Recently investors around the world have been waking up to a bipolar stock market. Perhaps things are great in the morning but by midday investors have arrived at the same “groupthink” conclusion. In that the global economy will implode again before the market even closes.
Now the drivers of this market volatility are as varied as they are interesting, but in our view volatility simply equals opportunity. After all, if the conceptual framework of investing profitably is to buy low and sell high, then dealing with the stock market seesawing back and forth is just the cost of doing business. Therefore, bullish and bearish investors alike should be enjoying the recent market volatility for a couple of reasons instead of dreading it.
- Discounting Everything Positive is Simply Irrational: Earlier this week Apple (AAPL) unveiled the iCloud to the world as their next “it thing” and investors were numb to the revelation. Instead, investors remained focused on how everything in the global economy isn’t recovering perfectly. In our view, investors and traders alike are just looking for any excuse to sell. Topics such as the national employment numbers are stuck in an investor’s head like a bad song. The issue though with not keeping a long-term focus and/ or becoming irrational when investing is that it forces investors to let amazing opportunities pass them right by. In all fairness, we’re not diehard Apple fans but we still see no reason to completely disregard Apple’s next big move as the equivalent to stepping on gum when walking down the street.Now volatility works in mysterious ways, but what makes a great investor is one who can generate great opportunities from it. Without question, Apple continues to look like an interesting opportunity with the new iCloud, but short-term irrationality seems to have clouded the judgement of more than a few investors.
- Investor Overreaction Creates Buying Opportunities: Take a look at the S&P 500 (SPY) and it’s easy to see that the ride has been a choppy one. Still, the direction has clearly been higher and unfortunately investors often forget that no asset class moves at an upward 90-degree angle. Thus, this recent bout of volatility that has generated so much “fear” is merely a figment of the imagination. To the levelheaded savvy investor, volatility is just another word for opportunity. So, what does this all really boil down to? Simply stated, investor irrationality caused by volatility generates market overreactions. Negative market overreactions cause buying opportunities. Therefore, given this recent volatility we believe such an opportunity has been presented with the S&P 500 for the long-term investor.
Whether markets are in a bear or bull cycle, volatility will always be present just as fish always live in the sea. It’s the way world works and trying to fight this reality is just plain futile. The better thing to do is be patient, watch how volatility is affecting investors, and take action when opportunities arise like in the case of Apple & the S&P 500.