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Sunday, November 23, 2008

Five more things to avoid in a Bear Market

A lot of investors who joined the party from 2004-2005 and haven't really experienced a bear market bought a lot of stocks during the current downturn - specially after the Sensex breached 12000 and then 10000. They are now realising that just because the market has fallen a lot from its peak it doesn't mean that it can't fall even more.

So here are five more things you should avoid doing in the current market situation.

6.  Don't be swayed by the occasional bullish news. They should be noted and filed in the memory, but no action should be taken yet. Instances include the US bail out, the Chinese bail out, reduction of CRR/SLR/repo rates, slowing of inflation. These may appear to be good news and the market usually reacts positively to them. But you must understand that most of these are actually measures to put some upward impetus to the crashing economy and markets.

7.  Don't blindly trust your stock picking skills. You may have picked some real winners during the bull run. So did every one else. Bull runs lift all stocks - good, bad or ugly - to stratospheric levels. Be very careful in preparing your buy list in a down market. Do some 'paper' trading to see if your chosen scripts are going up, down or remaining static during the brief rallies. After some time you will realise which stocks should remain in your buy list.

8.  Don't assume that past performance will get repeated in future.  Just because certain stocks did very well in the later stages of the bull market doesn't mean that they will do well again when the market turns. Realty and cement stocks come to mind.

9.  Don't confuse inflation and capital protection. At times like these, you may be better off locking your cash into a two year fixed deposit at 10.5% and opt for monthly or quarterly interest. You may think that tax adjusted return will be 7% which will be eaten away by inflation of 9%. But a year hence, the inflation rate may fall below 6% (mostly due to higher base effect) and you will actually gain. Plus your capital will be safe. The periodic cash flow from interest income can be used if some unbelievable buying opportunities come by (like TISCO falling to Rs 100 or Bharti going below Rs 400).

10. Don't do some thing silly on a hunch because you are getting bored. This is a great time to actively learn the importance of patience. If you have targeted some interesting stocks (I'm looking at Maharashtra Seamless and Yes Bank), buy a small quantity and keep actively tracking it. When it breaches a previous low, don't jump in. Wait to see how far down it'll go. When it goes lower, wait some more. Till you see volumes almost disappear. Then buy some more.

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