Market Crash: How to Invest After the Polls 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

Phew! What a difference a day can make.

Yesterday, the Sensex closed more than 2,500 points higher. This was on the back of most exit polls predicting another big victory for the NDA in the 2024 elections.

Today though, the story is entirely different. As I record this video, the Sensex is down more than 4,600 points and I won't be surprised if the losses go up even more by the time the market closes.

Looks like most of the exit polls were off the mark and that too, by a significant margin. As the election results are trickling in, NDA doesn't find itself on comfortable grounds.

It is huffing and puffing past the halfway mark with the INDIA alliance putting in a much tougher fight than the exit polls had predicted.

It is no secret that the stock market was beginning to fall in love with the current BJP government. Investors were impressed with the work the Government was doing and all the plans it had lined up for the future.

The average Indian voter however, had an entirely different idea. He is perhaps not as happy as it is being made out to be.

He has sent out a warning signal that if the current Government does not mend its ways, it could be voted out of power.

Having said that, the NDA still appears to be in the best position to form the next Government and give Mr Modi, a rare third term.

Make no mistake though. The patience of the Indian voter is fast running out. He is unhappy with the Government about a few things and if the Government doesn't address them effectively, more voters may jump ship the next time around.

Well, our beat is not politics. It is the stock market and let us stick to that.

If it was positive sentiments that led to the huge rise yesterday, it is the negative sentiments that have led to the huge fall today. Till yesterday, it was being expected that the clear majority will help the Government frame more pro-market policies. Besides, markets don't like change as it usually leads to chaos and uncertainty in the near term.

And this is the exact reason markets have crashed today. Now that the BJP does not seem to be in a position to get a clear majority, it is feared there will be a course correction and the Government may not be as pro-market as before.

However, if you look beyond the sentiments and if you look at the long term, a completely different story emerges.

You see, the last 20-25 years have seen both the BJP as well as the UPA Government at the centre. And we've seen a significant difference in their approach to economic management. However, what has remained the same over all these years are the broader macro numbers.

To be more specific, India as an economy has continued to grow at 6%-7% rate over the last many years with an inflation of 4%-5% thrown in. And the broader stock market has also closely followed the economy.

To put things in perspective, 20-years ago, Sensex was around the 4,800 mark. Today, despite today's sharp fall, it is at 72,000. This is a growth of 15x over 20 years, a compounded annual growth rate or a CAGR of 14%.

The last 20 years have seen 10 years of UPA government and 10 years of NDA Government and yet, the stock market has compounded at a healthy rate of 14%-15%.

Thus, the takeaway is clear. Irrespective of the Government at the centre, the Indian economy has continued to chug along at 6%-7% and this is how it is likely to be in the future as well.

Hence, the need is to look beyond the near-term sentiments and focus on the long term. Over the long term, the Indian corporates will continue to grow, the Indian economy will continue to grow and the stock market will keep creating new highs every few years.

So, do not worry too much about the near term but invest from a long-term perspective. A stock market fall is not a reason to worry.

In fact, it is a chance for you to buy a slice of India's future at a much lower and an attractive price.

Now, coming to stock specific strategies, I believe that the stocks that get hurt the most or the stocks where the maximum wealth is destroyed are the ones where a lot of expectations are built into the stock price or where the business quality is very poor.

You see, when your stock picks are supported by solid assets or solid earnings or solid growth, a change in sentiment is not very costly.

However, if your stock picks are supported by dreams that a certain company will record a 5x growth in earnings even though it is loss making currently or a stock deserves a PE multiple of 30x instead of the 10x that it used to get historically, then you need to be very careful.

Stock picks supported by dreams can create a lot of wealth destruction with very low chance or recovery. Stock picks supported by solid earnings or solid earnings growth may also lead to wealth destruction in the short term but over the long term, such stocks usually recover and even end up giving decent returns.

So, change in sentiments can destroy companies supported by dreams but not so much the companies supported by solid earnings power and growth.

So, if I were you. Here's what I would do. I would take a nice look at my portfolio and mark out the companies that do not have a strong financial history, are trading at very high PE multiples based on the past 5-year or the 10-year history and have debt to equity ratios well in excess of one.

Let me repeat that. Look out for stocks that are frequently loss making, are trading at very high PE multiples as compared to the past and are highly leveraged.

Usually, even one of these elements is enough for me to exit a stock. However, if your stocks possess all three or even two of these characteristics then maybe it is time for a serious rethink and even exit them if needed.

Fundamentally strong companies that are likely to grow at a decent rate going forward and were bought at decent valuations, are not in danger of giving you a permanent loss. They may fall in price along with the broad market sentiments but such stocks eventually recover over the long term and end up giving you good returns.

The real danger comes from the stocks that have bad characteristics that I just highlighted and are only supported by dreams.

So, to conclude, long term India growth story is intact. Look beyond the current sentiments and take action based on how many bad quality stocks you have in your portfolio.

This is the best course of action not just right now but at any point in time in my view.

Let me know what you think. I will see you again next time. Good bye and happy investing.