COVID19 or Coronavirus, might have been a grim reminder to the uncertainties of life. But thankfully, there are few certainties in the world of investing.
One certainty is that big rallies in markets are most often met with high levels of decrease, though the timing is never clear. Everyone knows this, yet every time a downturn comes a large number of investors stare into the falling market like rabbits trapped by the headlights of a car and wonder why they did not move.
And this certainty has become obvious with the rise of the fear of COVID19 - most traders and investors are in a debris of falling investments, and surrounded by worries of a further decline.
With markets, each subsequent panic sought situation has only spread faster and become more furious than the previous one.
How to navigate these markets?
Understanding bias and psychology of markets becomes more important at times of panic in the markets when irrationality takes firm command and investors need to step back from the market mayhem in order to make sense of what is happening. So how does one navigate through this?
As a Position Trader
Whenever markets fall vertically and sharply, rarely do recoveries happen in a ninety degree fashion to the upside. Most traders have a tendency to be overly optimistic and hold views that it would come back up strongly. Here’s where your optimism can mislead you and you’re likely to cut yourself catching a falling knife.
If you’re doubtful or stressed out, its best to stay out of the markets for a while. Sometimes sitting tight is the right thing to do.
- Don’t jump to conclusions that the next short covering bounce will bring a rapid recovery.
- Do not trade with the fear of missing out. Short covering bounces can be sharp and volatile, hence, use very strict risk management methods (stop losses).
- If your positions increase in value by a large amount, take profits in a systematic manner and protect your gains should there be a sudden turn around.
What would be more important for the market now is to consolidate well on the downside first. There needs to be a meaningful base (time correction) on the downside, and only then if it chooses the direction to the upside.
Better foundations = Strong buildings
Technically market has breached major important levels. Hence, all major supports have become resistances and on bounces it would only generate more selling pressure.
As an investor
If stock markets were entirely rational places, they would hardly offer any exciting opportunities to investors. For investors, this is a lifetime opportunity to get into the market. Look for quality large cap companies, stocks with a history of creating wealth in the past and industry leaders with strong managements.
Like Charlie Munger says “A great business at a fair price is far superior to a fair business at a great price.”
- Use simple SIP strategies, like a fixed rupee amount invested daily or weekly.
- Don’t worry about the size of your investment. Focus on consistency.
- Be patient and don’t expect quick returns.
- For those invested prior to the fall, if you are holding good quality stocks in your portfolio and have seen sharp cut in prices, and are sitting on losses, be patient, they will recover in time.
- If you’re unsure about the quality of the company, sell them on bounces and re-invest in better firms.
Events of this magnitude, will delay returns, but patience pays off.There will be sunshine after the rain. Markets and life will be back on track with time.