When to Become Greedy, When to Become Cautious?

Understanding the Stock Market Squid Game

Late Rakesh Jhunjhunwala once remarked that a savvy investor waits for a stock market crash to buy stocks at discounted prices, whereas the average investor tends to pump money into stocks during a bullish trend. This philosophy aligns with the broader understanding of strategic stock market investing: being opportunistic during downturns and cautious during euphoric rallies.

Stock market experts emphasize that timing the market is nearly impossible. However, following a systematic approach can help investors navigate volatility efficiently. Investing during market corrections requires discipline, patience, and risk management strategies.

The Strategy of Buying During Market Corrections

Financial experts suggest a structured approach to stock market corrections. Instead of attempting to time the exact bottom, investors should consider accumulating stocks in phases. Here’s how it works:

1. Initial Purchase: When the market corrects by 5-6%, an investor should consider initiating the first tranche of buying.

2. Subsequent Buys: If the market continues to correct further by 4-5%, the next tranche of investments should be made.

3. Continued Accumulation: Investors should continue purchasing in similar tranches during each additional 4-5% decline.

This method ensures that investors acquire stocks at progressively lower prices, thereby averaging down their cost basis and maximizing potential upside when the market recovers.

Risk Management: The Importance of Stop-Loss

While investing in tranches is a sound strategy, it is crucial to maintain stop-loss levels to mitigate downside risks. According to Anshul Jain, Head of Research at Lakshmishree Investment and Securities, no investment guarantees returns. Therefore, having a well-defined exit strategy is essential.

• Investors should maintain at least a 7% stop loss from their buying price to minimize risk.

• High-risk investors may adjust their stop-loss threshold slightly higher, around 8-9%, to accommodate greater volatility.

• Stop-loss levels should be reassessed based on market conditions and stock-specific fundamentals.

Wealth Creation During Market Downturns

A smart investor views market corrections as opportunities rather than setbacks. According to Mahesh M. Ojha, AVP at Hensex Securities, strategic investors:

• Invest gradually instead of all at once.

• Avoid excessive greed during bull markets and book profits when targets are met.

• Set realistic investment goals, rather than expecting multibagger returns from every stock.

• Maintain a diversified portfolio to minimize individual stock risk.

Leveraging Tax Benefits: Loss Harvesting Strategy

Another aspect of the stock market’s Squid Game is tax-efficient investing. Pankaj Mathpal, MD & CEO at Optima Money Managers, explains how smart investors utilize loss-harvesting techniques:

• Offset Capital Gains: Losses from underperforming stocks can be used to offset capital gains in profitable investments.

• Reduce Tax Liabilities: By realizing losses before the financial year-end, investors can lower their taxable income and optimize their tax liabilities.

• Reinvest for Growth: The funds freed up from loss-harvesting can be reinvested into quality stocks during market downturns.

Conclusion

The stock market’s Squid Game is a test of patience, discipline, and strategic execution. While market downturns present lucrative buying opportunities, they also require careful risk management through stop-loss measures. On the flip side, bull markets demand caution and profit-booking rather than blind optimism. By following a structured investment approach, maintaining realistic goals, and leveraging tax strategies, investors can navigate the market effectively and build long-term wealth.