If you been an active stock market investor you must be definitely aware of how market corrections bundled with good growth projections serve as an opportunity of a lifetime to create wealth for successful investors.
But unfortunately, there are few investors who get worried about the mood swings of the markets and fear losing money to enter during such corrections. What they fail to realize is that such corrections are the best times to buy quality stocks at good discount prices.
Let’s understand why. It is said that numbers never lie and historical data has proved repeatedly that market corrections throw the best opportunities to create wealth.
Just look at how the Nifty behaved post every market correction.
As per the above table, Nifty dropped by 60% from its peak on 8th January 2008. An investor who entered the market during the lowest point in October 2008, would have made a whopping return of 92% in just one year. Likewise, all market corrections provide an opportunity to enter the markets at low levels, and when the markets recover, these investors were the happiest ones!
If you see the growth in Nifty after every correction, you will understand markets not only recovered but delivered a CAGR between 14-28% over the next 3 years.
Here we have mentioned the upside in the numbers from when the markets were at their bottom most, but imagine, even if you invested a little here and there, you would still be in a massive positive.
But the story doesn’t end here. Now you may think that all this is okay. But what if the markets are heading towards the next crisis?’
In fact not just markets, but even quality stocks that faced the heat of negative sentiments in the stock market were the first one to recover when markets started showing signs of revival.
Let’s take an example of Tata Elxsi. The stock fell down by 52% in Nov 2016. Many investors took this opportunity to accumulate this stock owing to its fundamental strength. Come now, the stock is now trading at INR 1,000, which is a gain of 87% in just two years after the fall. Even though the prices may fall, if the fundamentals are intact, there is no reason to worry about the value the stock can deliver for you in a long run.
But, there is a flip side of the same as well. Just take a look at the below table.
As you can see in the above table, these stocks corrected sharply but unfortunately failed to create recover. Suzlon, JP associates or DLF were actually the blue-eyed stocks of their time. However, when their fundamental strengths were tested, even though there were eye candies of many investors, they never bounced back.
For a successful investor, he would not just invest or hold on to just about any stock that has fallen, but, he would look to latch on to fundamentally strong business that are showing strong growth prospects.
Having said all this, ask yourself a simple question. What’s the most common way to create wealth in the stock market? You may think that it is buying low and selling high, and yes you are absolutely right. Market corrections provide you an opportunity to buy quality businesses at low levels. And as a smart investor, you should leverage on to this opportunity of a lifetime to accumulate stocks at a bargain valuation.
Well, by now you must have understood about market corrections and its importance to create wealth. Keep watching this space for more such informative articles on wealth creation.