrying about stock market crash and if they do crash buy more of them.
Let me explain this with an example. Suppose I decide to buy a pharmaceutical company called Alembic pharma.
Lets say, I intend to invest 2 lakh INR in it. So I buy shares worth 1 lakh INR say in the period from April to June 2020 and keep the balance 1 lakh in cash to invest during a correction or a crash if and when valuations are reduced.
This is my simple strategy but it does require courage as an investor to hold the stock during a downturn.
Here is a chart showing how stock of Alembic Pharma first fell from 680 to 440 during the market crash in March 2020 and then bounced sharply from its lows in March and has since then more than doubled in price.
This is why I say that once you have selected a fundamentally sound company in the right sector considering the current times then you need not worry whether there is going to be a crash or not.
All it requires is the courage to hold on to your stock. To believe in your investment as if you are the owner of this company.
Q8. How To Prioritize Investment In Other Sectors Like Automobiles, Infrastructure Or Finance Which Are Most Impacted By Covid Induced Lockdown
There is a right time to invest in each sector. Right now from the perspective of Indian economy, I am not a buyer in automobiles, banking or finance, infrastructure or entertainment related sector.
I certainly have automobiles, infrastructure on my mind and all I am observing right now is their Q4FY20 results and the management commentary with regards to covid related impact on their business.
SEBI has mandated all listed companies to provide disclosure on covid related impact on their business. Here is an example of a disclosure shared by an automobile ancillary company Indian Nippon Electrical Limited.
These disclosures help investors in identifying what are the capacity utilization levels at their manufacturing plants and for how long were the plants closed and impact on their financials or demand for their products.
As an investor we must read these disclosures to gauge the impact on financials, plant utilization, demand of products etc.
My next move is to wait for Q1FY21 results of automoible ancillary, infrastructure companies in my watchlist. Evaluate the management commentary and also keep track of promoter buying shares of their own company.
Therefore I will be interested in auto/infra sector after Q1FY21 results which should be out by Aug to September 2020.
In Information Technology sector I am looking at companies with least number of clients from travel and tourism sector or other sectors extremely vulnerable to lockdown.
Finance is the least priority sector for me this year as the moratorium on interest payments is hiding the pain in the lending business right now and I certainly do not want to be adventurous here until Q3FY20.
Entertainment sector like theater stocks is a complete no at this point in time. Even when cinemas are allowed to operate they may be allowed only 40-50% occupancy to maintain social distancing which means that businesses will struggle for some time to come.
Q9. What Should Be The Stock Selection Criteria For Investing During These Tough Times
In my previous blog post I had made a list of very important stock selection criteria for investing during current market crash. You can find the link below
There is another article you may find handy
How can investors navigate coronavirus led stock market crash
That’s all from my side folks. I hope I have managed to answer some of your questions. Please feel free to reach out to me in case you have any other question related to stock markets.
I will be happy to hear from you. Till then stay safe folks. Please don’t forget to share this post and do subscribe in case you have not already.
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