The current market correction has taught me some good lesson I like to share with my blog readers. And ask your best investment lesson learned in this correction?
We learn more from our mistakes and there is no denying it. The current market correction has taught me some good lessons that I want to share them with all my blog readers.
Some of my mistakes that I did in my portfolio as well as other stocks that I have avoided for investments.
So let me share some of the lessons I learned in the current market fall that has helped me become an even better investor.
1. The Debt Factor
Oh no not again. Yes, I will try to keep this short because I know I have been saying about the debt factor for quite some time in all of my investment checklist, business checklist, fundamental analysis and every article where I talk about stock picking but I will re-iterate this again.
The stock that has fallen the most in the current correction has a very high debt factor. The stock where the business may seem to have issues will fall the most. It has always been and it will always be the case. It is always better to avoid such stock for any kind of investment.
One of my trader friend who always has some insider information had on Suzlon in last Diwali (October 2017 and not 2018). Around Rs.16 it was to hit a few times in a few weeks. When I met him again last month, we discussed his insider information on Suzlon. He still is confirmed about his insider information and has invested hugely in the stock around Rs.16.
As a trader, I also traded in Suzlon around the same time because playing such insider information is really fun and exciting but my price targets are based on technical patterns with a strict stop loss.
Such a stock with such huge debts is never an investment idea for me but is good to trade.
The stock has become 1/3rd from his invested levels and still, he believes the stock price will reach his price target.
Such high debt stocks will always fall the most in any correction. Even being my friend and knows me personally and yet I couldn’t convince him that it won’t. From the current levels even if it triples, he will only recover his capital and that also sounds tough to me.
Similarly, there are many such insider tips of the high debt stock are never an investment opportunity. It is not about how much you can make when the stock is flying but it is important how much the stock will correct when the correction starts.
And the other most important point to note is when the correction gets over, will the stock come back to a point where it starts falling. I doubt. Who will prefer investing in such a stock and why?
2. Value at Price
High growth stocks in the bull market mean the valuations of the company skyrockets as well. It means often the investors invests in the right stock but at the wrong price.
As an example, Page Industries is one such stock where the current year EPS of the company is Rs.353 (as per screener.in). The stock reached a price of Rs. 36,300+ which is more than 100 times its price to earnings ratio.
I had invested in the stock but I was always wanted the stock to consolidate so the earnings catch up the valuations. It never happened and so it needs to correct. The only question was when.
The 20% CAGR growth for the next many years is awesome for sure but at what price is more important. The bull run in such stocks leads to valuations to skyrocket and in the correction, such stocks have to correct more as well.
Again, I could book out of the stock but that is not the case for all my investments.
I am stuck in Force Motors where I have purchased it at much higher valuations but still, the company has very low debt and is profitable. The company lags growth in this tough time. So it is never a good idea to average the stock here. The position is very small compared to my overall portfolio and when the growth returns back to the stock, I will re-consider it. As a general trend, the stock has a growth phase of a couple of years and the lull phase for a year or two. I expect the same to continue and see if the growth returns in a couple of years down the line or not and then take the decision.
Growth stocks fall the most in the correction and it is because valuations run up more than the fundamentals or slow down is anticipated in the sector.
In either case, the stock price corrects very sharply and try to return to the mean.
So though it is ideal for investing in such companies but it is also important to note at what price you are investing. The investor may have to pass long and boring wait for the stock price to get past the previous high. There is no denying fact that stock price will go past the previous high but when is a more important question. And can the investor be patience enough to hold through the tough time?
If you don’t have the patience, avoid investing in high growth stocks at higher valuations. Still, l if you invest in such stocks, make sure you invest with a stop loss and be prepared to convert your investment into a trade. Invest technically when the confirmation of correction is over and in the consolidation phase in the market and more so in the stock price.
3. Management Quality
When the going gets tough, the tough get going.
So it is very important that you invest in the management where they have the experience and has passed the test of time to be able to withstand any headwinds in the business or the market conditions.
I always believe Invest in people and the team doing the business and not in the financial numbers or ratios.
The way I look at the business is a very unique selling proposition for the business and this is one of the most important aspects of investing for me. This is also to judge the quality of the management. They have positioned the product to outpace the competition.
If the quality of the management has proved its metal in the past years, it becomes easier for the investor to hold the stock in the correction because you as an investor has the confidence that when the tide turns, your team has the capability to make the most of it.
Even when I invest in any small-cap company, the only thing I consider is how management has been able to make the business unique despite being in a competitive world.
The best example one can share is of Reliance Communication, Bharti Airtel and Idea. When JIO entered the market, one declared bankruptcy, other took things head-on and the third one merged to remain afloat respectively. The difference in each of the team that runs those businesses is clearly visible. All of them has very high debt but the point I am trying to put here is about the management.
Any business can find the entry of next JIO. Marico, Dabur, Nestle had Patanjali.
So if the quality of the management is great, the correction in the market is an opportunity to buy more because you know for sure they will be able to steer through the tough times.
What do you think is the most important criteria for a sharp correction in the stock price? It may or may not be from the above list. Speak your heart out in the comments below.
Madhukar Varshney says
What is the ideal Debt to Equity Ratio. For Example Ashok Layland is .07 but still it is dropping like anything?
Shabbir Bhimani says
I like it to be under 0.5
Also debt is not the only reason for the stock to fall. It is more of a demand supply in stock for the future outlook of the company. Read https://shabbir.in/why-stock-prices-fall/
Kedar Nadedkar says
Thanks Shabbir Bhai for Spot on & valuable points.
Shabbir Bhimani says
The pleasure is all mine.