The Problem with "This is a Great Buying Opportunity"

“This is a great buying opportunity”

You may have heard this many times over the past 4 weeks - yet markets have fallen each time after hearing this.

The advice itself sounds sensible - Markets have fallen, valuations look better, and long-term investors are told to step in. But we believe it is incomplete advice and assumes that you can Time the Bottom perfectly. The truth is that no one can consistently do it.

In this blog, we look at how phased investing in market corrections fares over trying to time the bottom, and how it helps to improve outcomes over time. We also analyzed data from past corrections and returns from phased investing fared better than most other options (unless you are able to predict the exactly the bottom of the correction!). More on this below in the section - Real Data: How Phased Investing Has Performed in Past Corrections?

Why Market Corrections Test Every Investor's Discipline?

Market corrections are a natural and necessary part of investing - they reset valuations, temper excess optimism, and create opportunities over time. In theory, equity investors are well aware of it.

Yet, when corrections actually occur, emotion takes over. ‘Expert’ opinions, greed, bull-market confidence and FoMo take over, and investors end up doing one of the following:

Mistake #1: Buying at the First Dip in a Market Downturn

One of the real risks in market corrections is not being wrong, but being early.

Investors, especially those who haven’t seen a significant correction or bear market before, tend to buy at the first dip or within first few sessions of market correction. While markets recover eventually, if you deploy a substantial portion of your capital at the first dip or early in a correction, you risk:

• Falling in the liquidity trap: Deploying too much capital too early removes your ability to act later. When markets fall further – you have no cash left and the real opportunity passes.

• Loss of confidence: Even if you have funds to deploy, you see losses accumulate on the funds you deployed early in the market correction and lose confidence. This often leads to behavioural mistakes, preventing investors from making rational decisions.

So an investor should wait for the markets to reach the bottom, right? Well, no…that has its own set of challenges.

Mistake #2: Trying to Pick the Market Bottom

Bottom Picking means picking the lowest point of the markets and buying then.  Simple and logical right?

Only one problem - no one consistently picks market bottoms

Even seasoned investors and institutions get timing wrong - not because they lack intelligence, but because markets are influenced by:

• Liquidity cycles

• Sentiment shifts

• Macro events

• Policy changes

All of which are unpredictable in the short term.

Trying to perfectly time entry often leads to investing too early, freezing when markets fall further or missing the eventual recovery.

Okay, so then what should an investor do?

Phased Investing - A Process-driven Market Correction Strategy

In our opinion, instead of trying to guess the bottom, investors should build a framework. Process over prediction.

An illustrative framework is presented below as an example

Maintain Liquidity

Market Correction or not, never go “all-in”. Always keep some capital for future opportunities. The quantum of capital you keep depends on your financial position, risk appetite, macro-economic situation, market valuations and outlook.

Holding liquidity may be a drag on your overall returns, but it provides a level of safety and enables you to capitalize on opportunities when they arise.

Defined Triggers and Phased Deployment

In market corrections, invest in tranches rather than lump sum. Decide in advance how much to invest at each level and what triggers additional deployment.

For example, an investor may have pre-decided criteria that in the event of a macro-economic adverse event, he/she will invest 10% of his surplus on 5% correction in NIFTY (or any other index), another 10% at 7.5% correction, additional 20% at 10% correction and so on. This can be applied to stock specific price levels as well and can change based on severity of the adverse events.

Sounds good in principle, but there is still an element of bottom picking here, right?

Yes, there is some element of prediction embedded in the deployment framework you decide – but staggered deployment ensures the risk is spread and you do not deploy everything too early or miss out deploying altogether.

Great, but does this work in real world?

Real Data: How Phased Investing Has Performed in Past Corrections?

We looked at 1-year returns from some past market corrections to see outcomes from phased investing.

For a phased investor, we assumed the investor deploys 25% of their investable surplus each at 7.5%, 15%, 22.5% and 30% Nifty corrections. For early investor, we assume they deploy their entire surplus at 7.5% market correction, and a bottom picker invests right at the bottom of the market cycle.

The returns under various scenarios, if you bought at your defined levels and sold one year from the bottom of the correction are:

	Early Investor	Phased Investor	Bottom Picker	Stay Put (Do nothing)
2008 Financial Crisis	7.3%	23.4%	85.1%	-0.8%
2015-16 Correction	6.1%	7.9%	25.1%	-1.9%
COVID-19	30.7%	50.4%	74.7%	20.9%
September 2024 Correction	4.0%	6.8%	13.8%	-3.8%

Source: NSE, Internal Analysis

Key Take-aways from Past Correction Data

• Being fully deployed before a correction or doing nothing (neither buying nor selling) in a correction gives the lowest returns amongst all scenarios. That's another reason to never be fully deployed, especially in seemingly overvalued market conditions.

• Bottom Pickers obviously earn the highest return - but it is very difficult and highly risky to pick the exact bottom.

• Phased investors earn more than early investors and in a more risk-balanced manner than bottom pickers.

• For less severe corrections (like September 2024 and 2015-16) – phased investing may result in a portion of your surplus remaining undeployed (since not all tranches are triggered). This may be a ‘drag’ on your returns – but we believe is a better risk-adjusted approach than the others and the returns are still better than early investors and staying put. The results show that despite the 'drag', returns are better than early investing and staying put.

For simplicity, we have considered the example of an index (Nifty) – however, the same can be applied for macro or market-driven corrections in individual stocks as well (but with different thresholds).

The Bottom Line: Process Over Prediction

When the next ‘Great Buying Opportunity’ comes, all you need is a process, that allows you to participate, without running out of capital or conviction.

Because in investing, markets don’t reward those who predict the bottom.They reward those who stay in the game.

We, at Vinamra Capital, help you to manage market corrections through phased deployment while keeping your goals and risk preferences in mind.