You can learn a lot from the renowned investor, late Sir John Templeton. His investing mantra was simple: Buy at the point of maximum pessimism. In other words, as an investor, he relished adversity. Around 10 years ago, when Asian economies suffered a massive financial crisis, Templeton bet on South Korea, the worst hit. His investment is said to have netted him gains of more than 260% in the next two years.
A typical buy-and-hold investor, Templeton identified stocks that were trading below what he estimated to be their actual worth. He then was prepared to wait till the market recognized the value of the stock and the price corrected.
However, in reality, it is always the opposite. As the market peaks, almost anything is touted as a “can’t miss” investment or fund. Consequently, traditional measures of an asset’s worth go by the wayside. And investors run in droves to the market.
They buy for no other reason than the belief that the investment would go up in such circumstances. When the market tumbles, as it did this year, investors run to debt or hold cash.
The late Shelby Cullom Davis, a New York investment banker, former US ambassador to Switzerland and well-known value investor, once said, “You make most of your money during a bear market; you just don’t realize it at the time.” Wise words for an investor to keep in mind!
Not every beaten down stock or sector is worth buying
In the phenomenal bull run in the past few years, risk has almost been an afterthought as investors plunged headlong into growth stocks and took heavy
sector bets. Now the winning formula is probably a more conservative mix that’s mindful of heightened volatility. You would do well to gravitate towards large and stable companies that have a better chance of weathering a market storm.
But of course, that does not mean there aren’t any great stocks in smaller market caps. What this means is that nothing will substitute smart, bottom-up stock selection. For instance, among the worst performers in today’s market are banking stocks. But Dhanalakshmi Bank is currently viewed as a good bet. Its quarterly performance was impressive and neither was it punished too hard when its peers got hammered.
It is the same for sectors such as banking, real estate and construction. But that does not mean you should run away from them. Neither does it indicate that you should mindlessly shop for stocks in these sectors. But if you find good undervalued picks, go ahead and buy them.
If you have not done your homework on investing in a stock, however, you should not be investing in it.
And, don’t just dump your fund if it has performed miserably. Check its performance regularly with its peers. You would do well to keep track of the portfolio.
Don’t try to time the market
With the markets in such an extreme state of flux, it is very difficult to predict when a bull run will peak. By the same measure, it is also impossible to call the bottom. All bull and bear markets will exhibit periods that look like reversals, but are just momentary before the bull or bear regains control.