Stock volatility is often due to Mr Market waking up on the wrong foot. This makes it an investing gift for the contrarian value investor.
Investors often feel bad when their holdings go down in value. But is this feeling justified? Or is volatility actually a chance to buy up more shares of great companies?
Stock Market Volatility In 2020 And 2021
In the year that has gone, stocks have done lot of going up and down. This movement is known as stock volatility. Some stocks are less volatile than others and this relative volatility is known as beta.
Today, 14.7.2021 is a day of big losses for me. My brokerage account is down -2%. Among the losers are the speculative stocks of Fisker Automotive (FSR), Fulgent Genetics (FLGT) and InMode Ltd. (INMD). All of these have fallen more than 5% for the day. All of them have a relatively high beta compared to the broader market indexes.
In days like today it’s a good time to review your investment holdings. Do you understand the businesses whose stocks you own? Do you believe in the long-term prospects of the companies? Or are you buying stocks just because the suckers are going up?
Focus on balance sheets, solid management and growth prospects
At all times, it’s very important to focus on high-quality businesses with solid management, healthy balance sheets and good growth prospects. These qualities become especially important in times of market turmoil.
When the market takes a dive of 10%, 15% or 20% you need to know what you own and why you own it. The market in the short time is a voting machine and in the long term a weighing machine.
Sell out of great businesses because of broader market gyrations and you lose out on great investment returns. Hold onto your winners and don’t sell at peak pessimism.
Importance of having a strategy for stock volatility
When there’s stock volatility in the markets the natural reaction is to get scared. At times the volatility happens for a reason. There might be political or economic risks actualizing, or the interest rates might move causing a valuation reset.
Whatever the market is doing, keep your eyes on the bottom-up analysis of company fundamentals. When the company’s earnings are growing, it’s stock price will follow. Add to this a solid management team, healthy balance sheet and growth and you’re set to go.
The best insurance against panic selling is understanding what you own. When you know that you own great businesses with good long-term prospects, you won’t be tempted to panic sell.
Take Home Message On Market Volatility
In the course of years, I’ve added and removed stocks from my portfolio. I’ve added to the companies I believe in and sold out of ones with worse prospects / valuation. At times of market volatility I can sleep well at night knowing that the businesses I own will keep doing well no matter what Mr Market will tell they’re worth in a given day.
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