History of major corrections in the stock market occurs more frequently than academic models suggest and also more frequently then we would like. The question in investors mind is of course not ‘if’ the market will correct but ‘when’?

Unfortunately, nobody can accurately prophecies to this question. This is the reason they are called as ‘black swan’ event. But the attempt to answer that question is to take decision about when to stay fully invested in the equities and when to be completely out. In these scenarios investors evade academics and to pursuit for the answer acts like a distraction, preventing investors from investing wisely.

Recent experience suggest that corrections are short lived. From 2001 crash to GFC, to Greece defaulting, to BREXIT, investors are guided by all the analysts to believe and install buying on dips strategy to be successful investor. But history also suggest that some corrections can be long lasting. Investors over here need to understand their risk management skills that will allow them to comfortably ride through any tumult the market generate.

Did you know, for example, the great crash of 1929 in US wiped 90% of the value of listed business and took 23 years before market can re- breach earlier high. And did you know that Japanese Nikkei is still less than half of 39,000 level it reached in 1989 – 26 years ago.

There are many big names in this industry who have warned and we have alerted our readers about it over here and about high chances of crash.

Many serious investors demand for data to justify major changes to their portfolio. But the fact is that data confirms long-term investors are always better off being invested in the right businesses (Quality) rather than cash. But data also does terrible job of predicting turning points and that’s why signals and anecdotes have some use. We are sitting on almost 35% of our portfolio on cash because we are not getting right business (quality) at right price (value) to invest with. Though market is trading at all-time high, our business is still running as usual to find opportunities in the right business.

Despite bubbles and burst, in the long run you MUST be invested in the businesses that increase its intrinsic value by retaining profits and redeploying them at high rates of return. Prices of such businesses can and will be volatile but if you cannot see them falling 50% in crash then maybe you should re-think of investing in the stock market.

Why I am saying to stay invested?

Because generally, investors are poor at predicting market direction and equally poor in executors of the two decisions required to navigate a correction successfully. Not only must investors correctly forecast when to get out, but also successfully establish when to re-enter.

It is important to know when to buy and when to sell any shares. And the only way to guide through that situation is by knowing its values. If the quality business had run up far ahead of its expected intrinsic value band then the best thing is to sell them now and buy them when they turn cheap. This is the only reason we are selling stocks from our portfolio and it is no coincidence that a big chunk of our fund is sitting on cash today. But same time, we haven’t stopped investing. We are still looking at the opportunities in right business at right price and deploying those funds within them.

Conclusion

Sitting duck and not investing of the fear of crash is not good strategy to navigate any unforeseen major correction. The best way to navigate any correction is by investing only in the quality business at cheap price and if you don’t find any, then stay on cash.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.