What To Do When Stock Prices Are Expected to Fall?

Something about human behavior stops all of us from making a decision to sell a thing in loss, no matter how deep are losses keep growing. Equally, greed for a few rupees more is what keeps the gambler going. When it comes to stocks, the best of us behave no different.

Exactly 3 months back, I wrote a post about market valuations and said that the overall stock valuations are expensive. I cannot tell you the loss of interest in that post at that time, and since then. I bet many of my readers did not take me seriously at that time. Why should they have; the markets were booming!

Now with markets falling, a little bad news from some parts of the globe everyone is suddenly talking about valuations. Mind you – we are less expensive now than we were back when I wrote that post (although only fractionally).

For my views on current stock prices and what may happen in short term, see the video below:

Why Do Investors Not Exit When Stock Prices Are Expected To Fall?

Let me assure that any rational person knows when stocks are cheap and when they become expensive, when stocks should appreciate and when stock prices are expected to fall. Trouble is that nobody knows this in the short term even if there is an industry built on such predictions.

Our gaming instincts coupled with the rush of quick money making potential gets the best of us over-invested at levels which are only good for systematic long term investing – Never stop your SIP because markets may look expensive!

Some Ridiculous Market Behaviours:

In case you find yourself doing any of this right now, ask someone else (who you trust) to look at your portfolio:

[1] It took just 2 months for the share price to fall from 380 to 150, why can it not recover and hit back 380 in the next 2 months. In fact, I should buy more now!

– This guy is just following price action and not even thinking about the underlying stock.

[2] This stock has already corrected so much, it’s time that it goes up. Also, in certain situations – this stock has already run up a lot, let’s buy something else.

– Price Action of the weirdest kind.

[3] I don’t want to buy a stock which is trading at 1000+ levels, I mean how much more can it go? I’d rather look for something for Rs 10-20, even if it goes up to Rs. 100, I would have made 5-10 times.

– This one is bizarre. Also – again driven by price.

[4] I purchased the stock at 400. I don’t care about the current situation, economy, trend, fundamental, nothing! I will not sell it at a price below 400.

– Sunk Cost Fallacy. Not a care about a failing business.

[5] Finally . . . . . 8.5% fixed income return is boring. I’d rather be in stocks.

– Somehow people are so convinced with the whole ‘inflation eating into their savings’ notion that they have developed an aversion to fixed deposits and other fixed income schemes. Often this may be the best thing to do. Think of it this way – You are not only making 8.5%, you are saving a much higher percentage of loss.

Also Read: Best Fixed Income Investment Options in India