In 2020, we’ve had it all. UK share prices crashing in the spring because of the arrival of a pandemic. And some stocks shooting up at breakneck speed because of the development of vaccines for Covid-19.
Other shares have been up and down depending on whether lockdowns are on, off, or back on again. And, behind it all, companies have been dealing with the uncertainties of the ongoing Brexit process.
Some investors have done well with volatile UK shares
Yet some investors have done well with their stock picks through all the volatility. Indeed, in some cases, stock market volatility can be the ally of the well-prepared investor. If the stock market decides to markdown stock prices in a crash, there’s a chance shares could be under-valuing businesses. And the key to success with investing is to know in advance what companies are worth buying into and which should be avoided.
So, I’d prepare up-front in three ways. Firstly, I think it’s important to apply focus. We all face information overload in today’s digital world. Often, opinions and news items are conflicting and it can all serve to cloud the picture of the things that are really important.
With shares, I reckon the best way to deal with the problem is to focus on just a handful of companies and get to know them well. If I do that, I’ll tune in to the news flowing from those businesses and everything else will be irrelevant.
Secondly, I’d prepare for volatile markets by doing my own research and thoroughly analysing the businesses’ underlying shares I’d one day like to own. I’d aim to understand the company’s valuation, trading markets, opportunities, threats and potential for growth. The deeper my understanding, the more decisive I can be if the market undervalues the business in a stock market crash.
Good things often come to those that wait
The third way I’d prepare for volatility is with patience. Once I’m focused and well-researched, I’ll need the patience to wait for the right opportunities. And that will arrive when the stock market offers me share prices that value a business below its intrinsic worth. Then, having bought a stock, I’ll need more patience to hold for a long time, through all the inevitable ups and downs as the investment matures and grows with the underlying business.
But it’ll take a cool head to detach from the emotions that typically flood in when share prices are falling in a market crash. Often, existing shareholdings will be plunging too. So, I likely won’t feel like putting more money into shares despite my focus, analysis and patience.
But if I can detach myself from my emotions, some of the best share purchases could be up for grabs when the markets are weak. The strategy follows a well-trodden path as exemplified by the likes of Warren Buffett and others.
