How To Play Market Volatility

Mr. Prasanna Bidkar, Co-founder, Astute Feed

Stock markets are subject to volatility and volatility is the thing investors are scared of. The reason being, whenever the movement is downward investors get jittery as the portfolio values shrink. Naturally it is bound happen as no one likes to see their portfolio value getting eroded so quickly. This is time when investors act in an erratic way and makes mistakes. So naturally when the markets are volatile, investors are bound be worried.

Through my various visits all over India for the Investors Awareness Programs (IAP), I came across many such investors who had lost the plot just due to greed and fear. But I feel, one should not be much worried about the volatility in the markets. Rather it is because of the volatility in the markets we get opportunity to make profits. Had the market remained stable, our investments would have also remained stable providing no gains. So market volatility is bound to be there and it is up to us how we utilize it to our benefits. While discussing this sort of topics, I always take help of Benjamin Graham’s way of investing. According to him “The stocks are subject to market fluctuations in terms of prices and Investors should be interested in the possibilities of profiting from these pendulum swings”.  

He says there are two ways to do It-

(1) Timing and (2) Pricing.

Let me explain what these two terms exactly mean.

Timing in simple terms means, Endeavour to anticipate the action of the market to Buy and hold when future course is deemed to be upward and to sell or refrain from buying when the course is Downward.

Pricing in simple terms means, Endeavour to buy stock when they are quoted below their fair value and Sell them when they are quoted higher than the fair value.

When one reads between the lines, he will understand that if someone emphasis on timing the markets, he will end up as a speculator.  I had many times stated and also firmly believe that timing the markets is almost impossible. Buying low and selling at peak, only happens in stories. It may happen just by fluke or coincidence once or twice. But repeating it on consistent basis is almost impossible.

Just to explain the above lines, when we try to gauge or predict market direction without any understanding, it is a mere speculation. Not every investor has an ability to do that and hence when they think they are investing, they are actually speculating.  The basic investment principle says “Never speculate like investors and never invest like a speculator”. If someone tries the same, it would only lead to disaster.

But when we talk about pricing, we are trying to judge the fair value of the stock. Usually the market forces are such that, they price the stock optimally. However many times (Under some circumstances) the prices are misjudged and this provides an opportunity in terms of pricing. By pricing, we mean discovering a fair value of the stock and to buy if it is trading at lower than fair value.  While forecasting the market direction is difficult (Or rather impossible in some manner) discovering fair values is not that difficult. Rather profession advice is also available on the similar front. So decide your fair price of a stock and when it is available below that buy it.

Just for example, in 2008 many good front line stocks like Castrol, Colgate, HDFC, HDFC Bank and Tata Motors were available at fairly cheap valuations. While many took it as an adversity, I personally feel it was an opportunity for the investors to profit from it.  It is a general tendency of an investor to invest when markets are high and shy away when markets are at low. I have personally seen the investors queuing up to invest when Sensex was at 21000 and opting for redemptions when Markets were trading as low as 8000-9000 in 2008.  Investors follow the market sentiments which are actually driven by someone else. Hence they act erratically and only end up making losses. Though the event is almost a decade old, market and investor behavior hardly changes. Even at current juncture, we have seen a similar scenario in few of the quality mid cap stocks. I am not saying go out and buy all midcaps that have fallen. However the price mismatch occurs when the markets are volatile. Look for good opportunities as fundamentals of stock usually do not change overnight.

I had stated many times, in stock market it is important to understand what not to do, as it helps in avoiding many wrong decisions? Form the above explanation is clear that, one should avoid timing the market. Rather pricing is one thing which one can follow to take advantage of pendulum swings.

About Author:  Mr.  Prasanna Bidkar, Co-founder of Astute Feed is having a decade of experience in evaluating The Fundamental & Technical side of Indian Stock Market