FINDING BARGAINS IN THE STOCK MARKET

What are bargains?

Bargains are rare to find in a market, thoroughly scanned by millions of investors every minute.  By nature, they are hated, discounted and neglected, or ignored completely.  They do not fit in a ‘respectable’ portfolio.  No one wants to own them.  They are orphans and the very thought of putting them by the side of darlings of the market in your portfolio would be a big blunder.  If the entire market is telling you a depressing, sad, and painfully long story of less-promising companies, why would anybody want to invite them into a party?  Typically, they are like the uninvited guests in one’s portfolio.   A healthy portfolio, by nature, must consist of the best candidates, leaving very little room for the lesser ones, and staying clear of the worst.  Bargains, in short, are unappreciated, unpopular, and unloved candidates.

Why look at bargains at all?

Ultrasafe securities, usually, deliver uninteresting returns.  There is always a mad rush to marry them in the marketplace.  Because they are over-owned and over worshipped, there is very little chance of such securities giving mouth-watering returns.  To outwit the market consisting of smart and intelligent souls, you need to take a contrarian path.  This is where bargains matter.  They are

·       Unnoticed, ugly ducklings of the market

·       Devoid of strong fundamentals

·       Encircled by controversies of various kinds

·       Apparently unworthy investment candidates

·       Known for delivering consistently poor returns

·       Perceived by all as useless investments

Why would anyone want to marry such an ugly candidate?  As the saying goes, if everyone feels good about something and is happy to invest readily, it won’t be a bargain after all.  Bargains have fallen out of favor and lost their sheen and value for valid reasons.  If everyone thinks and feels bad about a company that was once the darling of the marketplace, then certainly one must take notice of such a company. 

Where are those bargains?

Discerning investors look for good buys.  They constantly chase stocks where there is a price-value mismatch, where the price is low relative to value, or the potential return is high relative to risk.  Investors chase stocks that consistently deliver good results.  When the demand for such stocks reaches maniac levels, prices peak out.  The seemingly good quality stocks, turn into bad buys because of over-ownership.  To make money, therefore, one must focus on stocks that have gone out of favor due to irrationality or incomplete understanding.  Usually, bargains are found in situations where investors fail to assess an asset fairly or fail to look beneath the surface to understand it thoroughly or fail to look at the shining side of a scorned asset.  Such bargains are not topics of discussion at cocktail parties.  Usually, the price of such assets keeps on falling and falling.  They grab news headlines for the wrong reasons.  The market keeps on punishing the stock till it turns into a bottomless pit.  Poor performance would sink the stock price to rock-bottom levels.  Capital stays away from it or flees, and no one can think of a valid or solid reason to own it under any circumstances or at any price.  In short, the perception about the stock has become worse than the reality.  No one has a good word to say about any of such companies.

Investing in bargains

Bargains, as is clear from the discussion, offer deep value at unreasonably low prices.  To make it big, therefore, bargains deserve a closer look.  Cycle-fighting, contrarian investors have a golden opportunity to buy those distressed assets at irresistibly low prices.  if you hang on to bargain buys till the market begins to assign a ‘fair value’ you would be laughing all the way to the Bank. 

 

WHAT TO DO WHEN THE MARKET CRASHES?

             Introduction

You need skills of a different type in order to make money in a falling market.  When the market crashes in a big way, the first reaction is to get panicky.  Falling markets have a numbing effect on the mind.  The emotional side would force you to look at the dark side of the coin first.  The losses look unbearable or even unthinkable.  It is a red screen all over the place.  No green tick anywhere.  Such a sordid and scary scene that we do not witness during normal days.  You would see for the first time, winners and losers performing a lethal dance in front of you.  In a crashing market, there are no winners.  The only winner is the ‘cash’ component that you hold.  Of course, cash is king ALWAYS.  You would witness the best stocks; the very best stocks or the so-called gems fall like nine pins.  The stock market is actually a house of cards. It is fragile and pretty weak internally—but does not look like that during normal days.  We begin to build castles in the air, being used to looking at the green screen almost every day, especially in a bull market.  The humongous profits made during this phase would melt away within a fraction of a second—if you do not rise to the challenge and take appropriate actions.

Control emotion

Let us face the reality.  Yes, the market has crashed.  The real gems have taken a beating.  First, it was 10 percent; followed by another 10 percent and so on so forth.  Finally, a day will come where the losses on each stock would mount to 30 or 40 percent.  This would compel everyone to think, ‘did I commit a blunder by betting on these stocks’?.  When the losses become intolerable, you offload the stocks in a panic.  Panic is the first reaction of investors when you come out of the room with dents all over the mind & body.  Professional advice pours in now from every channel. ‘ Do not sell in panic’ – is something that every discerning investor is aware of. But if we do not sell, the stock falls continuously day in and day out.

Shall I sit on cash?

What if you sell the portfolio on the day when you get convinced that the market is not going up anymore?  Yes, when you sell the entire portfolio and sit on cash, further losses could be arrested.  Say on a portfolio of one lakh, you can assess how much pain you can tolerate—that is 10 percent or 20 percent on the entire portfolio.  Once you get out of the Market and watch from the sidelines—you can see many more Gems going down the drain.  You need not hang on to stocks that are no longer fancied nor loved by the market.  You can take a refreshingly fresh look at other stocks that you were thinking of buying, but could not buy due to their expensive valuation. 

Rebalance your portfolio

Market crashes offer the biggest opportunities to own the real ‘winners’ that have taken a big knock.  Because usually, the most fancied, most loved, and highly over-rated stocks would crash in a big way.  The stocks that you own may not fall in that category unless you are an expert in portfolio management.  So now you have market leaders available at mouth-watering prices.  instead of sitting on lame ducks, you can now own ‘market leaders’ that would rise from the ashes when the market regains its sheen and value. 

Passivity and Inaction

When the Twin Towers were attacked, the first reaction of those guys in the second Tower (the best financial brains in the world, from prestigious Ivey league Universities but well trained, stock market experts) was to get out in a fraction of a second without any second guesses or thoughts.  The Ups and Downs in the Stock Market taught them what to do when the emergency button is pressed.  A market crash is a rare, once-in-a-lifetime kind of opportunity. it offers you a chance to listen to the voice of reason.  Once the emergency button is pressed, you have to keep your cool and rush out before it is too late.  Once you sit on Cash, you are able to marry stocks of your choice—stocks that you could never own because of steeply high valuation—the so-called market leaders leisurely at carefully spaced intervals, observing market movement.  Passivity and inaction would sink your portfolio, denting your fragile heart every second.  Once you stuff the portfolio with market leaders, you can relax and heave a big sigh of relief.  One more advantage in owing market leaders is the fact that they usually do not have filters on the way up, and once the sentiment turns positive, those stocks can rise 10, 20, or 30 percent in a day!!!