The word volatile is often used to describe a falling or weak stock market. And volatile often comes out in discussions when investors have been losing money with stocks and shares.
But in the true sense of the word, volatile means markets that wiggle about all over the place. And we’ve endured our fair share of both those uses of volatile in recent months and years.
So it’s a wonder that any investor has made any money recently.
Long-term opportunities
However, volatile stock markets can bring opportunities as well as discomfort for investors
But one of the biggest challenges is keeping emotions in check. After all, it’s not easy for most of us to keep a cool head when the value of our portfolios is plunging.
So the first way an investor can try to gain advantage is by aiming to detach from the immediate financial outcomes.
Adopting a discipline of detachment may help investors to win in the end. So a focus on the long-term performance of a portfolio may help investors to assign less importance to shorter-term setbacks.
Indeed, over periods of five years or more, many of the reversals that seem so sickening today may become less important.
Secondly, it may be a good idea to embrace a kind of educated faith in the businesses being held in a portfolio.
If the original stock selections were based on enterprises with quality attributes and promising long-term prospects, they’ll likely survive an economic downturn. And if their valuations become depressed, the market will probably mark them up again in the end.
So why not have faith that the strength of the underlying business will shine through? Indeed, it may be a good idea to hold on to existing shares in a portfolio during stressful times in the stock market. And it’s also worth hunting for other companies at the bargain prices on offer.
Over time, those good-value purchases could go on to help boost the returns in a portfolio.
Following Warren Buffett’s example
The process of buying great stocks in distressed markets or circumstances is how billionaire investor Warren Buffett tends to operate. But focus is important. And that’s the third way to win in volatile markets.
Buffett often talks about focus. And that’s because there’s so much going on in the markets and on the newswires everyday to distract us. But key to making great investments is to focus attention on a handful of promising stock opportunities.
And that leads to the fourth tactic for winning in volatile markets – analysis and research.
The better we understand a business, the more decisive we are likely to be when opportunity strikes on the stock market.
But patience is often required. And that’s the final way to score advantage and win in the markets despite volatility.
It may be necessary to wait patiently for a good value entry point into a stock in the first place – one that makes sense of a long-term investment.
And it’s often necessary to be patient while investee businesses deliver the value over the long term by compounding their earnings while we are holding their shares.
