I am sorry but you might have to wait for an answer. By market crash i mean selling across all the companies in major market index like we are seeing now a day in China. Crash is not limited to one or two companies but a broader market across various industries.

Let us try to understand what goes on when market crash, who is trying to sell stocks? Do you think these are bunch of retail investors, executing co-ordinate selling ? First retail investors represent only fraction of total market capital. In India only 4% of market capital is owned by retail investors (source https://www.valueresearchonline.com/story/h2_storyView.asp?str=28417). Such a small percentage can not impact market even all the retail investors act together. Also there is no way retail investors can co-ordinate their act in such a big way before being in news. If these are not retail investors then who is selling ?

If these are not retail investors then these should be among FII, Mutual funds, Domestic Institutions or big individual investors (with large investment). These investors does not make decision based on emotion or news stories but based on real and insider information about economy and companies, which a retail investor can never have access to. Not only information these investors are also running complex models to forecast the economy. So this class of investors have information as well resources to carry out such a massive selloff. When many of them have the same belief in the economy or state of affairs based on the recent fact, they all tries to get out of their investment ASAP, which cause a massive selloff. They have firm belief that economy is not going to recover soon and little loss today is better than holding the investment and take a bigger hit.

Let me explain the last point from recent economic crisis of US subprime mortgage. Look at chart below to get an idea about the dates (source finance.yahoo.com). Bear stern was the first major casualty which happened on March 14, 2008. Market crashed around that time and lowest level Dow Jones reached was around 11740. After that Lehman filed for bankruptcy on September 15th 2008 and market crashed and lowest level of Dow Jones was 10609 around those days. But market saw further bottom from that point and lowest Dow Jones level was around 7550, which happened few months down the road. Think of investors who sold the stocks around March 2008 or Sept 2008, they saves 30-40% of their investment from falling further. Hence they took the losses on those market plunge to save 30-40% of value, which they foresaw happening few months down the road.

DowJones1.png

Based on above analysis my advice will be when earthquake comes, don’t stand by and watch market falling, instead you should also run. Get some cash from your holdings which you can use to buy stocks at bargain in coming months. One more point to clarify, this is relevant to economy which is impacted. In today’s scenario if China’s economy is crashing than above analysis is relevant for Chinese stocks. No doubt other economies will get impacted too but its impact will be limited to few sectors or area of economy. Here also retail investors should take the clue from our local Institutional investors and watch what they are doing

Advertisements