Corrections in stock markets evoke mixed feelings of fear, anxiety and panic for the most. Everybody must be familiar with year end/ end of season sale where we get great stuff at discounted price.To go for bargain hunting then. At 30-40% off the peak rate the stuff seems great. Why then opposite reaction when stock market corrects? We will try to seek the reasons for panic reactions, the remedies and the benefits one takes from these corrections.
Behavioral finance to me is one of the fascinating aspects which reveal a lot about our reactions and behavioral biases and issues in matters relating to finance, investing and stocks. Behavioral finance states that a normal investor has the reactions as described above. But this is the reason for suboptimal performance in the stock markets.
Behavioral finance to me is one of the fascinating aspects which reveal a lot about our reactions and behavioral biases and issues in matters relating to finance, investing and stocks. Behavioral finance states that a normal investor has the reactions as described above. But this is the reason for suboptimal performance in the stock markets.
I can tell how I start approaching the correction in stock markets –
1. Look at the degree of correction – 10%+ is good.
2. Look at weekly and daily charts to see extreme oversold situation.
3. Choose fundamentally good stocks on the basis of Graham and Goldblatt’s stock selection method.
4. See 1 & 2 for those individual stocks.
5. If all 4 factors and criteria are met I go and buy around 50% of the cash to be deployed in the stocks chosen.
As soon as I buy there is a chance that market may correct further but that doesn’t bother me much as I take a slight medium to long term view. In case of any further price correction I deploy more cash to buy.
So, one can use these corrections to buy more stocks. I follow exact opposite to gradually sell my stocks. Of course one has to be aware of all the above points and practice a degree of detachment and enter gradually. Obviously this needs a degree of detachment and patience as well little basic knowledge of valuation and charts. For a simple person who doesn’t know would be to invest an equivalent of 5% of his portfolio value at a correction of more than 10%. This is a sure way to increase your returns and safety in stock markets. Waiting for bottom would be too late for investment.
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