Nothing works for an investment portfolio like sensible bottom fishing. Bottom fishing in the stock market ensures that you pick great stocks easily at extremely attractive valuations. Bottom fishing ensures that you minimize or even eliminate the prospects of long term capital loss. And, when sentiment reverses significantly, bottom fishing buys generate extraordinary returns.
Everybody agrees on the merit of bottom fishing in the stock markets, Yet, most people are unsure of when to set out to do it. The trouble is that nobody knows a market bottom. Few can predict it. With such poor odds of getting a prediction right, one must not even venture to predict. If you cant predict a bottom, when do you go bottom fishing? How do you decide that?
The only way to do it is to be a contrarian and have a process to do your bottom fishing. If no one else is wanting to buy, one must take a hard look at the valuations of companies. If the stock valuations look attractive, you must simply step out and start buying in small lots. When valuations get progressively more attractive, then you must buy more. If the deals get better and stocks trade even cheaper, you must grab as much as your bank account permits. If pessimism is extremely high, buying should peak at around that time. If you have exhausted all the money by then, take a vacation from the stock market. The fact that you ran out of cash ahead of a market bottom will only reduce returns and not alter the overall outcomes too much in the long run. All you can do to tide over a cashless phase is to imagine that the markets are shut for a short while. Soon, you will realize that a market bottom & reversal had occurred.
What should one do to ensure that he manages the bottom fishing process effectively?
Identify companies that you always wanted to own but stayed out of because the valuations were not to your liking. Decide a price for each company which you believe is a reasonably attractive valuation. Estimate the premium at which the current price is trading. If the premium is within 20% , then it is probably time to start bottom fishing. Decide on how much money you wish to allocate to each company at current prices. Buy 10% of your target quantity for every 5% drop in share price until you reach your target price. When you reach your target price raise the quantity to 20% and continue buying when the prices drop below your target prices. By following this approach, your will ensure that you will have enough money left to buy . But, there is a possibility that you may at times end up buying less than you aspired to own if the valuations do not fall below a certain level.
The choice which an investor needs to exercise while doing bottom fishing is simple. He must decide if he wants to buy his quantity paying a small premium or to play it safe and buy only if the prices keep dropping to extremely attractive levels. In the first approach, he will ensure that he deploys his money and makes decent returns. In the second approach, he will deploy his money fully only if markets become extremely attractive and his returns will be significantly higher.
For now, it is time to get your fishing gear out. Happy bottom fishing.