How to learn Bottom Fishing?
You must have noticed that many stocks such as Sri Adhikari Brothers Television Network Ltd (SABTN), Dr,Reddy’s and Coal India are trading below or near their all-time low prices and you might think to yourself that this would be the best time to enter such stock
since you will be able to make big bucks when the market and/ or the stock’s turnaround. What you are doing here is what is called bottom fishing.
What is bottom fishing???
Bottom fishing refers to investors scouting for stocks that have reached rock bottom prices owing to some temporary issues either with the company or the sector or with the economy in general. It’s somewhat like fishing. But the whole thing rests on investor’s perception that the stock price has hit rock bottom temporarily and will bounce back, both of which are never guaranteed. Bottom fishing, therefore, involves a lot of risks. Investing in banking stocks during the financial crisis is an example of bottom fishing.
Simply speaking, an investor construes such low price of stock as an opportunity for picking up good stocks that are trading at such low prices due to some issues that are of temporary nature. Stocks such as NMDC and Aban Offshore that got badly battered fall in this category.
To do or not to do bottom fishing
Central to bottom fishing is an investor’s perception or belief that the stock is undervalued, which makes him pick up badly battered stocks especially in a bear market. The investor believes that when markets move the investment will turn profitable. But you must understand that there is no guarantee that the markets or the stock prices for the matter would not fall further. It can always happen that you buy the stocks on the expectation that prices would soon bounce back from the levels at which you bought the stock but on the contrary, the market plunged further and the stock prices crashed even lower. Bottom fishing is, therefore, highly risky.
Using SAS Online’s trading platform you can go bottom fishing but we do not encourage it. At least not entering stocks simply because they are trading at historical lows.
Some investors feel that they missed the buss during the previous rally and now that the stock is available dirt cheap they must enter it. But you must first try to understand why it is trading so cheap – is it the general economic condition? Is it the depressed market? Or more importantly is it the company itself?
Retail investors generally focus on sectors such as banking, capital goods, realty, pharma, media and logistics. Market experts believe that pharma is the best sector when it comes to bottom fishing in the Indian markets. But the timing is very important. If you believe the markets have seen the worst and are now ready to head north then it is the best time to go bottom fishing. Look for signs such as a return of the FIIs, sustained buying by domestic institutions, firming of economic indicators.
All these will tell you if good times are likely to be ahead. Again, nothing is certain in the stock market. We do not disagree that you can pick up value investments through bottom fishing but you must decide the time and price objectively.
Do your own research and don’t simply be swayed by what others have to say. Though the general market sentiment is positive, but nevertheless markets can always see corrections for reasons unforeseen.
So, Be very careful before you choose a stock now through bottom fishing. A knowledgeable and cautious decision has lesser chances of failure.