How to Keep Your Calm During a Stock Market Correction? How to Benefit from It?

In a bull market, “an optimistic investor sees correction as a buying opportunity whereas a pessimistic investor sees correction as the end of the bull run”.

For almost a year we are in a bullish market, we saw a swift rise in the NEPSE index up to 1632 from which the market had a free fall of about 25% because of the fear of the coronavirus. Our market was closed for around 100 days during the lockdown. We saw an extreme rise right from the second day after the market was reopened. The market rose above the recent high before the free fall (1632), then it went on breaking the previous all-time high of 1881, then for the first time it crossed the 2000 mark.

Similarly, we witnessed an extreme and impressive rally in a short time frame which took the NEPSE index up to the current all-time high of 2735, but we also witnessed that the market doesn’t always move in the same direction (be it while going up or down), while the market broke all the previous records and made new ones, we saw various corrections. Many people felt that the bull run was over some might have even called the rise a bull trap but some people saw the corrections as a buying opportunity and accumulated shares at a bargain. Those who sold all the shares thinking the bull run was over surely bought the shares at a higher price later on after the correction was over while those who accumulated shares in the corrections are enjoying the bull run.

People think of buying shares ‘tomorrow’, make a list with their target price, but if the market starts correcting then people do not buy shares even below their target price and when the corrections are over they buy those same shares at a higher price (sometimes the price is even more than the price that was before the start of the correction). During the corrections people forget the famous and widely heard theories of the market such as, “buy the dips”, “buy low sell high” or “buy on red and sell in green”.

From a trader’s perspective it might be risky to buy shares when the markets are falling (correcting) but from an investor’s perspective corrections are a gift, it is like a sale has started from nowhere.

It is wiser to start investing during the correction than waiting for the correction to finish but to minimize the risks one should not invest all the money at once because the chances are high that the price of shares might further go down after the purchase, so one must invest carefully. Corrections also provide an opportunity to rearrange the portfolio. There is a high probability that the shares might fall after the purchase but there is no need to panic if the investment is made after thorough research, study, and analysis. One common problem with many people in Nepal’s share market is that they want their share price to increase or even hit the positive circuit within a few seconds after they buy the shares, people with such mindsets are definitely in the wrong business.

Among few certain things in the stock market, one is that the market is not a risk-free place, what we can do is minimize the risks by our knowledge, the proper study, research, analysis, diligence, being well aware of our investments, and truly believing in the fact that we cannot predict and beat the market we can only minimize the risks.

Corrections during a bull market are like a sale that has taken place, whose start as well as the end we do not know. The sale can go off anytime. People get shares at a discounted price during corrections. The optimistic and intelligent investor is not afraid of the correction but looks at the correction as a sale taking place and thinks it is time to go on a shopping spree and buy ‘good’ shares. As we do not purchase clothes or things with defects even if it is offered on sale at a much lower price, we should not purchase ‘bad’ shares only because we are getting them at a discounted price.

Rojin Joshi - An avid and optimistic investor

Disclaimer: This article is only my opinion and not investment advice, DO NOT make your investment decisions on the basis of this article. Be cautious before investing money in the stock market as it is you who will have to bear the consequences (both profit and loss) of your investment.

Editor's Note: This article was submitted by the author on 24th April, i.e. before yesterday's trading session that pushed the index 92.46 points higher in a bullish move.