Strategy To Play Market Volatility

The kind of volatility the Indian markets are facing has surely kept the investors on their toes. This is the time when investors act in an erratic manner and make mistakes. So naturally when the markets are volatile, they are bound to be worried. However, the ground reality is that markets are subject to volatility which the investors are scared of. The reason being, whenever the movement is downward, investors get jittery as the portfolio values shrink. It is a natural phenomenon as no one on this planet would like to see their portfolio value getting eroded. 

We came across many investors who had lost the plot just because of greed and fear. But we feel one should not be too worried about the volatility in the markets. Rather, it is because of the volatility that we get an opportunity to make profits. Just imagine a situation where the markets only remain stable. In such a scenario, our investments would have also remained stable providing no gains. Then what is the purpose of making investments?

When one reads between the lines, one will understand that if someone emphasises on timing the markets, he will end up as a speculator.  And if investors could recollect, we have stated often and also firmly believed 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 a consistent basis is nearly impossible. There are many who would say so, but it is better to look at the contract note rather than taking it on the face value of what they say.

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 so 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.

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 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 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, professional 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 frontline stocks like Castrol, Colgate, HDFC, HDFC Bank and Tata Motors were available at fairly cheap valuations. While many took it as an adversity, it was rather 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 a low.