Saturday, November 19, 2011

Checklist for a Falling Market

Equity markets have fallen rather sharply over the last 6 weeks or so. When 4,800 on Nifty was breached on previous occasions, market “experts” were saying we’re near the bottom but this time they’re not saying so which gives an impression that price bottom may not be too far. But nobody knows. Either way, yours truly has always professed stock-specific approach which keeps you more focused in a bear market.

What’s that you should do in a falling market?

  1. Do your home-work and keep ready your Buy-list of stocks with total quantity that you’d like to accumulate depending on your portfolio composition alongwith staggered price points. We are presuming that one’s already in 30-50% cash to capitalize on the fall or may be fresh position coming in.
  2. In the Buy-list, avoid any highly leveraged companies or those with management/governance issues and where more than 40% of promoters’ holding is pledged.
  3. Next is make a note of the price points at which you’d be willing to buy each of those stocks in small lots of say 20%, 25%, 25% and 30% of the target quantity in a falling market. To give an example, suppose you want to accumulate 100 shares of RIL and price points begin with 20 no.s at Rs 780 going to 25 at Rs 740, 25 at Rs 705 and 30 at Rs 670. If it goes below 670 you don’t do anything. If it rebounds from 700 you hold only 70 and live for another day. There may be some change in your pricing depending on actual situation at that time, cash flow etc but a broad plan has to be ready upfront as to what you want to do to your portfolio both on buy and sell side. Example of RIL was just an illustration, I have no interest in the stock.
  4. Investors should be able to distinguish between a stock falling due to weakness in broader market and a stock falling due to fundamental damage. Out of the two, it’s only the former that should be bought into provided the stock was in your Buy-list in the first place.
  5. Be flexible to identify good opportunities. Having a starting list does not prevent you from being open. Very often, price falls make some stocks more attractive than they originally were. What happens is that a vertical fall is generally irrational and new opportunities are unraveled very fast in the slide. Having said that, basic conviction in the stock should be there and no short-cuts in the diligence process.
  6. Watch out for people advocating seemingly good stories and often enhancing them to suit their own biases while ignoring the hard facts.
  7. Even after the fall is over (first gets over in index and large cap stocks), the small caps languish at beaten down levels for some more time making easy picking, but please remember #4.
  8. Staying power is a must. One should be prepared for a flat to bearish phase of 12-18 months, if not longer. Oct-2008 to Mar-2009 was a very short fall time-wise and it can certainly get longer than that, and much will depend on actual signs of reversal in interest rate cycle.
  9. Make sure the cash deployed does not come in the way of any personal/family goals coming up in next 2 years.

Big money can be made in falling markets amidst despondency and pessimistic news flow, and that’s one of the reasons that equity investing is so tricky.

Happy hunting!


  1. Wow!
    Excellent Check-List Shikhar

  2. Hi Shikhar

    Thanks for this great post!

    Do you think it's a good time to invest in equities or wait for some more downside.



  3. Hi Sandeep,

    I'd avoid giving an ambiguous or cliched reply to this query.

    1. If your investment style is to do with bottoms up stock-picking, the timing hardly matters.

    2. Even if you see the longer market cycle, I believe this is a very good time to enter equities.

    3. Macros can improve from here over the next 12 months including concerns on inflation which will perk up the markets.