The Stock market crash today is believed to be a devastating phenomenon in world history. With the recent outbreak of the Coronavirus or Covid-19 pandemic, the entire world has suddenly changed into a different place to live in.
Market crash, though uncertain in its timing is obvious. It happened before. What is more important is how you reap benefits from it. It’s a heartbreaking event if you’re a victim of such a crash.
Today I will tell you a few secrets and key steps you need to take in a falling market which can make you millions. No matter whether you’re a beginner or a professional or a loser.
You’ll also learn how to deal with such crashes and how to foolproof your investing journey in future. Before coming straight to our point, I need to point out the key factors that are responsible for the stock market crash of today.
Why Did Stock Market Crash Today?
The stock market crash of today has started crashing during the 3rd week of February 2020 onwards. If you regularly read stock market news, you could notice that the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index all crashed miserably from their record highs. Global stock markets crash today including the Indian market reported their largest declines since the 2008 financial crisis.
What Panic Factors Fuel This Crash?
Markets dislike uncertainty and whenever market participants sense that panic selling starts. Due to this uncertainty and panic situation, you might have seen a wild nosedive and high volatility in the markets. Rising concerns and economic shutdown worldwide because of COVID-19 is the main cause of the stock market crash 2020.
Since then global markets have become extremely volatile due to the Covid-19 pandemic. Alongside the oil price war between Russia and the OPEC countries has worsened the situation. Chances are we are heading towards another Great Recession. This is because most of the leading countries are under continuous total or partial lock-down phase. Travel bans and other restrictions from around the world undermined all businesses and economic activities.
Fear of Uncertainty Due to Covid-19
The stock market crash today in the global as well as the stock market crash of India is due to the Fear of Uncertainty. People across the globe are anxiously waiting for how and when the situation will improve. How and when the resumption of normal economic activities and trade will start.
Due to the large-scale travel ban, restrictions, and lock-downs in multiple countries, the signs of a slowdown of growth in economies are already visible.
So, once the panic situation recedes and economic activities restored, Indian markets should respond favorably. Obviously, for this, demand needs to be increased with the help of various bail-out packages and boosting up the purchasing power of masses. And due to crashing crude oil prices, India may be in an advantageous stage to cash in the benefits.
At the peak of the on-going Corona Pandemic, you should be extra careful not to rush in and go for a buy-on-dip strategy. We have just moved into a new quarter-2020. So, you need to wait for the next quarterly results of potential companies and check their then valuations. The corona pandemic is not yet over. It may last longer until antidote and vaccine are invented.
This is crucial because you’re going to invest in good companies for a long haul. You can’t toss your hard-earned money into the air. The current quarter is going to tell you which companies will survive in the acid test. This is because corona effects will be going to impact the world economy to a greater extent.
We’re going to get a new post-corona world and a new normal. So, patience, self-discipline, and prudent judgment in finding potential stocks will serve you the best.
If you check out the past stock market crashes, you would find that the stock market crash of this intensity had brought in attractive opportunities for long-term investors. So, the stock market crash of this kind can bring in big money for you.
After lifting of Lockdown and a meaningful solution to this pandemic, a V-shaped recovery is likely in most beaten-down blue-chip stocks. You may expect U-shape recovery if the problem persists longer.
Sectors like pharmaceutical, healthcare, biotech, internet of things, AI industry (artificial intelligence), information technology; FMCG, etc are likely to perform well. Auto, auto ancillaries, private banks, and utility, etc will follow suit.
How to Find a Good Quality Stock Easily?
Before even thinking of putting your money in this bear market, you need to figure out good quality stocks. Buying good quality stocks at their bargain prices is very critical to your investing journey. By using just a few simple tools, you’ll be able to master the stock market. Yes, believe me.
If you buy stocks of good companies that have a high return on capital (ROC) high earnings yield (EY), and manageable debt to equity (D/E) ratio, you’re almost finished. Buying a quality stock at bargain prices can give you high winning chances. When you buy them at bargain prices, it will offer you a very good margin of safety.
