Now Is The Time To Be Trading!

What a choppy couple of weeks it’s been in the stock market!
Volatility – as measured by the VIX index, aka the ‘Fear Gauge’ – has spiked to its highest level since 2012.
But you probably don’t need any esoteric statistics to tell you things are rough out there.

Across the board, share prices have been walloped.
Large caps, small caps, defensives and growth stocks, they’ve all been hit just the same.
So while some sectors have taken more of a pounding than others (oil companies, anyone?), I doubt there’s a Fool who hasn’t seen their portfolio plunge.
A little.
But bring it on, I say.

Trading places

Now at this point you might be expecting me to say that as a Fool who follows companies not share prices, I ignore my oscillating portfolio and go out for a walk when the market goes crazy.
Which is half true.
I do focus on company fundamentals, and I do try not to get overly emotional about prices.
However, I’m a bit different from my fellow Fools, in that I tend to trade more than most of them.
As I see it, there are plenty of great companies I don’t own, as well as the ones I do.
If the opportunity arises to swap one I own for a better one I don’t – because either the quality or the value disparity is compelling – then why not?
Now I’d be the first to concede that profitably chopping and changing your holdings is far easier said than done.
Well, it’s easy to chop and change – but it’s harder to do so profitably, especially after costs!
I admit I’m still trying to get the balance right.
Nevertheless, I’m sure that for aggressive investors who do trade a bit more like I do, volatility is an opportunity, not a threat.

Who really knows how the big things will shake out?

It’s important to realise you don’t suddenly get smarter in a bear market.
Intellects don’t change overnight. But emotions can turn on a dime.
I don’t think investors selling me shares right now are generally dumber than me, or that those who buy my own are gullible mugs.
Far from it!
I think most companies I sell are good businesses, and I’m reluctant to let them go.
And when buying shares, it’s always good to realise the person selling often knows that company better than you do, too, and to stay humble.

I also don’t think I know better than the market either when it comes to the big-picture themes that seem to be behind this mini-panic.

  • Will the European Central Bank launch true QE?
  • Will Ebola spread more widely around the world?
  • Will the Federal Reserve hold rates lower for longer?
  • Could the protests in Hong Kong be a precursor to wider trouble in China?
  • Did AbbVie’s abortive bid for Shire Pharmaceuticals mark the top of the takeover party?

I have my hunches, but I’m no Bond villain cackling in my lair knowing exactly how it will all play out.
No, the reason I trade more in times of volatility is because I believe panic more easily leads to mispricing.

And ultimately, spotting and acting on mispricing is the only way anyone can beat the market.

Mind the gaps

A bull market is easy to enjoy, as long as you’re invested in it.
Many of us enjoyed strong returns in 2013. Small to mid-sized companies seemed to romp higher in price every day.
However in retrospect that steady ascent was setting us up for a fall.

When shares rise together, I think it’s often a sign that investors aren’t being as discriminating as they could be.
But 2014 has felt very different. Small to mid-sized companies have been sliding since April. In some cases that drip-drip-drip of falling prices has recently turned into a cascade.
A few shares on my watch list fell 20% or more in the market rout, seemingly on no news at all.
Rather, they appeared to go down just because too many investors no longer wanted to own them.
In contrast, other small-cap shares were becalmed and untouched by the volatility.
And that’s where I see the opportunity to act.

Be busy when others are tearful

You never know exactly why a share drops precipitously in times of turmoil.
Sometimes smart investors may have spotted something in the changing winds that will hit a company harder than you imagine.
But I can’t help feeling that – particularly in the small cap space – there can be indiscriminate selling during market panics that’s related more to margin calls, forced liquidations and good old primal fear.
If that’s true, then to my mind there could hardly be a better time to buy.

You see, one day this storm will pass. And when the sky is blue again and every share is rising and everyone is reading the same company updates with their feet on their desk and a Starbucks skinny Frappuccino in hand – well, good luck finding bargains then.
To me, those are the times you spend making sure your portfolio is increasingly well braced with the defensive companies that other investors are letting go of. A time more to think than to act – over-trading in such dull climates will likely rack up costs far faster than it helps your returns.
But in topsy-turvy times like now?
I say weatherproof your watch list, strap into your wellies, and wade on in!

The Motley Fool's top analysts believe that only a handful of companies will actually make big gains this year, so I highly recommend that you read their brand-new report into Where We Believe The Smart Money Is Going In 2014.  

The report offers in-depth commentary on building the 'perfect portfolio' for an unpredictable bull market, is completely FREE and without obligation. Simply click here to get yours sent to you instantly, while it remains available.