How to invest in BEAR market?

How to invest in BEAR market?
Value investors are always prepared to invest in a bear market. Why?
Because it is in the bear market that they make maximum profits.

Dear friends, it has been a crazy fall in the stock market, Nifty has fallen below levels of 16,000 and now currently trading at levels of 15,300;  So there is a high chance that most of you who have started investing in the last 1 year is facing losses in your portfolio. And it seems the backface is not over yet., there are still a lot of uncertainties in the market. Especially the US economy is looking in bad shape. The US stock market is in a freefall. NASDAQ has tanked more than 30% from its high. In fact, I'm not sure if you're aware, but this fall in this NASDAQ  is now even higher than the COVID fall. During COVID NASDAQ  tanked nearly 30%. But now NASDAQ has tanked even more than 30% and you all know the culprit, it has high inflation. We recently got the data for inflation in the US for the month of May and the Consumer Price Index(CPI) jumped to 8.6% on May 22, which is the highest in the last 40 years. Now one of the reasons for this crazy high inflation is the crazy jump in crude oil prices due to the Russia-Ukraine war that resulted in a huge surge in energy and commodity prices. For example, energy prices in the US have jumped 34.6% as compared to last year, and it is creating a huge dent in consumer profit, and grocery prices have jumped 11.9% year on year. So basically the situation in the US is not looking good. And 16 Jun 2022, US Fed has sharply increased the interest rate by 75 basis points, which is the highest since 1994 and there are more rate hikes expected in the future. That means there is more pain ahead in the US market. Clearly, the stock market in the US is in a bear grip. Now as far as Indian stock markets are concerned, the Nifty touched the high of 18437 in October 2021 and since then it has corrected nearly 15% to its current levels of 15,300. But if you look at the valuation of Nifty, its PE ratio has fallen from a high of 28 to its current PE of 18.9 which means there's a fall of 31% in Nifty valuation. And at current levels, Nifty PE is now available at a historic low level, last time Nifty touched this valuation was during the COVID crash. So as far as valuation is concerned, after this correction, the Nifty has become very very attractive, although there can be some more correction ahead. But any further correction in Nifty would only make it even more attractive. Now as an investor, what should be your approach, especially if you're someone who has recently started investing in the last 1 year, then you would be in a panic and that's normal because you haven't seen the bear market in the past. But if you look at the last 40 years of Sensex history, you will realize that there have been some brutal corrections in the past as high as 40-50% and not just once but multiple times. It happened in 1992 during the Harshad Mehta scam, during the 2000 .com bust, during 2008 housing bubble burst, and recently during COVID. So every time when the market jumps too much, it becomes overvalued, and eventually, it corrects, and every time when the market tanks, it jumps and makes a new high. The only problem is that majority of people end up investing when the market is at its peak because the majority of people end up investing based on past returns. So when the market is at the top, the past returns look great. And people fall into that trap out of greed. That's what happened post-COVID stock market jumped a lot and many new investors quite the luck. And now that the stock market is falling there's a lot of panic. But This situation reminds me of one great quote, it says "Bull market can help you make money but its the bear market that can help you create fortune". Let that thought sink in. It is bitter true because a bear market is a time when great companies are available at great prices, and the best part about the Indian economy is that it is bound to grow. There is no doubt about it. We are a country with 140 Cr people second highest population in the world which means there's going to be a huge huge demand for consumption. And the second reason is the financialization of our savings. Earlier people would simply keep the cash at home or invest in real estate or gold. But now people have started to invest in stocks, and mutual funds, and even the physical gold is getting replaced with digital gold. Just to give you an example five years ago in FY 16-17 SIP mutual funds were ₹3000 Cr per month on an average, today that SIP is more than ₹10,000 Cr per month. Overall in FY 16-17, the total SIP investment was ₹43921 Cr and this SIP investment has now jumped to ₹1.24 lakh Cr in FY 21-22 It means that the investment in India has jumped 3-times in the last five years. That's huge and it is only going to increase. Moreover, India has always been the leader in IT services, but now I see immense growth potential in the Indian manufacturing sector, especially after incentives like the PLI scheme, the Indian manufacturing sector is bound to grow. And many foreign companies will set up their manufacturing plants in India because we have a huge consumption demand. Overall, I'm very, very bullish on the growth prospect of the Indian economy, and when the Indian economy will grow, stock markets are bound to grow. 

