Investing During a Crash

These are some questions that friends and investors kept coming up with during discussions in the last few weeks. And my attempts at answering them.

• Have we reached the bottom? Will the market fall further?
• There is no way I (or anyone) can predict the level at which the price correction in the market will stop.  Technical chartists can provide levels, but they are not sacrosanct. They are based on previous levels in the market. If the situation has changed, the levels also may change.

• Can we start buying at these levels?
• Again a difficult call to take. It really depends on your ability to handle volatility in prices after you buy. There is no guarantee that a stock which has corrected 50% cannot go down another 30% from there. There are two approaches to buying during tough times - i) keep nibbling in small lots once the stock reaches your desired buy levels and ii) wait for the overall market to stabilize and then start buying. In the second case, you will probably end of buying at higher levels, but that is okay. If the choice of stock is right, and you are buying with atleast a three year horizon, a few percentage points should not materially change your overall result.

• Could I have sold before the crash and sat on cash?
• Wouldn't we all love to do it!!! Unfortunately, there is no predictable, repeatable and foolproof way to predict a crash. So, if you could not predict the crash, you could not sell beforehand and have the cash ready to be deployed at depressed levels. On the other hand, if you had sold early, you could have been too early and maybe you would have sold out at prices lower than where it is today even post correction. These decisions are easy only when viewed through the rear-view mirror. Some indicators that can help identify serious market corrections are:
• Overall market (indices) heats up and trades at high PE multiples
• Sectors within the market gets into bubble territory (Dot com, Banking crash etc)
• Large number of IPOs with craze valuations
• Major currency change (appreciation / depreciation)
• Major political event

             

• I don't have any cash now. How to benefit from the low prices now?
• You can't. Cash is the raw material of investing. If you don't have the raw material, you cannot produce the finished goods!! The best you can do is to rejig your portfolio and move cash from one holding to another (either new or existing) based on the relative valuation. But then again, that option is always available, irrespective of market crashes.

There is no easy or simple answer to investing. Remember what the old man said, "Investing is simple, but not easy!!"