You might have heard about Benjamin Graham, the greatest investment advisor who introduced the philosophy of “value investing” and “margin of safety”. Graham figured out that Mr. Market is sometimes giving away businesses at unreasonably low prices. By buying good businesses at bargain prices is a low-risk game. Bargain prices can offer you an attractive margin of safety.
My article is all about buying good quality value stocks with high ROC and Earnings Yield at bargain prices. So, how could you simply define the above terms? I will tell you all in detail.
Return on Capital (ROC) or Return on Capital Employed (ROCE)
It is the ratio of EBIT of a company divided by its tangible Capital. The tangible capital includes net working capital plus net fixed assets. EBIT is nothing but earnings before interest and taxes or pre-tax operating earnings.
You need to know that different companies operate with different levels of debt and tax rates. When you refer to operating earnings before interest and taxes or EBIT, these enable you to judge and compare the operating earnings of companies with minimal chance of distortion in the accounts. For finding ROCE, tangible capital employed is used for calculation instead of total assets.
Tangible capital is the summation of net working capital and net fixed assets. The net-working capital, also known as working capital is the current assets minus current liabilities which you’ll find in the balance sheet of the company. And net fixed assets are nothing but the purchase price of all fixed assets less accumulated depreciation.
The idea here is to figure out the amount of capital required for the smooth running of the company’s business. Current assets are cash, accounts receivables or any unpaid bills, inventory of raw materials and finished goods, and other assets that are capable of turning into cash within the current 12 months period. And current liabilities include accounts payable, wages of employees, taxes payable, and the current long-term debt within 12 months period.
You can judge a company’s liquidity, operational efficiency, and its short-term financial health by its working capital. If it has positive working capital, you are assured of its potentiality to invest and grow. If a company’s current assets fail to exceed its current liabilities, then you should be doubtful of its finances.
On top of it, a company needs to purchase fixed assets such as real estate, plant, and machinery necessary to conduct its business. This is because some fixed assets may need to replace them to keep the unit in the best working condition or addition of some assets for its expanding business.
Companies with high returns on capital are very likely to have a competitive advantage. This competitive advantage keeps competitors from destroying their ability to earn above-average profits. The competitive advantage allows them to continue to earn an above-average return on capital.
Earnings yield is the ratio of pre-tax operating earnings (EBIT) to enterprise value. The enterprise value is the summation of the market value of equity and net interest-bearing debt. Earning yield has some advantages over commonly used price to earnings ratio (P/E ratio). The idea behind the concept of E.Y. is to work out how much a business earns.
The enterprise value allows both the equity in a business as well as the debt financing by a company to help generate operating earnings. By using EBIT and comparing it to enterprise value, you can calculate the pre-tax earnings yield on the full paid-up capital of a business. This shows how a company is running with different levels of debt and different tax rates.
Debt to Equity Ratio (D/E Ratio)
D/E ratio is defined by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements. The ratio is used to evaluate a company’s financial leverage.
A higher ratio of D/E indicates that the company is getting more of their financing from borrowing. And that may pose a real risk to the company. If debt levels are too high, it may lead to financial distress or bankruptcy during an economic downturn.
Some good companies run their businesses debt-free. Some companies maintain the D/E ratio of around 1 to 1.5. But the ideal D/E ratio varies depending on the industry because some industries use more debt financing than others. Manufacturing industries and capital-intensive industries such as the financial companies often have higher D/E ratios that can be greater than 2
A D/E ratio of 1.5 means that there are half as many liabilities as there is equity. D/E ratio of 1 would mean that the companies and lenders have an equal stake in the business. If the ratio is less than 0.5, it means the company is financed mostly through equity. If it’s greater than 0.5, the company’s assets are mostly financed through the debt route.
Interest Coverage Ratio (ICR)
When you analyze the D/E ratio, you should also see the Interest Coverage Ratio. ICR is defined as EBIT divided by interest expenses that a company uses to incur for its outstanding debt. It is used to decide how easily a company can pay interest on its outstanding debts. A higher coverage ratio is better for a well being of a good company.
