Guide To Stock Market Crashes – Sensex & Nifty
So the market crashed! What do you do now? If you invest in SIPs, mutual funds or stocks then this guide is for you. We are going to bust some myths TradeAcademy style, this guide will talk specifically for the 24th August market crash.
On the morning of 24th August I was speaking with Shrinivas, when he said “The market is crashing I hope you noticed” – I hadn’t! I have an app innovatively called ‘Stock Tracker’, it started to alert dozens of stocks which were on my ‘buy’ watchlist. The market indeed was tumbling, the NSE India website showed no ‘top gainers’. Meanwhile my Whatsapp was filled with questions asking for investing advise. This guide is aimed at answering your questions. Take a deep breath, everything is just fine.
Doom Gloom Bada-Boom!
Short answer: The media will blow things out of proportion. This crash is part of the business cycle. Good companies will always rebound.
You must remember that news channels are paid to get more viewers. Our amygdala conditioned brains respond quick to stories of fear, threats and anxiety. It worked well for our ape like ancestors by saving from any danger that lay in the bushes. The same response is triggered when we see headlines of ‘Doom and Gloom’. It makes us think of the immediate, it makes us fearful of the stock market. But let’s relook into the crash with our neo-cortex, with our higher order brain that thinks using logic.
You may have come across ‘Crash wipes out 7 lakh crores’ ‘Biggest crash since 2009’ and my favourite ‘China rollout spooks world economies’.
Don’t be swayed by media articles , look at the facts. In this case this crash is portrayed as a doom gloom event. But is it really?
This is a price chart of Nifty (average of top 50 companies in India), the red bars are months when the market fell and the white ones are when the market went up. On the left Nifty was worth 882 and the right most bar is today, 7812 AFTER the crash. It is up 785%.
Look at the red bar on the right most corner, does it look very unusual? Or dooms worthy? Not really. We have had bars gaining more than we lost in the crash, a little bit of balance is normal.
Nifty/Sensex Down 8%
The right most bar, yes the red candle is the crash on 24th August, it is down 8% (at 11 am on 25th morning). How many times has the market fallen 8% within a month? That should be an objective way to see if this is really bad.
March 2000 – Down 10%
March 2001 – Down 15%
May 2004 – Down 20%
May 2006 – Down 16%
Jan 2008 – Down 24%
June 2008 – Down 19.99%
Well you get the point, if 8% is considered a heavy fall then that has happened 23 times. So it can be safely assumed that all his hype is not needed. But the next question is what do we do next?
Remember never look at crashes in terms of points, a 10% fall on Nifty when it was trading at 2000 is 200 and a 10% fall now is 770 points. Always compare in percentage.
Do you have a SIP or Mutual Fund Investment?
Short answer: Hold on to them. If you have a SIP continue investing every month. The market will fall but over the long term you will win.
Great, you have to take no action at all. Unless you are nearing retirement and need the cash in the next 1 year you should hold onto the investments. Worrying about a crash is for traders, and they have their own plan to handle these situations by shorting the market.
A SIP is where you invest a fixed amount in a mutual fund every month. The biggest advantage is that the small purchases in the market ‘average’ out your entry. They work wonders over long periods of time.
For example, you purchase a SIP at the height of the market then continue to the SIP every month on the way down, your average entry price is now at the halfway point. When the market turns upwards, after the 2008 crash it took 2 years, you would have seen a 50% increase in your portfolio at one point. (Nifty ETF, assuming starting point is just before the crash, every month, absolute terms, calculated without expenses)
Note: Averaging out is a bad idea for individual stocks, in the case of Satyam it would have blown your account. SIP averaging is based on mutual fund portfolio of blue chip companies and investment over several years.
Is This A Good time To Invest?
Yes, it always is. You can’t really change your answer because the market has crashed. Let me show you some of the best managed companies in India. They grow at the same rate, eerily consistent every quarter and have no debt (no loans). You tell me, how do they look to you. These price charts are after the ‘big crash’.
Do you think they look risky? Look at how much the prices have risen from left to right.
These companies are growing every year at a consistent rate, are market leaders and have little or no debt. Investors will always invest in such companies.
We will be introducing a course very soon on how to filter and invest in such companies.
A Little More Detail
This crash has signalled a downtrend, meaning the market will move lower. We will have to cross 8700 on Nifty to trigger the uptrend.
How far we fall is not something I will claim to know, it cannot be known. What can be known is your trading plan. Trend followers should look for short opportunities in the market, the next support is at 6,400 that is way off from current market prices. Short term traders should look for failed breakouts. Nifty stocks collapse after failed breakouts and are excellent short candidates.
In all likeliness we will be in a downtrend for the next 2 months atleast, but as all Trade Academy users would know, when the direction changes to up, we will look for buy opportunities.
Some excellent articles written about the crash
Vivek Kaul’s article has an engaging intro where he talks about listening to ‘free falling’ while writing the article. He is correct in saying the media makes a big deal about such events by mischievously using absolute falls instead of percentage. http://www.firstpost.com/business/sensex-crashes-1624-points-what-triggered-the-bloodbath-on-dalal-street-2405470.html.
TradeAcademy’s lesson in common stock market misconceptions. I will admit I’m biased here, that dude in the video is me – So you have a look and review it in the discussions on TradeAcademy.in
Please suggest useful articles so we can add it to the list here.