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Bottomline | Market Crash: It's yesterday once more

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Bottomline | Market Crash: It's yesterday once more

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Stocks are selling off sharply, but this isn’t the time to panic—if history is any indication. It is a time to scout for value.

Bottomline | Market Crash: It's yesterday once more
Fortune favours the brave, they say. That’s more true for the market than for anything else. The oft-quoted Warren Buffett line is most relevant in this context: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. History in the stock market has taught veteran investors to buy in panic and sell on euphoria, though emotionally that’s more often tough to implement in reality. But one institution that’s mastered the simple art is the Life Insurance Corporation of India, and it may be wise to follow its lead.
The sharp slide in global indices, the Dow Jones Industrial Average is already down about 5 percent from its recent peak going by futures prices, and the NSE-Nifty 50 index (Nifty) is down over 7.5 percent is causing some discomfort among investors—especially those who have ventured into equities in recent years.
Here, a walk down memory lane can help provide some context and comfort. Remember, given where India is in its economic growth cycle—we are far, far away from being a developed economy—and given the emerging potential, healthy growth over the long term is a very strong likelihood. If so, equities too should see growth in value. Do note that Nifty, which traded at 850 in 2001 recently topped 18,000, that’s a compounded annual return of 15.6 percent. Not something to be scoffed at.
HISTORY OF CORRECTIONS
What goes up, does go down. The market does not move in a linear fashion and while the uptrends and downtrends may not be similar in magnitude, one tends to follow the other. This is why market pundits often say “buy on dips”, because they know these will come.
In any market, there are short, sharp, steep corrections, and then there are long, deep phases of declines (or bear markets). Money has been made traditionally in both kinds, but only by the more discerning and savvy in bear phases.
A look at some recent short and steep corrections suggest gashes of 10-15 percent before another uptrend resumes, while long and deep declines can erase anywhere between 25 percent to 65 percent in value. The COVID-19 slide last year, though, was exceptional as the markets were spooked by the complete unknown. This led to an almost 40 percent value erosion from the peak. This time around, though, while the nature of the new COVID-19 variant is worrying, the world has a better grip on the virus and significant headway has been made in understanding how to treat the systems and contain the virus’ spread. So, while no one can claim to predict how things will pan out, one suspects the impact and fear will not be as severe as when COVID-19 first struck populations last year.
NIFTY CORRECTIONS
Date
High
Date
Low
Chg %
Days
SHORT & SHARP FALLS
Oct 19, 2021
18377.7
Nov 26, 2021
16985.7
-7.6
38
Jan 21, 2021
14753.55
Jan 29, 2021
13596.75
-7.8
8
June 3, 2019
12103.05
Aug 23, 2019
10637.15
-12.1
81
Aug 28, 2018
11760.2
Oct 26, 2018
10004.55
-14.9
59
Jan 29, 2018
11171.55
Mar 23, 2018
9951.9
-10.9
53
Sep 7, 2016
8968.7
Dec 26, 2016
7893.8
-12
110
LONG & DEEP CUTS
Period
Mar 4, 2015
9119.2
Feb 29, 2016
6825.8
-25.1
~1 year
Jan-08
6357.1
Oct-08
2252.75
-64.6
~9 months
Feb-00
1818.15
Sep-01
849.95
-53.3
~19 months
THE COVID PHENOMENA
Days
Jan 20, 2020
12430.5
Mar 24, 2020
7511.1
-39.6
73
 
If that’s the case, a correction of about 10-15 percent should be par for the course this time too, not a much deeper cut. Such a slide could see the Nifty bottom anywhere between 16,500 to 15,800, which isn’t too far away. And this could be swiftly reached if the global downward momentum is anything to go by.
Given this, now could be a good time to scout for value in the market by those experienced in the art and craft of stock-picking. For those who do not understand finance and accounting well enough and don’t have a strong understanding of the businesses they would like to invest in, using the index fund or ETF route is a good option.
If you haven’t started a systematic investment plan in the Nifty index yet, this could be a good time to get going.
Happy investing!
 
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