Panic and sudden meltdowns

A few days ago, the HDFC Bank stock had a sort of meltdown, losing over 8 per cent in a day and then some more over the next few days. While such crashes are common in the stocks of smaller companies, they are much rarer in large-cap companies. Generally speaking, large stocks are stable. There are various reasons for this, but in general, large listed companies have good information flow and are well-understood by investors.

However, that does not mean that there can't be shocks and surprises - sudden, panicked declines might be unusual but still occur with some regularity. A sudden panic in a stock hitherto known as a quality stock can be unnerving for the small equity investor. It could just be a panic or something real - a one-way reversal of a company's fortunes. It can be hard to tell.

The biggest such event occurred a couple of years back with the Facebook stock. In January and February 2022, the stock lost more than a quarter of its value in just a few days, amounting to a humongous 200 billion dollars. At that time, the reason was the sudden realisation by investors that the new version of Apple's iPhone operating system had privacy features that could sharply curtail the advertising revenues on the Facebook app on the platform.

Did the fears turn out to be justified? Amazingly, it's hard to tell, even though the stock fell far lower for a while. So many other things went wrong and then right with the Facebook stock that the impact of one particular factor cannot be teased out. However, now, two years later, the stock is higher than it has ever been. Looking back with the advantage of hindsight, all one can conclude is that the deep trough that Facebook stock fell into was a great buying opportunity for investors who believe in the company.

One basic factor investors forget when they panic is that large companies have a lot of business momentum. They are not accidentally big - there are always deep strengths to every aspect of such companies, which take a long time to ebb away and reverse. One isolated event, a few data points, or perhaps a year's earnings should make investors a little watchful. Still, by no means can anyone flippantly declare a giant venture to be tata, bye-bye, khatam suddenly. One quarter or even a year is just one chapter in a long story. Unless you are a day trader or a short-term punter, it cannot be something that can mean a signal for a final exit from a stock.

The important thing is to keep an open mind, and the way to keep an open mind is to always argue against the trend mentally. Just ask yourself - what if the panic is mistaken, and force yourself to argue against your instincts and examine both sides of the story.

Note that I'm not giving you specific advice on what the future holds for HDFC Bank, Facebook, or any other stock. These are general principles that apply to any large business. The key takeaway is that large-cap stocks seem stable but are not immune to sudden dips. Panic can play a role, as seen with many of these sharp drops, but it's crucial to remember the inherent strength and momentum these companies possess. Don't let short-term fluctuations, especially during panic selling, cloud your judgement about a company's long-term potential. Remember, it's far more common for companies to stick to the long-term trend and keep growing. A seemingly disastrous event is not a trend. While we can't predict the future, these principles offer a valuable perspective for navigating market volatility and avoiding rash decisions based on temporary shocks.

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