The right time to invest

What should an active investor do when faced with a sharp market correction? There are two schools of contradictory advice. One school says, "Buy on declines." The other advocates, "Wait for the momentum to turn positive before committing more." It is easy to find examples where one or the other advice proved correct. There have been many short, sharp bear markets where prices rapidly recovered. In such cases, the buy-on-declines school of investors gets windfall returns. There have also been many long bear markets where cautious investors did better because they held off until the correction was ultimately over. Every bull and bear market has some points of similarity with previous bull and bear markets. But each also has its own unique characteristics. There is no way to tell for sure if a bear market will last a year or five years. There is also no way to tell how much market capitalisation will be wiped out before any given correction ends. The current downtrend has been triggered by global factors, somewhat like the subprime crisis of 2008 when a real estate bubble burst in America. This time, it's the slowdown of the Chinese economy and the bursting of an associated Chinese stock market bubble. The Indian economy was in a good shape in 2008. It is in a reasonable shape now. There were no reasons to assume that India would be fundamentally affected by the subprime bubble, since the Indian economy was not directly exposed to US real estate. But there was a recession in the US sparked by the subprime crisis and that hurt India's corporates which had exposures to the US economy. Given recession in the world's largest economy, global trade collapsed for a while and FIIs also pulled out of emerging markets in 2008-09. In contrast, the Chinese slowdown is a symptom of slow global growth and there is likely to be a direct impact. China is a very big player in global trade and global trade has been badly affected. China's exports have also lost ground and exports from other large export-oriented economies, like South Korea, have also shrunk. India's exports have dropped for the past ten months. Whatever China does to stimulate its own economy, such as currency devaluation to push exports, will also affect India. The Indian stock market saw a very deep, very short correction. The Nifty fell from a high of 6,357 in January 200

This article was originally published on October 23, 2015.