Opportunistic Buying in Volatile Markets

Posted on 31. Dec, 2011 by TheFreeInvestor in General, Investing Philosophy, Portfolio

The market closing on the last trading day of 2011 turned out to be a nail-biter. S&P 500 closed at 1257.60, that is 0.04 less that closing of last trading day on 2010. No, that is not a typo or percentage. S&P 500 actually closed 0.04 points away from the closing of last year !

Though the ending was boring with almost 0% return of S&P 500 for the year 2011, the drive through the year 2011, especially the last 2 quarters, have been one of the most volatile times in the market with the all stocks moving widely in one direction on a certain day and in the opposite direction the next day.

Using the Power of Volatility

I like the writings and philosophy of Nassim Nicholas Taleb. In one of his recent Facebook posts he shared a draft version of the prologue of his new book. Here is an excerpt from the beginning of the section that stuck with me —

Wind extinguishes a candle and energizes fire.

Likewise with randomness, uncertainty, chaos: you want to use it, not hide from it. You want to be the fire and wish for the wind….

Similarly, I think, as investors we need to adopt strategies by using volatility to our advantage rather than being scared about it. There are few things investors can do –

• Accumulate stocks of favorite companies and building a full position over multiple tranches during down cycle of volatile markets. We can use the volatility as our friend and reduce the cost basis of a position.
• Keep enough cash in the portfolio to take advantage of irrational down days and buy high stock of high quality companies at a cheap price.

Happy New Year ! Hopefully 2012 will bring a lot of exciting time for investors. I am definitely looking forward to it