"If an investor convinces of a long term story, then he can create a position in the same stock when things improve. Detailed research along with proper channel check is required before making a decision on sustainable improvement and finding fair value," said Mitul Shah, Head of Research at Reliance Securities in an interview with MintGenie.
Edited excerpts:
They say long term investors should buy every dip. Under what circumstances does this thought doesn't hold?
The market around the world is in sell-off mode for the last couple of months following concern of rising inflation on account of the Russia – Ukraine Crisis, increasing interest rates aggressively to tame the soaring inflation and liquidity unwinding. As high volatility and chaos are expected in the markets in the near term, long-term investors are advised to use the BUY on dips strategy.
However, in case of prolonged geopolitical issues, elevated commodity prices and higher inflation levels continue for a longer period, it may keep the global equity market under pressure including Indian equities. In such a situation, equity would not give desired returns due to global parameters despite healthy domestic fundamentals.
When should long investors stop averaging down their stocks?
Averaging down strategy involves investing additional amounts at regular intervals in the stock when it declines after the original investment is made. While this can bring down the average cost, it may not lead to great returns every time.
Quality large cap and mid cap companies have a tendency to rebound, once the economy starts improving due to their capability to sustain turbulence of slowdown/recession.
However, in the case of a few mid cap/small cap companies with higher leverage, debt repayment and interest burden make it tough to survive at times. Their sustainability becomes a question.
Therefore, averaging during the falling prices in the case of highly leveraged companies during the down cycle of the economy should be avoided. Moreover, increasing concentration risk in selected stocks also lead to the risk of concentration, therefore diversification is advisable.
What technical conditions should force them to sell even if they are bullish long term?
If an investor made money in a short period of time then he can sell part holding and bet on the balance for long term gain. To make money in equities involves two key decisions: buying at the right price and selling at the right price.
Buying a stock is relatively easy, but selling it is usually a more difficult decision to make. In general, there are some intrinsic reasons—related to the stock itself and/or the markets—to sell a stock, and some extrinsic reasons related to the investor’s finances and lifestyle.
Occasionally, the sell decision may be triggered by a combination of intrinsic and extrinsic factors. Emotion and human psychology can sometimes get in the way of making a smart decision. There are a few technical reasons which may force investors to sell even if it seems bullish over the long term.
These conditions are technical support of stock prices (If an investor follows technical research and chart patterns), stop loss trigger, diversification of portfolio in case value of other holdings drops drastically as compared to a particular stock, and investors are required to sell particular stock to rebalance the portfolio.
Should they create positions in the same stock again after a few months when things improve?
If an investor convinces of a long term story, then he can create a position in the same stock when things improve. Detailed research along with proper channel check is required before making a decision on sustainable improvement and finding fair value.
Is it time to hold cash and trim exposure to equities for the short term?
Post recent correction, one can start buying quality stocks available at a valuation below historical averages. However, we expect pressure on equity to continue over the medium term due to numerous global factors, therefore holding cash would provide a better opportunity for re-entry in the coming months.
Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.
