Before knowing about how to survive, Let’s discuss what is a stock market crash/crisis or a bear market?
A bear market refers to a broader market (index) decline in asset prices of at least twenty percent from the recent swing highs. More often than not, it creates a panic-like situation with investors wondering the next steps and predicting the next move. India has witnessed a stock market crash in the past as well. However, it has always bounced back and created a value investing opportunity for smart investors. An unexpected bull run follows every bear market.
The first-ever stock market crash came after the Harshad Mehta Bull run in the year 1992. The primary reason for the crash was the outbreak of a financial scam by pumped in liquidity in the stock markets at all levels and falsely inflating the stock market prices. The bubble finally broke, and the stock market witnessed the first-ever stock market crisis.
The period after the stock market crash in 1992 followed a dominant bull run until the tech bubble that gave the 2001 crash to the entire world. One of the worse crashes in the history of the stock market in the whole world after the Great Depression came in the year 2008 where millions of people lost jobs and companies went bankrupt which led to a financial crisis – known as the ‘Great Recession.’ It was a financial crisis driven by debt traps and loan defaults by the subprime real estate lenders. Again, there was an excellent opportunity to handpick some value stocks in the Indian market available at a significant discount to book value. The Indian Nifty index has almost multiplied six times from the lows of 2009 to the highs of 2020.
Seeing the current global health crisis as an opportunity, we need to address the question to survive the current market crash.
- Rupee Cost Averaging – Rupee-cost averaging is the strategy of buying stocks at regular intervals and in roughly equal amounts. Cost averaging technique will help in a stock market crisis like situation.
- Diversification – Diversification is a portfolio risk management strategy to reduce the overall risk of the investments by allocating funds to a wide variety of investments within a portfolio. Diversification could be into different asset classes like shares, bonds, commodities, currencies etc.; or sectoral diversification like exposure to automotive, aviation, pharma, FMCG, etc.; or geographical diversification like taking exposure to assets in the foreign currency. Buying units of a mutual fund offers an inexpensive way to diversify investments for retail and small investors.
- Affordable investments – Even though sharp declines in the markets seem like an attractive opportunity, one needs to be cautious of the funds deployed. It is hard to predict the recovery of the stock markets. Therefore, one needs to invest as per the availability of the resources.
- Emergency funds: In such a global crisis, it is also essential to build an emergency fund to safeguard the family needs in the near future only if the situation worsens. The financial crisis in the past has witnessed severe financial and economic setbacks for corporates as well as individuals like below-par sales, job layoffs, salary cuts etc.
- Invest in safe, risk-free securities: Fixed returns with capital protection becomes a preferred option in a crisis like situation. Investors would avoid capital depreciation at any cost, and therefore, a large part of asset allocation moves towards risk-free government securities.
- Look for Good Valuable businesses: Value investing strategy involves identifying and picking stocks at less than their intrinsic or book value. Fundamentally good business and market leaders have a brighter and a faster chance to revive from the crisis. Given the bandwidth of resources with these market leaders, allows them to leverage their existing capabilities to exploit the opportunities as it comes. Most of these businesses are available at dirt-cheap valuations making it very attractive to invest in.
- Take Stock in Defensive Industries – Defensive industries comprise of businesses that are relatively stable or relatively immune to economic fluctuations. Companies that produce household non-durables, daily use products such as toothpaste, shampoo, and shaving cream are examples of defensive industries. These companies also often provide a consistent dividend to their shareholders.
- Go Short & follow the trend – This although, a risky bet but can be very profitable if done rightly using correct hedging techniques. Short selling stocks can provide good profits during a market crash. Apart from fresh short selling, investors could use hedge their portfolio with the help option derivatives.
- Keep calm and carry on – At this time shareholder should be patient and confident on the stock he/she has bought.
Bear markets can provide excellent opportunities for investors. Value investors such as Warren Buffett often view bear markets as opportunities because the valuations of good companies get beaten down and are available at very attractive valuations. This is the principle of value investing strategy as well. StockBasket offers a selection of a group of stocks backed by the value investing approach.