Making money in the stock markets is every investor’s conundrum. On a prima facie, it is a straightforward answer: ‘Buy Low, Sell High’. As plain sailing as it sounds, there are countless intricacies involved.
With the hindsight, investors who purchased stocks during the bout of stock market correction made more money than those who purchased stocks during the bull rally. This is true. But then if every market correction is a good opportunity to invest, then concomitantly, every elevation in the prices of stocks is a good opportunity to sell.
Willy-nilly, this is not true, especially when it comes to long term investment.
- So, how would you know it is the right time to invest?
- Market corrections are good opportunities, but how would you know if the markets are not going to correct further?
- What if the markets dip further after you purchase the stocks?
- And, how long you should wait before you can sell the stock to book the profits?
Looking at the past trends, one may think it is easy to predict the lows and highs through various technical charts. However, it’s not so easy and the entanglements are gargantuan while investing for a long run. The moment we say stock market corrections should be optimised by investing in the markets, one may presume that we should not invest while markets are recuperating. And nothing can be farther from the truth.
Rather than timing the market and predicting the lows and highs, we need to focus on the quality of investments and their margin of safety. Especially, in times of knee-jerk uncertainties in the stock markets, it is practically impossible to predict the momentum in the future.
So what should an investor do? Yes, market opportunities are similar to sale, which gives you an opportunity to invest in sound businesses at low levels. Every such opportunity should be optimised by investing in sound businesses or multibagger stocks rather than desisting your investments out of fear. However, beware that you do not buy weak businesses which may look attractive given their bargain valuations. Companies which are not fundamentally strong will experience steeper fall in their valuation as compared to companies which depict strong management credibility, steady operational growth, healthy balance sheet and compliance with legal and regulatory standards. In fact, the growth trajectory of the sound stocks is not deterred by such interim fluctuations and would still give significant returns in long run.
To cut the long story short, identifying companies with a proven track record, high growth potential and at the same time available at attractive valuations is the trilogy of key factors to invest successfully in the stock markets.
Lastly, buying sound stocks during a market correction is a good idea to get started. But the movie is not yet over! The key to creating wealth is investing regularly in a disciplined way in companies which are able to deliver returns. One may adopt a SIP route to invest in such stocks for a long-term which will help you to remain disciplined, even during market crashes. To optimize the rupee-cost averaging, we recommend our clients to invest 50% of their investible surplus while getting started and the remaining in the span of 5-6 months.
“The key to making money in stocks is not to get scared out of them.” - Peter Lynch