Promoter’s Holdings in a Company
If you’re an investor from India, you should also check the promoter’s share in a company to make things safer. Promoter’s holdings of more than 30% are safer and more popular in India.
A promoter may be an individual firm or founder, who helps the formation of a company in its initial stage, and takes an active role in its promotion, and appeal to people to invest money in the company. Promoters should maintain the utmost good faith and disclose all material facts about the company’s business.
The main cause of concern is that in times some promoters pledge their portion of shares in the market to raise money in their capacity. The pledging of shares means taking collateral loans against the shares that one holds to meet its business or personal requirements.
So, you need to be very careful while investing your money in a company that pledges its shares by its promoter. A higher percentage of pledging may sometimes lead to a disgraceful situation. In that case, you should investigate detail into this matter. Best you should avoid investing rightly in this company if you find it out with a high percentage of pledging.
What Stocks to Buy
You must be aware of the fact that the stock markets across the world have crashed due to the corona pandemic. You might have eroded some of your hard-earned capital. This happens rarely in our investing journey. Nobody has control over it. Market crash at this intensity was overwhelming. Most of the quality stocks are traded at their never-seen valuation and bargain prices. You’ll find many good stocks around the globe in their cheap valuation.
If you’re an investor or a trader for a while, you must have experienced this painstaking market crash in 2008. And most probably you’ve gone through a devastating period in your life and erode some of your capital bases. To be frank, I too have lost out a large chunk of money in the market.
Experts believe that this is the right time to buy high-quality stocks at their bargain prices. And this is why; you should keep some funds aside to get hold of this lucrative lifetime opportunity you may come across. But you might be undecided keeping in mind the recent crash. Even thinking of putting your single penny in the stock market is fancy for you.
Keeping this crash in mind, I also think that the right time to buy cheap stocks may not come yet. Because nobody knows what is in store for us soon. Corona pandemic may last for months until the situation improves globally or effective vaccines arrive in the market.
Is the valuation of the Indian Companies Fair?
Before coronavirus sets in, the valuations of some of the Indian stocks were trading on the higher side. This may be due to inadequate earnings growth that make them a bit expensive. The recent market crash has brought several stocks down to an attractive valuation. Now, you can buy them at bargain prices.
But before that, you need to do your researches and wait for a consolidation phase. You need to look for good quality stocks at discounted prices with a pretty good margin of safety. I will tell you how to identify good quality stocks later using darn easy points.
What Market Expects for a Turnaround?
Once the corona cases contain or some good news such as effective antidotes or any effective vaccine arrives, you could see positive sentiments prevail around the markets. Of course, for markets to be turned around, some bailout packages need to be infused from the government of respective countries.
The market is now gripped with fear, uncertainty which is detrimental to economic activity and demand. If the situation remains gloomy, you could see the markets volatile and susceptible to daily news-flow around the pandemic, a phase where no investors could be interested to put their money in.
How Indian Investors can Profit from a Stock Market Crash of Today?
The market today is in a panicky state. No retail investor wants to buy. Many are confused about what to do. The market is behaving differently. With every news update around coronavirus, the market moves with wild volatility. There is no definite direction and stability in the market due to a lack of clarity.
If the corona situation improves, the market could recover some lost territory. Else you could see it slipping into an extended bear phase. So, you need to take a wait and watch policy. Until then, your primary duty is to do your research and get your investing fund ready. It is obvious that due to the corona pandemic, economic growth and corporate earnings in India are impacted to a great extent.
Sectors like travel, tourism, hotels, real estate, infrastructure, manufacturing, and services are living through a tough time. The Work-from-home concept has a limitation. The financial sectors are crippling with inappropriate NPAs, scandals, which shake the confidence of investors.
