Before you decide to buy or sell a stock in this current market, here are a few pointers to guide your decision
After the crash in March that saw the Sensex fell by 24.7 per cent in just one month, the recovery in the last few months has come as a surprise for most investors. From its lows at 25,981 on 23rd March, 2020, the Sensex has recovered to 39,203 as on 17th September, 2020.
The Sensex's rise is not a standalone event. The markets around the world have raced, riding on easy liquidity that central banks and governments around the world injected to bolster the economy. From its bottom on March 23, 2020, the S&P 500 has raced 50.7 per cent. Its six-month returns as on August 15, 2020, stand at -0.2 per cent, indicating that the fall that it witnessed has all but erased.
The excitement about the rally has now been replaced with caution and anxiety. First, the market has run up unprecedentedly, so many are anticipating a fall on account of plain profitbooking. Those who were courageous enough to invest at the bottom are now sitting on healthy gains and it's quite tempting to direct those gains to the bank account. Secondly, the March and June quarter results have started to show the impact of the pandemic, with sales, profits and margins getting contracted across the board. Though some experts suggest that the impact was not as severe as anticipated and hence the rally, others are pointing to the high levels of uncertainty ahead.
Amid this, the average investor wants to understand what he should do now. Should one stay invested and wait for a recovery or should one exit the market or should one do both, i.e., partly book the profits? Then there are others who have missed the rally altogether. They had sold out during the fall and stood on the sidelines. Now they are rubbing their hands in despair, looking at the steep rally.
The answers to all these questions are not straightforward. They seldom are as far as the market is concerned. To make a proper choice, things have to be put in a proper context. In the cover story of the September issue of Wealth Insight, we explored a valuations perspective of the market, the business performance of BSE 500 companies and some fundamentals to help you decide what to do now.
For this complete analysis, do catch the cover story in this issue where we evaluate data on the sensex and look at which companies have performed the best and worst in terms of sales, net profit and operating margin.
What we bring to you below are the key takeaways from the analysis that can help any stock investor decide their future course.
Before you decide to buy or sell a stock in this current market, here are a few pointers to guide your decision.
1. Don't underestimate the bull
The swift recovery in the last few months has virtually undone the market crash. Those who had sold out were caught on the wrong foot. Thus, timing the market in anticipation that you can protect your returns or cut your losses is generally unproductive. Once you have selected a good company, it makes sense to stay invested in it through all phases of the market.
2. Always be prepared for a correction
The crash in March came as a shock for most investors, who had grown accustomed to seeing new highs. Corrections and crashes are an integral part of the stock market and as an investor, you should always be prepared to face them. This implies not investing your short-term capital in the market and keeping a long horizon. Pick safe and sound stocks that you can stand by during crises. As Buffett said, "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." See crashes as opportunities to accumulate more good companies at lower levels.
3. Valuations are always tricky
If you examine Sensex's valuations (refer to our cover story in the September issue of Wealth Insight), different parameters tend to point in different directions. They are seldom in sync. Thus, reading a simple P/E chart and saying that the market will fall or rise isn't going to be of much help. Also, it pays to understand a particular valuation metric and its components. Miscellaneous occurrences like COVID can make them behave erratically, so better put things in the right perspective.
4. The index hides more than it reveals
Looking at the Sensex or BSE 500 may provide a broader idea of the direction of the market but that's not everything. Indices are often weighted and can move up even when a majority of their components are trending downwards. Hence, basing your decisions just on index movements can be counterproductive.
5. Don't paint all companies with the same brush
While the pandemic has hit almost every sector and company, you can't paint all the companies with the same brush. Certain sectors and companies have been severely hit but then there are some, such as pharma and IT, that have clearly stood out. It's not that these sectors offer some sort of panacea for bear-market woes. Recall that the pharma sector had been out of favour for long and the IT sector is disregarded on and off based on the headwinds from the US.
6. Beaten-down sectors may provide opportunities
The pandemic isn't going to last forever. In a few months, as a vaccine becomes available, the beaten-down sectors will start reviving. The good companies in those sectors may turn out to be the next leaders. Many of these companies may currently have inflated P/Es but then as you saw, that's because of subdued earnings. At the same time, the sectors and companies that weathered this storm may become overvalued. Hence, smart investors would start looking at the out-of-favour sectors and companies.