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Why Smart Investors Look Forward To Stock Market Sell-Offs

6109 Views | October 29, 2018

On October 18, 2018, the Sensex fell 1.33 per cent in a single day to 34,315.63 while the NSE Nifty plunged 1.43 per cent to 10,303.50. The fall in the benchmark indices has led to decline in the value of many stocks on the Indian bourses. Investors may feel jittery about the prospects of their individual portfolios losing worth, but a market sell-off also comes with its own silver lining.

The art and science of cherry-picking stocks

In India, while there has been an across-the-board dip in values, some sectors have been hurt in the sell-off more than the others. For instance, petroleum company stocks have come under stress due to the declining value of the Rupee as well as rising international crude prices. Banks too have been under pressure due to their potential exposure to the beleaguered Non-Banking Finance Companies (NBFCs). This provides opportunities for investors to cherry pick companies with strong fundamentals. Think of it as a stock-mega sale where everything is going for a discount.

The markets might fall further…

There is no way of telling what course the market will take. It could fall or it could as easily rise a bit. Timing the market is always a losing proposition. However, with every fall, there is a new opportunity that presents itself for purchase of your chosen stocks. In fact, you should consider purchasing in tranches to take advantage of Rupee cost averaging to minimize the impact of a volatile market.

Mr. Market is on sale

The famous investor, Benjamin Graham, created an allegory for the stock markets, terming the market as ‘Mr. Market’. In his book ‘The Intelligent Investor’, Graham asks the reader to imagine that he is a business owner along with a partner called Mr. Market. The partner frequently offers to sell his share of the business or to buy the reader's share. Mr. Market is a manic-depressive on some days and wildly optimistic on others. When depressed, he offers the shares at a huge discount; when optimistic, he offers the shares at a huge premium. The reader is always free to decline the partner's offer, since he will soon come back with an entirely different offer. Mr. Market’s emotions are a reflection of stock market sentiment.

Many investors make the mistake of exiting the markets when they see the worth of their portfolio erode suddenly. We need to fight our instincts. It is not uncommon to see the average investor struggle with market movements; a lot of investors purchase shares when the markets are rising and sell them when the markets are falling. It is time to review how we think about the markets. The current fall in the stock markets is a wonderful opportunity to accumulate fundamentally strong stocks available at reasonable prices.

Taking the idea of Mr. Market forward, Graham then goes on to explain that what is important is to focus on whether the stock valuation of a company is reasonable after calculating its value through fundamental analysis.

We, at StockAxis, use our years of experience, knowledge and incisive research to pick potential multi-bagger stocks of companies in growing sectors run by competent and honest promoters.

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