how to play stock market in 2022

Understanding this quote is the key to investing in stocks in 2022.

What is meant by ‘Voting Machine’ and ‘Waiting Machine’?

By Weighing Machine, Ben Graham meant that stock prices would only move based on fundamentals… in the long run.

from the voting machine. He meant that stock prices are, in the short term, driven by people’s emotions: greed and fear.

This raises the question that what creates the feeling of greed and fear in the stock market?

Here’s the answer…

Story is the fuel of greed.

Surely fear is fuel.

We have seen fiction in all its glory in 2020 and 2021. Stories about economic recovery were widely spread and why you should keep all your money in stocks.

People believed the stories. Investors and traders alike thought the market could only go up.

But uncertainty has taken hold in 2022.

After the bottom out in March 2020, there has been a steady rise in the stock market. By October 2021, the Nifty rose from the level of 7,600 to 18,500. Profit of about 2.5 times in a little over 1.5 years,

It was a really great rally. The stock market has never grown so fast, so much, for so long without any meaningful correction.

But things have changed now. The market is behaving very differently. It is no longer driven by the spirit of greed.

Fear driven by uncertainty is now in charge.

And accepting this reality is the key to investing in 2022.

a demanding stock market

If fear is the dominant emotion, doesn’t that mean the stock will go down?

And if so, shouldn’t you stay on the side line by selling? Or even better, fewer markets?

Alas, it wasn’t that easy.

People like to think in binaries. 1 or 0. Yes or No. good or bad. right or wrong. Up or Down.

This type of binary thinking certainly helps in making our decision making easier. it’s fast. It frees the mind from extra effort.

It is also useful in many situations in life when deep thinking is not required.

The same is true in the stock market. Often, Mr Market will offer you very good as of March 2020. In such situations, your decision to buy or sell is very easy.

But most of the time, the stock market does not provide you such simple buy/sell opportunities. Most of the time, you’ll have to put in a lot of thought-provoking effort to understand what’s going on.

And it’s not just for everyone.

This is what you face in 2022. The year 2022 will probably go down in history year of uncertainty,

And that means the stock market today demands high level thinking. Simple statements like ‘the market will crash’ or ‘the market will go up’ are unhelpful.

Market volatility is so high that it is impossible to predict stock prices with any certainty.

Anything can happen.

Tomorrow the market may stop falling.

The market may remain flat instead of going up or down.

There may be some further downside in the market, but when the bulls give up, it could reverse and start rising again.

Or the bears may eventually win out and the market may crash.

Which of these scenarios is most likely?

No one in the market, not even the so called ‘experts’ you see on TV every day, can’t answer this question. The market is now in a position where many possibilities are on the table.

And all this is only for the short term. Looking at the long term, there are more possibilities.

What is the solution?

Since the crash in 2020, the bulls have not faced a single serious market correction. Even due to the second Covid wave there were no accidents.

The market has continuously transferred money from bears to bulls for one and a half years. As a result, the bulls are sitting on huge amounts of money… and they don’t want to lose it.

It’s completely natural. The richer the person, the more he worries about losing everything.

And that explains the recent panic in the market.

Of course, there are other reasons as well – inflation, rising interest rates, multiple geopolitical concerns (Ukraine, Middle-East, Taiwan), another COVID variant, GDP growth falling short of expectations, and much more.

But most importantly, there is a fear of losing all the gains made since March 2020. Investors have made so much money, so fast, they are unsure what to do now that the market is not going up.

what should you do?

The answer has two parts. It all depends on what you want to do in the market.

Do you want to trade or do you want to invest?

if you want to do businessThe answer is to develop a good trading system and continuously evaluate it.

You also need a sound-concrete risk management process to prevent losses.

Your trading system will tell you how concerned you should be. If it is shouting warning signs at you, then you should take your money out of the market. If not, you can continue with your trades.

But you must have a stop loss no matter what.

if you want to investYou will need to follow a good investment methodology. Your system should consider your investment objectives, risk appetite and time frame.

Here are some pointers…

be ready for Buy high quality stocks in 2022, If the market goes down, even fundamentally strong stocks will crash.

And this would be a great opportunity to buy high quality stocks at a reasonable price.

You can find it in stock like this Equitymaster Stock Screener, It is very user friendly and you can create your own customized watch list.

View Equitymaster Stock Screener here,

In addition, you need Stay away from fundamentally weak stocks, Do not invest in any loss making company.

Rahul Shah, Equitymaster’s co-head of research, has compiled a list he calls Toxic Stocks of 2022 You should avoid all these.

Watch Rahul’s video for more details…

Avoid companies with high debt, Corporate India is in debt repayment stage. If the companies you’ve invested in still have a lot of debt, it’s time to rethink your portfolio.

And here’s something important. Be very selective with smallcaps,

If you have made money in smallcaps in this bull market, and want to continue investing in them, we have a few words of caution.

Your work will be difficult in 2022. Easy money is made in smallcap. The low hanging fruit is plucked in 2021.

If a crash happens, then smallcaps will be the biggest losers. remember this. Remember, your hard earned money is at stake.

Having said that, there are still some great buying opportunities in the market. It’s just that you’ll need to be very selective with smallcaps in 2022.

change your strategy

The bulls made so much money, they became overconfident. Some investors believed that the market would continue to go up in 2022 and beyond. And any improvement will be small.

The market has already proved them wrong.

And so we recommend a change in strategy.

In a bull market, almost every stock you bought went up. But now it will not happen.

The market has woken up to the reality that many stocks, even fundamentally strong bluechips, are overvalued… and they can’t sustain their highs. P / E ratio,

But that’s just about specific stocks. There is a risk of serious downside in the entire market. Not the 5-10% variety we have become accustomed to…but a worthwhile variety.

We recommend that you be very strict with your investment process. You must have very clear pre-determined rules to buy and sell any stock in 2022.

Your pre-set rule for buying may be to invest in a growing, fundamentally solid company at a good valuation. This rule will be very useful in improvement.

Your pre-determined rule for selling may be to exit when fundamentals turn bad or there is an unfavorable, structural change in development.

These two rules along with the above points will not only help you avoid bad stocks but also buy high quality stocks in case of market downturn.

in conclusion…

Investment in 2022 will not be the same as in 2021.

This will not be the year to invest blindly in the stock market. Your chances of losing money are higher than last year.

In this case you will need to be more cautious. Focus more on fundamentals… and valuations.

Be prepared to handle a lot of uncertainties.

And lastly, don’t forget to have the right asset allocation. That’s what Equitymaster recommends,

Be safe!

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such,

This article is syndicated from equitymaster.com