The only challenge is that it won't be a smooth ride, there will be ups and downs, so more than anything the stock market is a game of mind; no matter how good you are in selecting the stock at the end of the day, it boils down to your ability to hold your nerves, when the stock falls 40 to 50% and not many people have that courage to hold their nerves when they see their portfolio down 40 50%. And this correction might last for a long time, 6 months, 9 months, 1 year, or even beyond. So it will test your patience level and the majority of investors would eventually lose their patience and exit from the stock market. But there will be a few people who will create a fortune from this bear market by investing in good quality stocks. Because if you have invested in companies with strong business models, strong leadership, and strong financials, then you don't need to worry, these companies will eventually bounce back. All you need is a conviction to not just remain invested, but utilize this fall to accumulate good stocks in your portfolio. Although the majority of people lack conviction in the stock market, because they invest based on tips, but if you understand the business, you will get the conviction and that conviction comes only with knowledge.

In fact, this bear market is a time that separates the quality stocks from the junk during the bull market, even the poor quality stocks jump, but the bear market will differentiate the good quality stocks from the bad quality stocks. So at this point in time, the most important question is now that the Nifty has fallen below the levels of 16,000, should you invest at current levels? By the way, here we are only discussing long-term investment. So the answer is absolute, yes. The only thing you need to keep in mind is the right asset allocation. Do not just invest all the money in the stock market, make sure that you diversify your money across asset classes. For example, personally, I invest in equities, including stocks and mutual funds as well as fixed income instruments like bonds, FD, and a small exposure in gold. So currently, I have around 60% exposure in equities and the remaining in fixed income instruments and gold. Within stock make sure that you nicely diversify your money across your large-cap, mid-cap, and small-cap in the current situation. It is better to have higher exposure in large-cap stocks and lower exposure in mid-cap and small-cap stocks. And also make sure that it diversifies your money across sectors, do not just stick with a single sector like IT or technology, diversify across sectors including banking, auto infra, FMCG, manufacturing, etc. 

Now the most important question is how to invest in stocks? Should you just invest all your money in one go or should invest systematically? Well, personally, I think that the stock market is going to remain volatile for the next 12 to 18 months. It means you don't need to invest all your money right away, you can break it into parts and invest systematically. For example, let's say if you have a ₹10 lakh then you can break it into 10 equal parts and invest a ₹1 lakh every month for the next 10 months. But the big question is which stock to buy and such volatile times. So I would say that invest in the leaders in their respective sectors. For example, in banking, you can pick stocks like ICICI Bank, HDFC Bank, then in IT you can pick stocks like Infosys, TCS, HCL, then you can pick stocks like Asian pain, Pidilite, Titan, Bajaj finance, Reliance, HUL, Tata Power, Tata motor, Divis lab, etc, just keep adding these quality stocks in a systematic manner. Even if you buy one share per month, it would compound your wealth in the long term. The reason why I'm suggesting these leaders is that these companies have faced such difficult times in the past and have always emerged even stronger than before. Especially during difficult times, the weak business struggled to survive, and a leader in the sector gained more market share. So these giants are only going to get bigger. I also hear a lot that these large-cap companies are already multi-bagger. Now to an extent, I agree that large-cap companies can grow multiple times in a short duration, but these companies are also less volatile. And even if you can get a 15% CAGR return for the next 20 years, you will generate 16 times the return, that's the power of compounding. You don't need a 100% return every year, you just need a 15% CAGR return for the next 20 years to generate 16 times return. But having said this, you can always invest a small portion of money in mid-cap and small-cap stocks, the majority of quality stocks are mid-cap and small-cap segments, which have collected nearly 40-50%, For example, CDSL is just a ₹12,000 Cr company, but it is a leader in Demate industry with more than 50% market share and demand industry is growing at a faster rate. CAMS is also a ₹11,000 Cr company, but it is a leader in the Indian RTA segment with a 67% market share and that is a huge growth prospect for the RTA segment. Stocks like Dixon technology, a leader in India for manufacturing of electronic equipment like your mobile, TV, etc. 

Likewise, there are many good mid-cap and small-cap companies that are among the leader in their segment and have a bright growth prospects. So it is certainly a great time to add these stocks in a systematic manner. Finally, I think that some of you would be facing another challenge, you would have probably run out of money. So if you have already invested all your money and don't have more money to invest, then just sit tight and keep patient do not watch your portfolio all the time. It will take some time. But if you have invested in quality stocks, that you will eventually see good returns in your portfolio. And like I said before, a bull market can help you make money, but it's a bear market that can help you create a fortune. This quote is absolutely true for the Indian economy, and I'm personally utilizing every opportunity to invest in quality stocks. Now tell me in the comments, what is the percentage allocation of equities in your portfolio and which stocks are you adding in this current downturn? I hope you'll find this analysis useful.

If you want to know more about investing, you can read this:

Post a Comment