Turning Volatility into Opportunity
May 22, 2021
Market volatility is an incredible opportunity for long-term investors. It allows us to buy our favorite companies at cheaper prices!
But while it sounds so easy to always stay cool and collected, it’s actually much harder in practice. When the market turns south, there’s a never-ending stream of headlines screaming about how we’re about to enter another recession or how inflation will wreak havoc on stock prices.
Tune this noise out. Nostradamus doesn’t work for the financial media. If the TV prognosticators actually knew which way the market would zig and zag, they’d be retired on an island rather than recording in the studio.
And the worst thing we can do during volatility is to make decision based solely on emotions. You know that uneasy feeling in your gut after seeing the red ink in your brokerage account? It has a nasty habit of convincing you to make suboptimal decisions.
However, even with all of their associated anxiety, I almost never let a market selloff go to waste. These are the best times to take advantage of incredibly companies going on sale.
At the risk of oversimplifying things, the way I handle market volatility pretty much boils down to a three-step process:
1) Be cool. I’ve learned a lot from my zen-master friend Krzysztof Piekarski in this recent year. I’ve read and then re-read his advice about listening to your inner self and learning to how approach decisions objectively. Napoleon once described a military genius as the man who could do the average thing when everyone around him was losing his mind.
Through the media headlines, it become apparent very quickly on which days the market is seeing red. I’ll walk away from my computer and grab a coffee to clear my head. I want to be calm and collected, and remind myself that days like these should be approached as opportunities. There is work to be done.
2) Do your homework. One of the perks of being a 7investing advisor is getting to devote a ton of time every day to research. I have a fully-stocked watchlist of recommendation ideas on hand at all times, and I regularly update it with notes and updates.
I think many of the market’s greatest companies have previously been recommended by 7investing. So I’ll often take another look through our our reports, just to make sure I understand the thesis and what metrics are the most important. The best-case scenario is to find an incredible company who is performing admirably in the places where it matters, yet is selling off only because the market’s having a mood swing. I try to do my homework upfront, to be ready to strike when the opportunity arises.
3) Buy quality. It’s tempting to buy into higher-beta stocks, which will normally sell off more dramatically than the broader market. But I personally use market downturns as a chance to buy the best of the best. If I’m not fully invested, these are the times to use the cash balance to buy into those companies I always wanted to. Or, if I don’t have any cash on the sidelines (which is becoming more and more common), I’ll take the opportunity to upgrade my portfolio — replacing lower-quality companies with those where I have higher conviction.
Remember that great companies will find ways to win through both bull and bear markets, and that consistent revenue growth has the highest correlation to long-term returns.
Market volatility is the admission price we pay in exchange for greater returns. When the waters become choppy, buckle your seatbelt…but also know there are calmer seas that lie ahead.