What to do when markets see a correction?

The Nifty reached an all-time high, touching the levels of 20,222 on September 15, 2023. Immediately after this, the Nifty started correcting and moved down to levels of 19,300 by early October. The Nifty rose briefly only to further correct to 18,800 in the last week of October. This represents a correction, amounting to nearly 7% from the peak levels to the lowest point in October.

As soon as such a correction happens, the mood of investors changes from optimism to that of pessimism. New theories begin to circulate, such as:

“This was the maximum level that the Nifty could have reached this calendar year. One can expect further downside.”

“This is just the beginning of another correction, and this may become really steep as we near the general elections next year.”

“Nifty has broken certain critical levels to continue its uptrend, and the Israel-Hamas conflict may only cause further downside.”
Numerous such theories and assumptions abound, but the truth of the matter is that these are often just “market noises.” An investor is most likely to become confused, and the tendency to make incorrect decisions becomes more pronounced.

The nature of stock markets is such that returns are never linear. Any stock or index goes through phases of uptrends and downtrends and can never be in a permanent uptrend. An investor must understand this fundamental reality before making any investments.

Sometimes stocks turn out to be “bad investments,” generally having issues with corporate governance, weak fundamentals, or an industry disrupted by technological changes. Such stocks will not yield returns to investors under any market conditions for a long time unless situations change. Examples include the fall of Satyam after the scandal was uncovered, and Kingfisher Airlines where the founder was a willful defaulter, etc.

However, if investments are in sound companies, they may go through corrections but over a longer period of time, the upward movements far outweigh the corrections, providing handsome returns to investors. Examples include Titan, which has consistently gained strength after every correction over the past decade. The same holds true for Varun Beverages, which reached new highs after every correction in recent years. One downward movement cannot be a sole criterion for exiting a stock.

More than anything else, what makes a successful investor is human behavior. Many investors tend to panic after witnessing a small correction and exit positions, even if it results in losses. Experienced investors tend to endure the rough times and wait for an opportune moment to exit their investments profitably. This is not to say that one should never exit a loss-making position. The reasons for exit can include weakening fundamentals, a sudden drop in profits, or other circumstances likely to negatively impact the company. Tracking and identifying such developments are also part of becoming a better investor.

There are times when riding out the rough patches ultimately pays off. As mentioned earlier, Satyam crashed to abysmal levels after the scandal, but seasoned investors who remained patient were rewarded following the takeover by Tech Mahindra a few months later. Those who sold in losses after seeing the prices crash were ultimately the losers. Another recent case is during the outbreak of Covid, where many stocks corrected sharply in March 2020. Those who panicked and sold out during the correction missed out on the next rally, which saw many stocks reaching new highs. In fact, panic selling has been the reason for most retail investors to miss out on bigger gains.

If you, as a retail investor, are now worrying about any further correction, it’s time to evaluate your portfolio and identify if any of the stocks have sound reasons that warrant an exit. Besides that, it is better to ride out some of the tough times to enjoy the benefits of staying patient later and, in the process, become a more confident investor.

 

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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