Markets can remain irrational longer than you can remain solvent - John Maynard Keynes
The ability is sit through long periods of drawdowns and no returns is the core secret to long term success in equity markets. Markets don't move in a linear fashion. They are volatile and frequently not rational.
Often waves of selling can be triggered for technical reasons. For e.g. it came to light that SEBI has introduced new guidelines on FPI ownership disclosures. This is likely to trigger selling by FPIs that don't wish to disclose their ownership details.
The likely fall in market prices due to this forced selling, is likely to trigger further forced selling by leveraged participants using MTF and Options, especially since MTF volumes are at an all time high.
Eventually, value buyers will emerge once prices have sufficiently fallen and the forced selling subsides. And the prices will eventually rebound.
A regular investor needs to have the stomach to sit through this volatility with equanimity. It is natural to doubt the quality of your stock picking during such testing times. This is part of the reason why we recommend staying invested in sector leaders as part of our defensive posture.
What are the other ways to increase your staying power?
- Stay net cash positive i.e. don't use excessive leverage for buying stocks
- Park sufficient cash to meet your daily expenses for 6-12 months without needing to dip into your portfolio
- Have alternate sources of income outside of stock markets
- Have hobbies and interests outside of stock markets. If you don't need to look at your portfolio regularly, chances are you may not even notice such short lived technical drawdowns.
Market corrections serve to transfer shares from the weak to the strong hands. Don't let irrational price movements take you out of the game!
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