Toughest Markets Investors Have “Ever Seen”

Investors with >15yr industry experience spoke about the toughest market environment they have ever seen this time. We were in the bull market which on one hand is great but on the other hand is starting to make things confusing. Midcap indices were falling whereas the broader indices were making new highs. Normal bull market rules weren’t working, and inconsistencies make it even harder to invest now vs. even a downturn. Investors had a tough year, but this month has exacerbated the pain.

When the bearish phase in the overall market ends, as it always does at some point, you must find yourself holding stocks of the market leaders. It’s foolhardy to get upset and emotional with the market or lose your confidence. The next big race could be just a few months away.

Finding New Leaders during Market Corrections

With every forward step towards growth, the Indian economy will throw up new leaders - companies which have the potential to become multi baggers in future. Corrections, or price declines, in the market can help you recognize new leaders - if you know what to look for.

In case of existing leaders that have the ability to sustain their leadership position, you will notice that when the broad market moves southward, these stocks will fall marginally more than the market. For instance, a 10% drop in the broad market could result in a 15-20% drop in such stocks. Laggards (weak companies) will fall significantly more than the broad market. Avoid these stocks.

Once the market turns northward, you will notice that these leaders will be the first stocks to recover and will head towards new highs. The ideal time to pick such stocks is within the first month of the market turning bullish.

Pros Make Many Mistakes Too

A number of investors (even experts) tend to believe that a stock that has seen a large drop is an attractive investment opportunity. This could be a serious mistake. Instead, as mentioned earlier, look for the leaders which have experienced lower price drops during the bear phase.

It’s time you change the way you invest. It’s important to lay down a set of rules that you must strictly adhere to for your investments. Be prepared for the oncoming bull period - get rid of the laggards and start looking for the leaders - both existing and new. Some key parameters to spot leaders are growth in sales, sustained earnings growth, good order book, tapping into new markets, etc. Spotting these leaders at the early stage can help you reap attractive gains.

You have to stay in phase with the new leaders in each new cycle. Here’s a historical fact to remember: only one of every eight leaders in a bull market reasserts itself as a leader in the next bull market. The market usually moves on to new leadership, and India will keep growing, with new entrepreneurs offering you, the investor, new opportunities.