{"id":35217883,"date":"2021-04-18T06:30:06","date_gmt":"2021-04-18T06:30:06","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/2021\/04\/18\/embracing-volatility\/"},"modified":"2021-09-13T19:41:24","modified_gmt":"2021-09-13T14:11:24","slug":"embracing-volatility","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2021\/04\/18\/embracing-volatility\/","title":{"rendered":"Embracing Volatility"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\">Market volatility is a feature, not a bug.<\/h2>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>In the short run, market is a voting machine; in the long run, it&#8217;s a weighing machine. &#8211; <em>Benjamin Graham<\/em><\/p><\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\">Price is a measure of Sentiment<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/3c0b9e0a-b6f3-4072-872f-9fbaf0da45a4_2048x1886.jpeg\" alt=\"Buy! Buy! Sell! Sell! signed Kal print | Get money online, Ways to get  money, Stock trading\"\/><\/figure>\n\n\n\n<p>Early last year, when it became clear that the China Virus had spread all over the world and was getting millions sick, overwhelming healthcare systems everywhere, the markets tanked. In USD terms, Indian stocks were down more than 40% and the S&amp;P was down more than 30%. <\/p>\n\n\n\n<p>Then, a miracle cure was discovered and the markets quickly recovered.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/652b1059-7945-40f8-9350-5a00a4075f7d_1400x800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p><strong>Just kidding!<\/strong><\/p>\n\n\n\n<p>Governments and Central Banks everywhere did whatever they could to lift sentiment. And markets quickly followed.<\/p>\n\n\n\n<p><em><strong>Sentiment<\/strong><\/em> remains one of the least understood but the most important factor in investing. All prices are eventually tied to how optimistic or pessimistic investors are feeling about the future. <\/p>\n\n\n\n<p>While Graham\u2019s <em>weighing machine<\/em> might arrive in time for tenured investments, like bonds, that have a fixed maturity date, perpetual securities like stocks are always at the mercy of the <em>voting machine<\/em>, i.e., sentiment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The Market sets the Price<\/h2>\n\n\n\n<p>For stocks, Price = multiple <em>x<\/em> earnings<\/p>\n\n\n\n<p>For prices to go up, you don\u2019t need earnings to go up. It is enough if multiples do.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\"><div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"550\" data-dnt=\"true\"><p lang=\"en\" dir=\"ltr\">There are two pieces that drive returns&#8230; multiple expansion \/ contraction and the earnings themselves. It\u2019s hard to predict the former (they\u2019ve gone opposite their expectation of normalization), but they completely whiffed on the fundamentals. US companies have crushed.<\/p>&mdash; Jake (@EconomPic) <a href=\"https:\/\/twitter.com\/EconomPic\/status\/1364645903747878912?ref_src=twsrc%5Etfw\">February 24, 2021<\/a><\/blockquote><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div><\/figure>\n\n\n\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\"><div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"550\" data-dnt=\"true\"><p lang=\"en\" dir=\"ltr\">Talk about multiple expansion &#8230;<br><br>Russell 1000 Growth Price to Book Grew from 5.2 to 12.4 in 5 Years\u2026Russell 1000 Value 1.5 to 1.6 in Same Time Frame &#8230; <br>forward P\/E has doubled for growth and flat for value over past 5 years.<br>h\/t TOPLEY&#39;S TOP 10 via <a href=\"https:\/\/twitter.com\/MarketWatch?ref_src=twsrc%5Etfw\">@MarketWatch<\/a> <a href=\"https:\/\/t.co\/0zj1DlkIjz\">pic.twitter.com\/0zj1DlkIjz<\/a><\/p>&mdash; Justin J. Carbonneau (@JJCarbonneau) <a href=\"https:\/\/twitter.com\/JJCarbonneau\/status\/1364910361170837510?ref_src=twsrc%5Etfw\">February 25, 2021<\/a><\/blockquote><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div><\/figure>\n\n\n\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\"><div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"550\" data-dnt=\"true\"><p lang=\"en\" dir=\"ltr\">Me, when other people brag about gains fully attributable to multiple expansion: Idiots. Don&#39;t understand the role of randomness in life.<br><br>Me, when my own stocks go up fully on the back of multiple expansion: So prescient to recognize the fundamentals before the market did.<\/p>&mdash; Nimble Opinions (@NimbleOpinions) <a href=\"https:\/\/twitter.com\/NimbleOpinions\/status\/1305935911784534017?ref_src=twsrc%5Etfw\">September 15, 2020<\/a><\/blockquote><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div><\/figure>\n\n\n\n<p>The market doesn\u2019t care <em>why<\/em> you are transacting. Only that you are. It doesn\u2019t matter what your investment horizon is or the type of investor you are, all transactions take place in the market at a price set by it.