Friday, October 7, 2011
Its always wise to invest in equities when you find them cheap in terms of valuations and can hold on your investments for long term (for 2 to 3 years). If you have a short term horizon investing during falling market can be risky. Stocks looking attractive today can be dirt cheap tomorrow, nobody can predict the bottom of falling market. A stock which is corrected by 50-60% during recent stock market correction can go further down by another 20%.
We have seen many investors who invest in stocks looking at 52 week high and lows. There are many such stocks which fell by more than 50% during recent correction. Many retail investors get facinated to buy such stocks by just looking at the stock price without digging out the actual fundamentals of the company. Infrastructure stocks are a classic example of this case. Well known companies like JP Associates, Lanco Infratech, GMR Infra, GVK Power and many more such stocks eroded the capital of many retail investors in last couple of months.
Couple of months back Lanco Infratech was trading at Rs. 30 and investors looking at stock price correction from Rs. 75 to Rs. 30 during the year poured their money thinking that the stock is corrected by almost 50-60%, how much more it will go down? Today, stock trades at Rs. 14.90, cut of another 50%. Is this the bottom? Nobody knows, it can futher slip down to Rs. 10. Smart investors will be least interested to invest in companies sitting with high debt burden during rising interest rates. Stock price does not matter, what matters is earning visibility of the company and long term view.
None of us can time the market, you may see your portfolio in red even if you have invested in fundamentally strong debt free companies but in such stocks you may not experience such a severe loss on your investments and when stock market moods become positive with lot of optimistic views of investors, you may see such companies making new 52 week highs giving you great returns and poor stocks with 52 week low will keep languishing behind.
Therefore, its always wise to invest in companies with sound fundamentals during falling markets because that is the only time when you see such companies valuations cheap and stock trading at attractive price, but equally important is holding them for sufficient time period to get rewarded.
Research has shown that small and mid cap stocks correct more severely compared to large cap stocks during stock market downturn and if you do the right cherry picking during tough time, you can enjoy multibagger returns from your stock portfolio.
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Falling Market - Golden Opportunity for Long Term Investors
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