As retail investors, you need to look out for some silver lining sectors. Sectors like pharmaceutical, healthcare, biotech, agriculture, FMCG, utility are pretty good that tends to meet the basic needs of people. Due to the crashing of oil prices, oil-based sectors like paint, lubricants, petrochemical, plastics, rubber could do well in the longrun . Once the corona situation improves, and lock-down withdrawals in phase out manners, you could see better earnings of those sectors.
Here are Some Important FAQs that might have come in your mind.
Is There A Recession Coming In 2020?
The global economy may enter into recession this year. The Organization for Economic Cooperation and Development has already slashed its forecast for 2020 growth by half, from 2.9% to 1.5%, and the International Monetary Fund(IMF) is also in the process of revising it.
After the financial crisis of 2007-2008, the corporate debts of G7 countries have been increased substantially. If the economic situation worsens, companies with high levels of debt run the risk of defaulting. In 2019, ‘The Institute of International Finance’ had raised a serious concern. It forecasted that in an economic crisis half as severe as 2008, the non-financial firms could be without the earnings to cover the interest payments.
The McKinsey Global Institute has also issued a similar warning in 2018 for the high risk among emerging markets such as China, India, and Brazil. In April 2019, the U.S bond’s yield curve got inverted or slopped downward, which hinted of a 2020 recession across the world. A yield curve is nothing but a dotted line that represents yields or interest rates of bonds. The slope of the yield curve gives you an idea of future interest rate changes.
This inverted yield curve, coupled with trade war fears prompted a sell-off in global stock markets during March 2019. This resulted in more fears that a recession was imminent. Debt in 2019 was 50% higher than that during the height of the Great Financial Crisis. Economists have argued that this increased in debt is what led to debt defaults in economies and businesses across the world during the recession.
Why the Indian Stock Market Crash as of Today in 2020?
Indian market began correcting when the union budget placed on 1st February-2020. And then it started crashing alongside with the global markets. Because of the griming situation due to the outbreak of coronavirus, Nifty50 fell nearly 4900 points from its peak of 12400. After that market recovered nearly 47% from its ditch, a V-shape recovery.
Technically (as per Elliott Wave Price Projection analysis) Nifty could plunge in the level of 7000 So is the case with Indian Sensex today. These are the reasons for the Indian stock market crash today.
Is the Stock Sarket Going to Crash Again?
Maybe it will dropdown once again. Nobody has any idea how far coronavirus affects the global economy. The situation is very much gloomy. Many leading countries in Europe and America have been going through a tough time as corona infections and deaths are reaching its peak. The world has never seen this type of pandemic in decades.
There are chances that the stock market crash of today could extent further. Due to all sorts of ban, restrictions, and lock-downs, there could be a slowdown of growth or negative growth in economies of leading countries. If a recession comes, it could surpass even 2008 level. Next Indian stock market crash prediction could not be rolled out.
Even legendary investor, Warren Buffett is expecting another crash in near future. That’s why he might have sold out many stocks including Goldman Sachs. Please watch this important video to get a clear picture.
What was the Worst Stock Market Crash?
The stock market crash 1929 was the worst one in American history which began on October 24, 1929. The Dow Jones dropped nearly 25% shaving off almost $30 billion in market value. It started crashing from its peak in August 1929 when production began declining, and rising unemployment. Low wages, escalation of debt, a tumbling agricultural sector, and liquidity problem of large bank loans also added fuel to fire. And because of this panic spread all around and overvalued stocks, the market crashed.
What Happens if the Stock Market Crashes?
When the Stock market crashes, it creates negative sentiments for investors. A market collapse can wipe out millions, even billions of market capitalization. Everywhere there is a negative outlook around the market. Panic selling comes into play. You could find heavy sell-off and short-selling of stocks until some good news arrives. Bear overpowers the bull and bear market may exist for a longer duration.
How Long did it Take for the Stock Market to Recover After 2008?
The stock market fell miserably nearly 90% during the 2008 financial crisis. It took almost four years to recover its loss. The stock market crash 2008 was a global crisis that lasted nearly 18 months. There was a great pessimism around the market. If you are a passionate investor, you might have seen several ups & downs in your investing journey.