<\/p>\n\n\n\n<p>As an investor, you can be right about the company (direction of <em>earnings<\/em>) but wrong about the sentiment (direction of <em>multiple<\/em>) and can end up with a stock that goes nowhere in price for years and exit with no rewards for your effort.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">No such thing as Buy-and-Hold Forever<\/h2>\n\n\n\n<p>It is the end of a &#8220;long-term&#8221; for a subset of investors everyday. <\/p>\n\n\n\n<p>Investors usually save with a specific goal in mind. These goals tend to be time bound: retirement, kid\u2019s education, etc. While their horizons can be \u201clong\u201d at the outset, it gradually shortens as the D-day arrives. Equities (and other high-risk securities) are constantly being sold and rotated into bonds (and other low-risk securities) set by a glide-path. <\/p>\n\n\n\n<p>As much as professionals like to fantasize about long-term investing, the investors in their funds have bounded horizons. This is especially true for open-end funds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Sentiment + Finite Holding Periods = Volatility<\/h2>\n\n\n\n<p>Finite holding periods create the <em>need<\/em> to transact. This makes it impossible to ignore sentiment. The two combine to create volatility.<\/p>\n\n\n\n<p>It is easy to blame investor greed and fear for bad portfolio outcomes. We have all seen this sketch make the rounds:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/ed721cb1-e80e-4fac-a2c4-8f180ac356b0_800x600.jpeg\" alt=\"Buy High, Sell Low: How To Free Yourself From The Madness\"\/><\/figure>\n\n\n\n<p>However, even if an investor overcomes the call of greed and fear, it is impossible to ignore <em>time<\/em>. This makes sentiment the prime determinant of investment outcomes.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/4c8a015c-3022-41e9-bbbc-08bf16724de1_3600x1800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>If you think investors having longer time-horizons can ignore volatility. Think again. As the chart above illustrates, volatility is an equal opportunity hater.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Embrace and Extinguish<\/h2>\n\n\n\n<p>Volatility clusters. You have reasonably long periods of calm, then suddenly a lot of things \u201cgo wrong.\u201d Markets gyrate and you feel that all hell has broken lose.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/f0028283-7494-4d92-bf37-8f447f62390b_3600x1800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>This leads investors to assume that periods of calm are normal and volatility is abnormal. But in markets, the reverse is true. Sudden shocks, volatility and jolts to sentiment are the norm. Calm periods are the anomaly. <\/p>\n\n\n\n<p>Sentiments wax-and-wane. Multiples expand and contract. Markets melt-up and melt-down for no good reason.<\/p>\n\n\n\n<p>The only time-tested way of reducing volatility is asset allocation. Invest in a basket of different assets (make sure that at least a few of them a not financialized) and accept the market for what it is.<\/p>\n\n\n\n<p>Embrace volatility and extinguish it.<\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p>Looking for a sensible way to invest? Here\u2019s how to&nbsp;<a href=\"https:\/\/stockviz.biz\/index.php\/2021\/09\/14\/getting-started\/\">get started<\/a>.  <\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"Market Volatility is Feature, not a Bug\" width=\"1020\" height=\"574\" src=\"https:\/\/www.youtube.com\/embed\/m5YRCK6ANnk?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Market volatility is a feature, not a bug. In the short run, market is a voting machine; in the long run, it&#8217;s a weighing machine. &#8211; Benjamin Graham Price is a measure of Sentiment Early last year, when it became clear that the China Virus had spread all over the world and was getting millions &hellip; <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[4033],"class_list":["post-35217883","post","type-post","status-publish","format-standard","hentry","category-investing-insight","tag-risk","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/35217883","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=35217883"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/35217883\/revisions"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=35217883"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=35217883"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=35217883"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}