The above is the sequence of events which I personally experienced. And with loads of help from my luck, I made almost 700% in a market which was grinding down every day and was well on its way to crash 50% for the year.
But honestly, it was my sheer luck and nothing else. But this small story also has a few lessons for everyone to learn from market crashes. I have tried to list them out below:
- Always be a big fan of fear in stock markets. When people become over pessimistic, it should be taken as an invitation to make huge profits. Even Warren Buffett says that “We are fearful when others are greedy and greedy when others are fearful.”
- Always be ready with a list of stocks to buy in market crashes, i.e. have a list of crash stocks. This list consists of stocks which one regularly tracks and is eager to buy in case prices fall sharply.
- Courage in Crisis, but without Cash is useless. Always maintain adequate levels of cash to take advantage of such crashes. This can be done by using PE ratio as a tool. There seems to be a definite relationship between PE Ratios and Market Returns. When PEs are high, chances of correction are high and hence an investor should book profits and hold cash to take advantage of probable (but inevitable) corrections.
- Always use corrections to buy fundamentally safe stocks which have the ability to survive major recessions/downturns/corrections. There is no point trying to find multibagger small stocks which have high mortality rates in downturns. And during corrections, the market gives us ample opportunities to pick large-cap stocks trading at massive discounts.
- Always understand the difference between shares falling due to weakness in broader markets and those falling due to fundamental issues. A stock like DLF fell alongwith other shares in 2008. But it was not ‘just’ because of fall in broader markets.
- Always keep an eye on 52 Week Low List. You may find some really interesting & investment-worthy-companies in the list during market crashes.