Opportunity When Everything is Going Down

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Opportunity When Everything is Going Down

In Nepal, there are very few investors who back up their investment strategies with theory and prior analysis


The Market Trend
The Nepal Stock Exchange was continuously heading down in June and July of 2018. The NEPSE index declined by157 points (11.77%) in a period of 30 days. The total number of transactions in the same period of 30 days was 122,299. 

This contrasts with a similar time period when the NEPSE was at its peak (NEPSE was at its historic high on July 27 2016 when it hit the 1881.45 mark). The comparable data for that period were total number of transactions 211,575, and NEPSE increased 16.56%. The total number of transactions was 72% higher when the Index was at its peak as compared to June-July 2018. The latest decline may be due to panic, among other reasons. However, this is an opportunity for investors. 

According to Warrant Buffett’s investment philosophy, we should buy the stocks of the companies that are selling well below the intrinsic value of their business. It may be painful to buy into a panic over the short run, but over the long run, it can pay off if you are buying stocks well below their intrinsic value. But the actual market is different from theory.  People hesitate to buy the stocks when the market is in a bearish trend.

Misleading Turnover
When the market is Bullish, the turnover also hits the increasing trend whereas when the market is bearish, the turnover is in the decreasing trend. The turnover figures play a very important role in the strategies the investors apply in the stock market. However, the turnovers can be misleading when the market is at a peak or at its lowest. 

The daily turnover when NEPSE was at its highest was about Rs 2 billion, People may see that high figure as a positive sign and go on buying. But then the investment might get trapped. When the market is at its peak, the turnover is high because a huge amount of selling occurs then. Due to this, the market declines the next day and those who have bought at the peak bear losses.

Similarly, when the market was at its lowest, the turnover was about Rs 204 million only. This actually is the point when there are many investment opportunities as the companies are trading below their intrinsic value and there is a high possibility of the price going up. That is why, a huge number of people generally suffer losses in the stock market. The ones who can analyse and interpret these trends are the top gainers of the market. This is called Herding Behavior.

After all, Buffett says that, it is better to be approximately right, than precisely wrong. The key Graham Number is 22.5. The stock below this Graham Number is said to be undervalued so is worth investing in and the stocks above this number are said to be overvalued. When the market was in Bullish Trend, the Graham Number wasn’t below 22.5. This indicated the stocks were overvalued and riskier to invest in. But now when the market is in bearish trend, there are many companies which are trading below this Graham Number. Some of the companies are listed in the accompanied table.

The companies having Graham Number below 22.5 are said to be undervalued, and are worth investing in, whereas the companies having Graham Number above 22.5 are said to be overvalued and so are riskier.


Stop Loss
The investor determines the price in which they are willing to buy or sell the share. The principle to bear in mind is that of loss minimisation. Stop-loss technique is used for this. Before buying the share an investor should predetermine at what rate he/she is willing to sell the share. There should be two such predetermined rates– one if the price goes up and another if the price goes down. The latter is lower than the former. The lower rate is the stop loss rate. If you sell the share at that rate, you will minimise the loss. This technique is known as stop loss. However, the market runs just opposite of theories. Every investor fears to invest when the market is going down, whereas everyone is overwhelmed by a need to invest when the market is going up. Despite the theories, which say that the stock should be bought when it is trading below its intrinsic value, people fear that the stock price may go down further. So they hesitate to invest in such scenarios. 

In the context of Nepal, there are very few investors who back up their investment strategies with theory and prior analysis.  Most of them take investment decisions on the basis of rumours. The investors shouldn’t have a love/hate relationship with stocks. The decision should be based upon analysis only. If the investor has a feeling that the price might go up but in reality it is still going down, he/she must sell that stock to minimise the loss and escape from the market. So a prior analysis plays a very important role in any investment.

The author of the article is a fifth semester student of BBA in Banking and Finance at Kathmandu College of Management.