After witnessing substantial falls in good, stable stocks like Bharti & SBI (Almost 10% in 2 days), it occurred to me that what would happen if suddenly, the markets decide to correct? My first reaction was that I would start picking up good stocks.
But what actually happens is that when the markets fall, a large number of stocks start appearing on the buying screen. And because one is spoilt of choices, it becomes very difficult to choose among so many good stocks available at cheap prices. I faced a similar situation in early 2008 when all indices and stocks were falling like there was no tomorrow. But I was lucky to make some money during that period.
So how to be prepared for such falls?
The answer is to have a Stock Watchlist.
It is always wise to be ready to grab an opportunity rather than allowing opportunity to take us by surprise. A watchlist helps in this case. How? Once you create a watch list of great companies, you can monitor these companies. As share prices fall, sooner or later they will become good investments too (in addition to good companies).
Though we do follow a number of stocks mentioned in our Stocks We Stalk section, below is a list of stock which we would be delighted to buy in case market corrects and these stocks are available at lower prices –
|Stocks to buy during market corrections|
So now we know which stocks we want to buy in case markets correct. So what should we do now? Pray for a major correction, what else? 🙂
- Buy at PE12 & Sell at PE24
- Buy at PE13 & Sell at PE23
- Buy at PE14 & Sell at PE22
- Buy at PE15 & Sell at PE21
- Buy at PE16 & Sell at PE20
|Percentage of time spent by Indian markets at various PE levels – Last 13 years|
|Click to enlarge|
- Starting with Rs 10,000, we invested in index when it first touched PE12 and sold out completely when it first touched PE24. Now we waited for markets to correct to levels of PE12 and invested all proceeds from our previous sale. Again we sold off completely at PE24. The process was repeated as long as possible.
- We repeated similar exercise with PE levels of 14 and 22. We bought at PE14 and sold off at PE22. The resultant data is tabulated below.
- As you can see, buying at PE12 and selling at PE24 resulted in just 6 transactions in last 13 years!! But returns have been a phenomenal 26% i.e. Initial amount of 10K has increased to 198K!!
- Similarly, for PE14 & PE22, returns have been a great 18.8%
- This type of investing may require a lot of patience as we only make 6 transactions in 13 years, i.e. one transaction every two years!!