Market Volatility - How do you handle it?

just'd like to ask opinions here on how do u deal with market volatility?
it's always easy to say that one would buy and hold, but when market volatility starts it's hard to keep 1's nerve still against fluctations (e.g. when market turns bear, value at risk)

btw, i'd think now is a poor season to do buy & hold due to an optimistic / complacent market as i observed that period of optimisms (rallies / bull runs) - characterised by a low VIX reading
http://finance.yahoo.com/q/bc?s=^VIX+Basic+Chart

are almost followed by volatility

currently i stick with 'low beta' stocks like telcos which i presume has a more stable cash flow and hence less fluctations

(08-10-2010, 12:24 AM)ag88 Wrote: just'd like to ask opinions here on how do u deal with market volatility?

Ignore it, and focus on the business.

Same. It is quite a hassle to sell and buy back and misses the sudden rerating of market

The most important reason is that I hardly ever got the market timing correct. When I think it will go down, it goes up. When I think it will go up, it goes down like a falling rock.
After a while, I gave up and I just pray that my portfolio of stocks can give me enough dividends to tide me through the miseries of a bear market.

This is a good topic I think. For me, it comes down to two words: Be Patient.

I started investing in Aug 2007. We all know what happened after that. I got very scared as I saw some of my holdings fall to easily 30% of the price I bought it for. Thankfully I'm working and used the time to accumulate cash as well as refine my investment criterias and valuation. I continued buying into companies that have strong balance sheet and healthy cashflow. As of now, my positions are all above water. If you include dividends, they have given a more than decent returns which I am satisfied with.

Of course, some people might say that in a bull run (which some say started in March 2009) everyone's a genius. I haven't been investing long enough to say that I know how the markets work (I don't think I'll ever know) but lessons I learnt are:

1) Always have a minimum flow of income that is sustainable over a long period. Psychologically, it protects you from liquidating your positions in a falling market.

2) Go for companies with strong B/S and healthy cashflow. The chances of them going bust is relatively less and them continuing to give dividends in bad times is more likely too.

3) Trust your valuation criteria and margin of safety. If I wasn't scared as hell during the late 2008, early 2009 period, my returns would be flying sky high now. Having said that, my investment valuation, criteria wasn't as developed back then either.

The only problem I can't find a solution to, as a retail investor, is when boards decide to take their companies private during bad times. After all, that's when the market values their stock cheaply hence it's the best time for companies to buy their stock back cheaply. The GO price is usually based on price traded over the last X no. of days. So if you bought right close to the peak and if the company is offering to buy back at the trough, you could be in a real nasty situation of (a) being offered a price way below your purchase price and (b) stuck with a stock as a minority shareholder in a private company which can't be easily sold. I almost got caught by Pokka on this one. Luckily, management's timing at taking the company private was worse than mine. If it took just 6 months more, I think the offer price would have been below my purchase price. So I guess buy and hold wouldn't help you in this scenario and the lessons learnt here is: don't bet the ranch.

ag88 Wrote:just'd like to ask opinions here on how do u deal with market volatility?

Here is a useful quote from Benjamin Graham's The Intelligent Investor:

"The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or ignored."

kazukirai Wrote:1) Always have a minimum flow of income that is sustainable over a long period. Psychologically, it protects you from liquidating your positions in a falling market.

2) Go for companies with strong B/S and healthy cashflow. The chances of them going bust is relatively less and them continuing to give dividends in bad times is more likely too.

3) Trust your valuation criteria and margin of safety. If I wasn't scared as hell during the late 2008, early 2009 period, my returns would be flying sky high now. Having said that, my investment valuation, criteria wasn't as developed back then either.

These are very good basic principles.

I would add that the more homework you do, the more facts you can use to arrive at your conclusion. And if your reasoning is sound, then volatility is actually opportunity. If you know something is worth at least $1, and you buy it for $0.50, and it goes down to $0.30, it has become an even better bargain and you should be willing to buy more.

If you are correct about the valuation, at some point in time you will be able to realize a big profit, made even bigger because you bought more when it was even cheaper.

If you are wrong you will have thrown good money after bad. So make sure you are seldom wrong. The more homework you do, the fewer mistakes you will make.

A strong balance sheet is sometimes seen as an impediment because the lack of gearing can reduce returns. But remember that the most important goal in investment is not to "get rich" - it is to "avoid becoming poor". And if you want to avoid becoming poor then you must first make sure your investments don't go to zero.

Only after you have established that your chosen companies can't go bust, should you think about how much money you can potentially make. Don't be like the guy who was 6 feet tall, but drowned when crossing a stream that was on average 5 feet deep.

My way of handling it is to simply invest in index itself. While individual company may cease to exist during a bear market, it is hardly for the index itself. With index investing, instead of wary of volatility, I'm lovin' it.

It should perhaps more precisely asked, "How do you handle portfolio losses during market downturns?"

While index is very unlikely to fall to nil, our STI index has halved from time to time. Can you withstand seeing a -50% return from your portfolio peak?

To handle losses during market downturn, I think one needs experience, perspectives and understanding of your investing methodology.

I assume that the more downturns one experiences, the lower the extent to which one's blood pressure will rise when one sees large losses.

Two, if one can change perspectives and view things differently (i.e. the intrinsic value is there or the market is positive in the long run), one may be able to console oneself and live better with the losses.

Third, the understanding of your investment method is very important. A TA investor, I presume, should never allow yourself to live with larger losses. A FA investor should re-check more thoroughly and see if the under-valuation still exist. If the undervaluation no longer exists, it is wiser to sell than to hold.

(08-10-2010, 08:19 PM)thinknotleft Wrote: While index is very unlikely to fall to nil, our STI index has halved from time to time. Can you withstand seeing a -50% return from your portfolio peak?

Humm, to be fair, any stock will have an equal chance to be halved at any point of time too, not just only index. To be frank, it is in my opinion that, if my investment time horizon is very very long, a -50% drop in price from its peak is a very good chance to accumulate more at a cheaper price. Hence, in this sense, a -50% return from the portfolio peak is acceptable, because it will only be a temporary fluatuation an investor has to face, from time to time.

(09-10-2010, 12:52 AM)PassiveReturns Wrote: Humm, to be fair, any stock will have an equal chance to be halved at any point of time too, not just only index. To be frank, it is in my opinion that, if my investment time horizon is very very long, a -50% drop in price from its peak is a very good chance to accumulate more at a cheaper price. Hence, in this sense, a -50% return from the portfolio peak is acceptable, because it will only be a temporary fluatuation an investor has to face, from time to time.

It is emotionally very difficult to accept that your portfolio is showing a return of -50%, even though it may consist of purely unrealized losses. I have been through this myself during the market nadir back in 2009, when I was about -60% down, and I confess the feeling was pretty terrible as our brains are not equipped to handle such financial "pain".

In theory, it is easy to assert that one will buy when one is 50% down in order to average down on a losing position; but when the crap hits the fan, only those who are very disciplined and have a lot of mental fortitude are able to make the move to average down. Of course, having a strong mental framework helps a lot in deciding which companies one should average down and buy more of.

One should note that the greatest enemy in investing is not the technical and knowledge aspects, it is the EMOTIONAL aspect.

I choose to go East Coast and do some prawning.