The Right Approach to Falling Stocks

Mon, 11 Jan Pre-Open

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2016 has seen a disastrous start for global markets. Did you know that Wall Street saw its worst yearly start ever? That's right. The US equity benchmarks, the Dow Jones Industrial Average (DJIA), and the S&P 500 lost 6.2% and 6% respectively in the first five days of 2016. The rout is global in nature. Indian markets have been spooked by events in China, Europe, the Middle East, and North Korea. All this is apart from the worries about the US economy.

But let's put things in the right perspective one by one. Let us start with China. The economic slowdown in China is nothing new. Everyone knows that the dragon nation will find it difficult to move away from a manufacturing centred economic model. There is also the major issue of bad loans given by China's banks to unviable projects. Another recent issue is the fall in China's forex reserves. We acknowledge the seriousness of these issues. However, we don't believe that the Chinese economy is about to collapse. Even less likely is the prospect of India's economy being badly affected by China's problems.

As far as Europe is concerned, the economic slowdown is structural in our view. Indian firms with exposure to Europe have felt the pinch. However, this long-term decline of Europe should be viewed as an opportunity rather than a threat in our view. If a truly enterprising Indian firm can crack the European market, it will create a lot of wealth for shareholders.

The Middle East is a worry in our view. The tensions in this region can impact the price of crude oil, India's top import. Investors would do well to check for stocks in their portfolio that could be impacted due to such geopolitical risks and decide if they are comfortable with such risks. Our Asset Allocation guide is a useful tool that can mitigate such risks to an extent.

All these risks highlight the simple fact that equity markets are volatile by nature. They do not provide linear returns. The key to successful investing is to be able to separate the noise from the long-term fundamental issues facing the companies you have invested in. This is not easy during times like these. Reacting to scary news in the right way is easier said than done. However, we know of no other way to profit from the emotions of greed and fear that engulfs markets from time to time.

The start to the year has been bad. Fear is returning to the markets. This will no doubt throw up interesting buying opportunities. However, not all investors will profit from them. We believe, only those investors with the right approach to stock selection as well as the right thought process concerning stock prices, will prosper.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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