Stock market behaviour and finding an opportunity from it
The stock market is forward looking. That is, current stock prices are established based on the expectations of the future earnings power of the company.
The future expectation is depending upon many factors like,
Company Financials: Earnings expectations, profit margins, increase/decrease in debt etc.
Company Announcements: New product launches, mergers and acquisitions, management change etc.
Economic Factors: Inflation, Interest rate, economic growth etc.
Technical Factors: Market sentiment and trends
Others: Government policies, tax announcements, competition etc.
Different types of investors depend on different factors. Short-term investors and traders tend to prioritize technical factors, for long-term investors fundamentals of the company play an important role.
Whenever there is a good or bad event/news about economy, industry, company etc. stock prices will raise/fall irrespective of the company fundamentals, this is the time where trades and speculators lead the market sentiment/trend.
The above graph explains how fast markets will react to the future expectations, Nifty has been crashed by >35% with a very few reported Covid cases and even lockdown wasn’t announced in India.
As a long-term investor, market crashes to be treated as an opportunity to re-enter into the market as long as you are focusing on the quality stocks, unless economic is going to shut down.
Historically, market recovery is also as fast as crash in any big events, so catching bottom of the crash is impossible and they will lose the opportunity when markets recover sharply.
Below illustration explains the benefits of investing in crashes,
In the above table, Investor A and C benefited simply because market has to recover 33% for 25% crash.
So, it is important and very useful to use market crashes as an opportunity to create long term wealth.
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." - Warren Buffett.