Over the past year we have seen much market volatility, causing many investors to feel anything but settled. So why would we suggest that market volatility can be your friend? It’s simple: fear and panic leads to a dislocation between the price of equities and the true value of businesses.
In many cases lower equity prices resulting from panicked investors, margin calls and economic events have little impact on businesses. These same businesses that you use to buy gas, groceries, and do your banking will be around next year and for many years to come. The market has temporarily miss-priced these businesses based on the fear factor. A dollar’s worth of value can now be bought for maybe 70-cents or less. This is the opportunity.
Let’s look at it from a different angle. The current market price is a method to predict future expectations of corporate profits. If everybody thinks the same thing about future prospects, then the price will either rise or fall based on these expectations. It’s the savvy investor who can look beyond the current negative market conditions and see the potential for the future.
Speaking of savvy investors, we cannot avoid mentioning Warren Buffett and his recent $5 billion investment in a major US bank. This is an industry that has been severely beaten down by current market sentiment. Nobody wants to own anything related to US banking. The world hates US banks. Buffett, however, sees beyond the current sentiment and has great confidence in the future of this business.
Investing in equities is not a trip to the casino. The market is an efficient way for investors to trade ownership of businesses. For this system to work for you, you must have confidence in the system and the future. While the current economic backdrop is highly uncertain, we believe that in due time, most of these issues will subside and companies will once again be priced more favourably.
Many retail investors do not have the fortitude to stomach the day-to-day market gyrations. It takes a special type of person who will not panic and will actually invest more when prices fall. And then, of course, you must have the same discipline to sell when prices become full or overvalued. One option for the retail investor is to offload the responsibility to a third party. They can hire professional money managers to make these day-to-day decisions and then attempt to ignore the volatility of the market. This is their secret of how to accept volatility as their friend.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.