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Opportunity Knocks (Volatility is Back--Yes!)


Nathan Kawaguchi



            Investors were spooked this week by Greece, the Euro and a possible trading glitch.  Whatever the reasons, I am just happy to welcome back volatility.  Value investors live for volatility because it presents the rare buying opportunities on the downside and selling opportunities on the upside.  Because prices generally move upward in the long run, the downside volatility is much more difficult to come by, so investors cannot afford to waste the rare buying opportunities when they present themselves.


Although the past year has produced spectacular returns, the last six months or so have been relatively uneventful for conservative value investors.  The steady rise over the past several months has taken stocks into fair value territory and beyond.  Without any meaningful corrections along the way, many conservative value investors have been forced to sit and wait for the next opportunity.


            As usual, patience is paying off.  While the recent correction has only erased year-to-date gains in the overall market, the price movements in many individual stocks have been much more severe.  Because we are coming down from moderately overpriced levels, there is not yet an abundance of bargains available.  What investors should be doing right now is making a shopping list and looking for opportunities to put cash to work incrementally, should prices continue their downward trend.  This is assuming, of course, that investors still have cash to put to work.  At, we have been recommending a large cash position since October 2009.


            Because the past year’s rally has mostly rewarded risk (the so-called “dash to trash”), many larger, higher-quality stocks are selling at relatively more attractive valuations.  This should be the first area in which to look for investment candidates to add to a shopping list.  This is especially true if people are correctly worried about another significant global selloff.  The higher quality names should hold up better relative to the “trash” in the event of another crisis.  To quote Howard Marks, “We don’t know where we’re going, but we sure as heck ought to know where we are.”  Happy bargain hunting.

Disclosure: No Positions