Exactly 4 years ago, i.e. on 21st January 2008, I bought some shares of Ranbaxy. The day is remembered as one of the darkest days for Indian equities as bell-weather Sensex lost 1408 points in a single trading session. This was the first-ever 4-digit loss for the Sensex at close.
And this big cut was just the start. It was followed by another bloody cut of 857 points on the very next day. (Read more about biggest Sensex falls here
Now let’s go back a little deeper in past.
In July 2007, I invested some money in A. Ambani’s Reliance Natural Resources Limited (RNRL) at Rs 42. This decision to invest was neither based on any fundamental nor any technical analysis. The only reason which I can now remember is that there was a growing interest in ADAG stocks (herd mentality). Though I always want to believe that I am a sensible investor, the truth is that I have made my share of mistakes in stock markets and have traded in not-so-good companies quite often.
At times I have been lucky to have made some money. And at times not so lucky.
But in this case, I would say that I was quite lucky. Even in 2007-2008, RNRL was widely regarded as a speculative stock and not worthy of holding for long term. It was a stock which was abhorred by long-term investors. Luckily for me, markets continued being irrationally exuberant and started making new highs on a daily basis.
Out of my sheer fear of losing profits, I sold all my shares of RNRL at around Rs 200 each in first few days of January 2008. This investment gave a staggering 383 percent in 6 months and made me feel like a Stock Market Super Hero. 🙂
But my luck continued helping me and I used that money to purchase shares Ranbaxy at Rs 340. And as if markets had decided to prove all my decisions correct, the Japanese pharma major Daiichi Sankyo bought Ranbaxy and there was an open offer by the acquirer for shares of Ranbaxy. The open offer came at Rs 737, but I decided not to wait for the same and in August 2008, sold my shares in open market for Rs 552.
These two stock transactions gave a 7x return on my initial investment in just under a year! A compounded annual growth rate of close to 700 percent!!
The above is the sequence of events which I personally experienced. And with loads of help from my luck, I made almost 700% in a market which was grinding down every day and was well on its way to crash 50% for the year.
But honestly, it was my sheer luck and nothing else. But this small story also has a few lessons for everyone to learn from market crashes. I have tried to list them out below:
- Always be a big fan of fear in stock markets. When people become over pessimistic, it should be taken as an invitation to make huge profits. Even Warren Buffett says that “We are fearful when others are greedy and greedy when others are fearful.”
- Always be ready with a list of stocks to buy in market crashes, i.e. have a list of crash stocks. This list consists of stocks which one regularly tracks and is eager to buy in case prices fall sharply.
- Courage in Crisis, but without Cash is useless. Always maintain adequate levels of cash to take advantage of such crashes. This can be done by using PE ratio as a tool. There seems to be a definite relationship between PE Ratios and Market Returns. When PEs are high, chances of correction are high and hence an investor should book profits and hold cash to take advantage of probable (but inevitable) corrections.
- Always use corrections to buy fundamentally safe stocks which have the ability to survive major recessions/downturns/corrections. There is no point trying to find multibagger small stocks which have high mortality rates in downturns. And during corrections, the market gives us ample opportunities to pick large-cap stocks trading at massive discounts.
- Always understand the difference between shares falling due to weakness in broader markets and those falling due to fundamental issues. A stock like DLF fell alongwith other shares in 2008. But it was not ‘just’ because of fall in broader markets.
- Always keep an eye on 52 Week Low List. You may find some really interesting & investment-worthy-companies in the list during market crashes.