Their Story. Coping with market volatility

Sell stocks in over-heated market

Srinivasa Murthy, a book publisher, is a seasoned stock market investor. He started trading in stocks in the early 1990s when there was a frenzied bull market led by the big bull, Harshad Mehta. “I would buy around 1,000 shares and sell them once I made a gain of ₹1. But I was singed when the markets crashed in 1992,” says he.

Another episode that helped convert him to a long-term investor was his tryst with P Rajarathinam stocks. In the mid-nineties, it was touted that any stock that found favour with him could turn a multi-bagger. “Madras Hi-tech Circuit, one such purchase, cost me dear,” he says ruefully.

He has since then turned away from trading. He initially bought stocks of companies that had his friends on its board of directors. But that strategy did not really work. He now studies the fundamentals of the company, especially the quality of the management before buying the stock.

Murthy’s journey through the previous market cycles helped him sell the underperforming stocks just before the market crashed in 2008. “When your barber starts giving you stock tips, that is the time to exit stocks,” says he tongue-in-cheek. “I moved in to cash before the crash and waited until early 2009 to buy blue-chip stocks, such as ITC, Hindustan Unilever and Tata Steel.”

So what has he done in this bout of volatility? “I have sold shares and am sitting on cash. I will wait for prices to reach mouth-watering levels before buying.” Does he see the need to shift his asset allocation when markets turn too turbulent? “Not really,” he counters. “I stick to my asset allocation — a third of my money is in mutual funds, provident fund and fixed deposits, 40-45 per cent in direct equity and the rest in land— even when things get turbulent.”

His advice is — do not panic and wait for the correction to end. If you have money, then you should start buying.

Don’t borrow and trade

Ashish KR Joshi from Valsad district, located on the Gujarat-Maharashtra border is a private wealth manager. He has closely observed all the three major crashes — 1992, 2000 and 2008.

“The 1992 crash was spurred by excessive leverage; people even pledged their homes to play in stocks. Greed was at its peak then,” he recounts. “They were not ready to listen! In the end, they lost money, faith in the system and many tried to end their lives also! Even today I see the aftershocks of 1992.” Ashish is well placed to comment on the 1992 crash since he hails from a region where many are passionate about the stock market.

He thinks that both in 1992 as well as 2000, investors suffered losses due to abnormally high valuations. “Lack of awareness, absence of shares in dematerialised form and delay in physical transfer of securities widened the losses of many investors.”

According to Ashish, the 2008 crash taught investors the perils of trading with leverage. Many small investors suffered huge losses due to their exposure to equity futures.

“The 2008 crash also taught investors the importance of asset allocation and asset rebalancing,” says Ashish. “Major inflows through the systematic investment route began only after this episode.”

Large firms too can go bust

Kunal Nandwani, founder and CEO, uTradeSolutions, has been personally impacted by both the 2000 as well as the 2008 crashes.

In 2000, he had just graduated in computer science and was all set to join Satyam. “But due to the recession caused by the market meltdown, I lost the job before I joined,” says Kunal.

He has seen the 2008 crash from extremely close quarters as he was working in Lehman Brothers’ London office when the company went bankrupt.

“From late 2007, I could see the employees of Lehman dwindle every month. The number went down from 60,000 in 2007 to 20,000 when it shut down finally. Every other day someone right or left of me would get fired.”

He feels it was a great learning experience, looking at what went on inside Lehman as well as trying to understand how outsiders such as the media perceived it. “I often tell potential recruits in my company that it is a myth that only start-ups can fail and large organisations are safe. Look at what happened to me at Satyam and Lehman.”

So did he lose money in these crashes? “I had very small personal investments then, both in India and Europe.” The most important lesson he learnt was that the advice people gave on where prices should be, was not always correct.

Follow your own counsel

Bharath Baba, after working in the FMCG and banking sectors and having tried his hand at turning an entrepreneur, is now a full-time trader.

He held short positions in HCL and Reliance Capital just before the market crash on January 22, 2008. “At that point, my broker told me that the Nifty will not decline below 5,650.

So, I covered all my shorts and went long in the market. This was around 2.45 pm on Friday. There was a massive crack on Tuesday morning and these two stocks fell over 25 per cent.” This made him quit trading for a while and, instead, he took to writing blogs on where the market was headed.

He thinks that you don’t really need a large correction of this magnitude to send traders away from the market. “A 10-15 per cent fall in a stock is enough to scuttle a trader, if he is over-leveraged.”

“The most important lesson I have learnt is that you should be very careful about risk-management,” says Bharath. “Often it is difficult to be unemotional about the market. The need to be right supersedes all other emotions, preventing a trader from taking the right decision when the trade goes against him.” So, what are the risk-management practices he adopts? “I have moved from futures to options. As you know, in options the potential to make money is high but risk is low,” he explains.

He uses previous supports, Fibonacci levels and moving averages to decide his stop-loss level.

He was holding put options on Nifty as the market opened on August 24. But he covered them the same afternoon. “The trouble is we tend to cover profitable trades faster than the loss making ones,” he rues.

Don’t lose sight of your goals

Praveen Kumar V is a Bangalore-based independent financial advisor.

He observes that both the 2000 and 2008 crashes taught investors the importance of diversification. “In 2000, there was a frenzy in the market for technology stocks, many New Fund Offers in the technology space were launched. Then, in the selling that happened, all the money was sunk.”

In 2007, infrastructure was in demand and people got stuck to those funds in 2008-09. So do clients tend to panic and rush to redeem when the market falls? “I have observed that this tendency is higher with clients who have a smaller exposure to markets when compared with HNI clients,” says Praveen.

What should people do to weather such volatility? “My advice would be to focus on their financial goals while investing and not just invest for the pleasure it provides. If the goal is far away, you can stay put. If you have funds, then buy as the market declines to enter at better valuations. If the goal is near — less than five years — then stay away from equities.

“I have had very few calls this time despite the fluctuation in the past week; many have even invested additional sums,” says Praveen. “In 2008, many investors had even stopped their SIPs; but then that was a long-drawn correction that sustained over many months.”

So, is there a greater interest in balanced funds, given this volatility? “Not really,” says Praveen. “We recommend balanced funds for investors with low risk appetite or to those above a certain age. There is no change in the kind of funds investors at large are interested in.”

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