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How to Invest During Market Fluctuations

Jul 16, 2020 12:18 PM 6 min read
Editorial

Are you excited to buy stocks when the stocks of many companies are hitting an all-time low? Confused about which stocks to invest in? Investing in markets seem risky? Read on for some tips and advice on how to invest during periods of market volatility - like right now, during the coronavirus pandemic.

What are Market Fluctuations?

Market fluctuations are a key aspect of any investment. Market fluctuations or volatility is a term used for change in stock prices suddenly without any trend. The market consists of a large number of participants and companies. The prices vary when people want to invest more in one company than in others. This change of interest depends on strategies of the company, government policies and the economy of the company.

Market fluctuations happen in cycles. Like a pendulum, the market dips at its lowest values and then starts to increase and it keeps going back and forth. If the market drops for a certain time period, it will bounce back and acquire a new higher stock value.

An investor finds ways to benefit from these fluctuations. During these cycles, an investor must be mentally and psychologically prepared to battle in the field of market. While battling, they would incur profits as well as losses and they must be prepared for that. When we see the stocks of a renowned company fall, we are tempted to buy it. We must remember, however: just because a company had performed well in the past doesn’t mean it can guarantee profits in the future.

For instance, let’s take a glance at the failure of Yes Bank. Before the collapse of the bank, there was no anticipation of its failure whatsoever. Investors had invested heavily because the business plan and strategy seemed to be in a good state. The collapse came as a shock for the investors and as a surprise for customers.

This is the ground reality of the stock market – the only predictable thing about it is its unpredictability.

If this scares you, then I suggest you look at one more case. Amazon stocks have reached their highest value ever during a pandemic when all other companies are facing crisis and their market values are free-falling. Hence, we see that careful and calculated investments can lead to successful profits.

 

Investing Methods Proved Wrong

Many people make decisions based on two parameters: timing and pricing. Investors concerned with timing bought stocks when they were undervalued and sold them when they were overvalued. They also refrained from selling while the market was going down. In this way, the investors made huge profits.

Meanwhile, investors concerned with pricing looked at the price-earnings ratio, dividend yields etc for market valuation and profits. However, these two parameters almost coincide with each other and they do not hold much value without each other.

Some people follow formula based schemes, which can to be a huge mistake. Either those schemes did not work or if they did, they decreased the amount of profit that could be made. This was because the current circumstances of the market can be similar but not the same in the future. Hence, using a formula based on the exact same conditions of the past can be fruitless. Also, if the formula worked and many people started following it, the demand for the stocks would increase, the price would increase, thereby reducing the chances of profits.

Benjamin Graham has cited an example of losses incurred in 1960. This is when people had blindly started following a formula-based approach towards stock market investing, which worked for a short time period but as it gained popularity, the formula became invalid and resulted in huge losses.

 

Things to Keep in Mind While Investing

As we have seen, formulas cannot be derived for investments, we have to evaluate and re-evaluate the current situations of the market on our own. To do this, we first need to identify the bull market. Benjamin Graham in his book, “The Intelligent Investor”, suggests the following clues to identify the bull market:

  • Higher prices of stocks and bonds than in the past
  • Higher price to earnings ratio
  • Dividend yields are lower than bond yields
  • People want to buy stocks on borrowed money

If these are true, then the market is most likely a bull market. However, if the prices of stocks are lower, the market may be a bear market.

After identifying the bull market, we must look for a suitable company. A company whose stocks you want to buy must have a strong balance sheet and consistent earnings with few liabilities. Such a company could survive a period of volatility and could overcome any short-term fluctuations and yield profits in the long term.

 

Tips to Ace the Art of Investing

Investing for a short term can prove to be fatal as market fluctuations can never be accurately determined. There is a huge amount of risk involved in predicting what happens tomorrow in the stock market. A company might have to use its funds in asset investment or loan repayment, which may result in loss of confidence in investors and fall of stock points. However, if the company is sound and in a good position, long term investment will prove useful.

Buying and holding strategy is a good policy when the market is unstable or volatile. In this, the investor buys stocks and bonds when the quoted price is lower than fair value and sells it after 5-10 years when the price increases.

We must remember that during fluctuations, we shouldn’t worry or overreact when the market goes down. Most people would take their money out when this happens, ignoring the opportunity of future benefits while others would invest in companies based on their previous performances.

Both of these decisions are taken emotionally and not intellectually. We must carefully analyse the situation before taking any decisions. At the very basic level knowledge about business models, management teams, the track records of earning profits, cash-in-hand and the company’s plans to generate more profits and cash flows in the future is a must.

Another way to maximise profits is to balance between high-risk and low-risk investments. Many pronounced investors have built empires using this technique. High-risk investments include investments in IPOs (initial public offerings) and low-risk investments include mutual funds or index investments.

 

Investing During COVID-19

Today, we are in the midst of a pandemic. This has invariably hit our markets as well. Lockdowns have been imposed in most countries due to which production of goods has decreased. Countries are facing economic crises and investors have pulled their money out of different investments out of fear. Markets are highly volatile. While there are opportunities to invest, there is still a lot of risk involved.

The healthcare systems are growing and have come into the bull market. For instance, telemedicine, earlier banned in India, is now seeing a surge in demand and profits. This is because the Government is supporting its expansion and there is a lot of demand.

Apart from this, sectors related to oil will also benefit from the crash in prices of crude oil. Companies producing paints, body and hair oil, soaps, moisturisers etc. Can benefit from this crisis. Hence, investing in these sectors can prove beneficial.

Experts suggest that we must invest in large-cap companies as there is a margin of safety. They can more likely cope with this stressful situation better than small companies. If one wants, they can invest in mid-cap companies through mutual funds. This provides us with a safer option to invest our money.

Jonathan Stubbs, Capital market analyst, CNBC, called the current situation of extreme volatile markets as the “Kangaroo market”. The image below clearly distinguishes the bull, bear and kangaroo market. A bull market is one which sees a growth of 20% or more in stocks whereas the converse is true for bear market. However, a kangaroo market is one which jumps up and down over a period of time without any strong trend. This is the time when printing money can be difficult. Technical skills and fundamental analysis have come to a standstill. This can be a good time to invest in equities of well managed companies for retail investors.

Warren Buffet once said:

The stock market is a device to transfer money from the impatient to patient.

The current situation may prove to be a testimonial to his wordings.

But alsp remember another thing that Mr. Buffet once advised: “Investment is best when it is most business-like.” We must learn from our past mistakes and not fall into the trap of blindly following the formula proposed. We must be patient regarding our long term investments, carefully analyse the market situation and base our decisions on statistics and data - all without panicking. In these times, an investor must make their hearts brave and strengthen their minds and put their best foot forward.

 

Written by Mrigakshi Gupta

FIN.

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