8 investment and trading lessons to take from Covid-19

Here are 8 investment and trading lessons to take away from the crisis so far.

May 07, 2020 11:05 IST India Infoline News Service

A lot has happened in 2020, which many of us thought unlikely. Nifty hit a series of lower circuits in two weeks and Templeton wound up 6 debt funds overnight. Bajaj Finance corrected more than 60% in over a month and crude oil closed in the negative. In the midst of this chaos, India and large swathes of the world remained locked for over a month due to COVID-19. Here are 8 investment and trading lessons to take away from the crisis so far.

Investment lessons to learn from COVID-19
Even true blue chips can erode serious value
Few would have imagined that a stock like an HDFC Bank, Kotak Bank or Bajaj Finance could give up 50-60% value in a short span of time. But the COVID-19 correction has been a great leveller. It has proved that when structural issues crop up, then the bluest of blue chips are not immune. In this case, the structural issue refers to apprehensions that the lockdown could result in a sharp fall in consumption and a sharp spike in loan defaults.

It is the most adaptable that survive a crisis
As much as COVID-19 has highlighted the vulnerability of blue chips, it has also underlined how adaptable companies with flexible business models are best equipped. Look at the stocks that bounced back sharply from the lows. In the case of Reliance it was the path-breaking Facebook deal. For HDFC Bank it was control on asset quality and for TCS it was the persistent focus on digital. Adaptable companies may not be unaffected, but they certainly emerge unscathed.

Every crisis throws up investment opportunities
In the midst of the pandemic, pharma stocks are hitting new highs. That is hardly surprising. A sudden thrust on generics combined with the disruption created by Chinese supply chains restored interest in Indian pharma. Most of the key generics players in India are either at 52-week highs or have gained more than 50% from their March lows. The moral of the story is there are opportunities to grab in every crisis.

Traders don’t sleep over positions
Most traders would have learnt this the hard way when Nifty opened on lower circuit. But the harshest lesson was reserved for the oil traders who left long positions open on 20th April. The benchmark WTI crude closed at ($-37.66/bbl) and traders saw their losses multiply four-fold even as they slept. This is specifically true for traders in volatile commodities like crude oil. There is nothing like a safe overnight position and so it is best not to sleep over your positions.

Hope is a good breakfast; but a bad supper
One lesson from COVID-19 is not to rest on hope in this kind of market. Be it long positions in Bajaj Finance or in crude oil; had you adopted an averaging strategy, you would have been deep out of the money. Keynes once said that stock markets can be irrational much longer than traders can remain solvent. That was harshly driven home during COVID-19. It is best not to rest your trading strategy on hope. Managing risk is a better option.

Debt can be awfully risky too
It is not like India has not seen debt defaults. During the 1990s, scores of NBFCs defaulted on fixed deposits resulting in losses worth crores for small investors. However, over the last 20 years, investors have surely grown to believe that debt funds were relatively risk free. Defaults by Essel Group, ADAG, IL&FS and DHFL were ignored because they just caused a dent on returns. Things changed when Templeton wound up 6 debt funds overnight. It highlighted that it was possible to lose a substantial part of your capital in debt, especially if your fund manager played in low-grade bonds.

Diversification is you best hedge
We heard this ad nauseam; but not putting all your eggs in one basket does pay off. We saw that in that in the case of investors who hedged their portfolios with gold. Gold has emerged as the best performing asset class in the last 1 year yielding 32%. Similarly, equity portfolios focused on banks or a debt portfolio focused on credit risk funds would have meant deep cuts in your portfolio. Virtues of spreading risk have been brought out starkly by COVID-19.

Finally, focus on goals and asset allocation
Remember, corrections in the Indian market are nothing new and asset classes have recovered and reinvented in the past. COVID-19 will come and go but that does not shift your goals or your goalposts in any way. The only answer to that is to focus on asset allocation. For example, had you focused an asset allocation model, you would have automatically booked out of equity at higher levels. What is more; the correction would have left you the opportunity and the liquidity to capitalize on it.

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