How to make profits even during a stock market crash?

The idea in any crash is to sell into weakness and buy into themes and sectors where you can see sustainable strength.

Aug 21, 2019 10:08 IST India Infoline News Service

Examining Profits
When there is a stock market crash (we have seen many in the last 20 years), the first reaction is to go on the defensive. While it is essential to cut losses and protect your capital, such crashes also give you an opportunity to make profits. How do you actually make profit out of a market crash? Here are five ideas for you.

A crash is the time to buy into strength and sell into weakness
This is a key decision when you see the markets correcting sharply. The golden rule is to buy into quality and avoiding cyclicals. Look for stocks that have a strong dividend yield without earnings risk. They can be good bets in such markets. Don’t buy the very stocks that drove the rally in the first place. For example, buying tech stocks in 2001 or realty stocks in 2009 would have been more like a misadventure. The idea in any crash is to sell into weakness and buy into themes and sectors where you can see sustainable strength.

Treat stocks like an attic bargain: get your shopping baskets out
This is an extension of the earlier point. If you were willing to buy Hindustan Unilever at 45 P/E, there is no reason you should not buy the stock at 35 P/E. Market crises or no crisis, people are not going to stop using detergents and toiletries. Treat equity shares like a normal bargain shopping and try to get great stocks at great bargains. A sharp correction is a golden opportunity since you are going to get quality stocks at attractive prices. You need to be careful about buying into any mid cap or small cap stocks since they may have larger corporate governance issues. This is the time to get your shopping baskets out and focus on the high quality names that are available cheap.

Did you know that you can actually profit from tax farming?
This is a slightly complicated argument but popularly used by large investors and HNIs. Assume that you are holding on to a stock and it is down in the last 10 months. In case you are already having short term gains during the year, you can book a loss on this stock and repurchase it after a few days. That way you hardly lose anything in terms of market value but the notional loss is converted into an actual loss and used to reduce your overall tax liability. With LTCG taxed, you can apply that to long term gains also. Even if you don’t have profits to write off, you can book these losses and carry forward for 8 years.

Since you don’t know the bottom, focus on discipline and regular investing
When markets are falling, don’t try to predict the market bottom. The only thing you know is the mix of your portfolio and your risk exposure. Your focus in these times should be more on managing the risk. In fact, you must adopt a phased approach to buying because it is possible that you will get a better price. While the benefits of this strategy will not be visible immediately, you will see the benefits over a longer time period in the form of better ROI.

Make the best of futures and options
Instead of just trading on futures and options, you can use futures and options to hedge against your stock holdings. Use short futures to lock in the profits or use put options to make money on the downside. You can also write higher call options to reduce your cost of holding stocks rather than sitting on notional losses. These derivative strategies can go a long way in improving profits and enabling you play the market on the downside. In fact, your profits can actually get magnified in such cases, provided you play it carefully.

Remember, a market correction is a great opportunity for serious investors. In fact, if you prepare yourself thoroughly with a quality portfolio in the midst of this carnage, you will be positioned to capitalize when the next Bull Run strikes!

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