Do You Lose all Your Money if the Stock Market Crashes?
You could lose your capital if you get panic and sell your position in a market crash. You need to have patience and manage things cool-headedly. So invest your money in good companies. And holding your position despite what happens to market should be your investing mantra. Efficiently managed good companies never remain in their losing position. They often bounce back and regain their businesses after a few sagging quarters. So their stocks rise again.
Should You Hold Your Existing Stocks or Sell?
If you go through the history of stock market crashes, it was crystal clear that the market always recovered from its bear zone when the favorable conditions return. The bull market and bear market co-exist hand in hand. Your foremost aim should be to acquire good quality stocks at their bargain prices.
If you purchased good quality stocks backed by fundamental analysis, why should you throw your money by selling them at lower prices? If you think the fundamental of your holding stocks weakens, it would be better to sell them at losses. But never panic and lose your cool.
Is it a Good Time to Buy Stocks?
Though there is a lot of uncertainty in the market now, so you want to wait until the market settled. And then you may buy the most suitable stocks as low as possible. But waiting too much may result in a missed opportunity. You may not get such an opportunity in your lifetime to buy your stocks at these levels again. So, use your head and look for technical support levels.
When you see strong support, just calculate the earnings yield. If you find the earning yield high enough, it means you get a good margin of safety. I will discuss earning yield and margin of safety later in my post. But make sure you always put aside some money which you can afford and you won’t need them for at least three years.
How Do You Survive a Stock Market Crash?
If you buy stocks without doing your proper research, it is likely, that you won’t survive in a stock market crash like today. So always do your well-thought-out research and purchase good quality stocks. That way you can save yourself to a greater extent.
And, never take advice blindly from so-called market experts. If you can, try to avoid frequent updates from the live TV shows like CNBC and turn off the hot news closely. Many a time, these will distract you and put psychological pressures on you.
How Do You Get Rich in a Recession?
Experts believe that the best time to get into the stock market is while the recession is coming to an end. Then, how can you know the recession is at its end phase? Well, when you see the economy is growing little by little with improved corporate results, you would be more confident.
To get rich from stock investing, you need to take calculative risk. Here you’re taking low risks by buying them at their discounted prices. Thus you can grow wealth by putting your money into good quality stocks over a long timeframe with a minimum of three years.
Let me tell you that first, you need to figure out a company’s ROC, D/E, Earnings Yield, Promoter’s Holding, and Pledging percentage of the previous year. Try to find ROC of over 25% and a P/E ratio of more than 5 which gives you a high earnings yield. You can do it either manually or through online screeners such as https://investing.com or https://screener.in (Indian market).
When you finished finding out your potential stocks with high ROC, high Earnings Yield, low D/E, and low pledging percentage, you’re almost done. What you need now is to compare those hand-picked stocks with respective real market conditions. Just make sure you need to pick companies of higher market cap for getting higher liquidity.
Just take the EPS (earning per share) of the previous year and divide it by market price of your hand-picked stock. The figure thus you work out is nothing but the earnings yield on a realtime basis. When you find the figure (in percentage basis) is rising as compared to earnings yield of the previous year, you should be happy enough to find your stock at a bargain price. In other words, its margin of safety is pretty good.
Here I am giving you a live example of an Indian company HEG. Its approximate previous year’s ROCE:139%, Earning Yield:41.6%, D/E Ratio:0.16, Market Cap: INR 2968, Promoter’s Holding:59.62 with zero pledgings. And its last year’s (2018-2019) earning per share (EPS) was INR 758 and the current stock price is INR 770. So, when dividing EPS by 770, you will get E.Y. at approx 98%. So you’re getting an attractive bargain price with a pretty good margin of safety.
If you find this post valuable, please leave a comment. I am sorry that I failed to post new articles for months as I was traped in a lockdown away from home and remained in 14 days quarantine.