Some time back, we did a post on power of doing nothing in stocks markets. We still stand by our view that when investing for long term, Doing Nothing can actually work in favor of investors. But wouldn’t it be nice if you could give booster shots to your portfolio every couple of years? Wouldn’t it be great if you got an opportunity to buy shares of some great companies at reduced prices?
Market Corrections can be used to give booster shots to your portfolio
We think it would be. 🙂
If you are an investor, you should understand that stock markets are volatile. You can either fear it and commit the most foolish but most common mistake of buying high and selling low OR use this volatility to your advantage.
Whenever stock markets correct (sharply or otherwise), its like markets are putting stocks up on a sale. For example, those who remember 2009 would agree that it was once in a life time sale of bluest of blue chips. It was like a distress sale where shares of good companies were being sold at throwaway prices. For example, shares of Tata Motors were available at around Rs 26 in March 2009. And within no time, i.e. by December 2009, the share prices moved up to Rs 160, and by end of 2010, it had skyrocketed to Rs 270!!
Tata Motors – From Rs 26 to Rs 270 in just 20 months!!!
If we were aware that markets available at PE multiples of 12 are grossly undervalued, we could have made a lot of money. 🙁 But past cannot be changed and future is still not here. So what should one do when markets correct? The first step would be to reassess your investment horizon. If you are among those who still prefer long term investing and are focused (like us) on safety of capital + dividend + atleast market matching returns, then it makes sense to buy stocks of companies that already exist in core of your portfolio (Check our ‘strangely named’ long term portfolio). This is assuming that you are sure that reason for which you bought these companies are still valid. And who wouldn’t like to buy cash-generating companies like ONGCs, Clariants & Balmer Lawries, etc at low prices?
Portfolio structure & which type of stocks to buy on dips
When we buy stocks at reduced prices, we end up doing rupee cost averaging. We buy more for every rupee spent. This is a proactive way of strengthening the core of our portfolio. And once we are committed to our chosen investment philosophy, uncertainty and market corrections are waiting for being taken advantage of. Disclosures: Long term positions in Clariant India, Balmer Lawrie, ONGC. No positions in Tata Motors