Let Volatility Be Your Friend
Readers of this blog will notice that a couple of picks of mine have been in the dog house, while others have performed well in a choppy market. Unfortunately, for the casual web surfer who stumbles onto here, they will focus more on the stocks that have been down.
One common characteristic of successful value investors is they take advantage of the lower stock price and increase their position(s). On the other hand, many investors will do the opposite and sell. Truth is, the stock market is a volatile animal. In a given month, a stock’s price can move up dramatically. But, it can also go down dramatically. A perfect example of how fast a stock can move is Office Depot (ODP). When I wrote about Office Depot, every consumer company was taking a beating as economists and analysts expected a slowdown in the economy. As a result, the whole office supplies industry, which primarily consists of Staples, Office Max, and Office Depot were depressed and hit the 52 week low list. Office Depot also landed on the Magic Formula List for stocks with a market cap over 2 billion. I wrote about Office Depot when the stock was trading at $13 and change. Soon after, the company reported earnings that fell short of analyst expectations and the stock tumbled about 20% to $10.XX. Talk about timing.
At this point in time, I could have written some lame excuse about how Office Depot has become a sell and avoid the stock at all costs. But, those who know me know that will never happen. The beauty about contrarian investing is even if a company reports horrible earnings it is a win win situation. Assuming the company reports a worst than expected quarter much of that bad news will be priced into the stock. On the other hand, if a company has a positive earnings surprise; you will see a nice pop. This was the case with Office Depot. In a matter of 2-3 weeks the stock has moved up more than 25% despite reporting declining revenue. Not bad eh? Anyone can gloat and feel like a genius when a stock is up, but can one watch their stocks go down 20% and not panic. In my opinion that is what separates the elite from the average.
Finally, a couple of years ago I found an interesting quote on volatility by Peter Lynch. I memorized it for situations like this. Who knows? It might help someone out one day.
When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom. - Peter Lynch
Readers of this blog will notice that a couple of picks of mine have been in the dog house, while others have performed well in a choppy market. Unfortunately, for the casual web surfer who stumbles onto here, they will focus more on the stocks that have been down.More…
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May 2nd, 2008 at 1:20 am
Averaging down is a business like mind set. If you own a business and have an opportunity to buy inventory at a discount you should be inclined to do it.
This gives you the opportunity to make a greater profit when you sell it later(assuming values arent falling).
When buying stocks, the same logic applies. If the real economic value of the business isn’t falling, the lower stock price is giving you the opportunity to make greater returns.
The problem is more emotional because the market is repricing the value of your stock every second of every day. Losing quotational value hurts. I’ve learned that this is the time to add to my position.
The hardest decisions are;
1) trusting my judgement on the real value
2) buying more when the price falls
May 6th, 2008 at 8:29 am
Nice post, but it seems like the same content has been appended to the bottom.
May 6th, 2008 at 9:16 am
thanks Jae I didint realize the error.