How should investors make the best of volatility?

One way to naturally overcome these bouts of volatility in the markets is to adopt a systematic or phased approach to investing.

Oct 27, 2021 12:10 IST India Infoline News Service Sandeep Bhardwaj |

Volatility is never a good feeling in the stock markets. For investors, it normally means notional losses and a sense of fear about the markets. For traders, this volatility means that stop losses tend to get triggered more often, even when their views are right. Let us first understand how much has been the volatility in recent days.
Date Open High Low Close Open/Close Gap High/Low Gap
11-Oct-21        17,868        18,042        17,839        17,946 0.44% 1.14%
12-Oct-21        17,916        18,009        17,865        17,992 0.43% 0.80%
13-Oct-21        18,098        18,198        18,051        18,162 0.35% 0.81%
14-Oct-21        18,273        18,351        18,249        18,339 0.36% 0.56%
18-Oct-21        18,500        18,543        18,445        18,477 -0.12% 0.53%
19-Oct-21        18,602        18,604        18,378        18,419 -0.99% 1.23%
20-Oct-21        18,440        18,458        18,209        18,267 -0.94% 1.37%
21-Oct-21        18,383        18,384        18,048        18,178 -1.11% 1.86%
22-Oct-21        18,231        18,314        18,034        18,115 -0.64% 1.55%
25-Oct-21        18,230        18,241        17,969        18,125 -0.57% 1.52%
26-Oct-21        18,155        18,310        18,099        18,268 0.63% 1.17%
Data Source: NSE

In the above chart, I have captured two Nifty variables viz. the ratio of the close to the open price and the ratio of the high price to the low price. Normally, the ratio of high price to low price shows the volatility trend while the ratio of close price to open price is the outcome. It is evident from the above table that as the high/low gap has gradually picked up, the ratio of close to open goes into the red, resulting in negative returns for investors. The bigger question is whether investors can really leverage this opportunity?

Price is what you pay, value is what you get

The legendary Warren Buffett famously said that investing would be so much simpler if we treated stock buying like an attic sale. What he meant was that in most products, people tend to flock to buy at lower prices. It is only in the case of shares and stocks that people prefer to buy at higher prices. Let us take a hypothetical illustration.

Suppose you have been holding on to a blue-chip stock like Infosys or Asian Paints in your portfolio. You are convinced that whatever the challenges, these stocks will eventually bounce back. Now, the question is whether a 10% correction in these stocks makes them less attractive or more attractive? The answer is obvious that it makes them more attractive from an investment perspective.

Market volatility and corrections are a wake-up call

This is an important aspect of any market correction. You will often find that rallies are led by stocks that may appear to be either illogical or even fallacious at times. This is part of any bull rally. There is no bull rally without excess optimism. So, froth is bound to appear in certain quarters. This volatility and correction is a time to restructure your holdings.

You may have bought a steel stock that has appreciated 300% in the last one year. Let us not get into the fundamentals of steel for the time being. Remember an old market wisdom that “If something is too good to be true, then it is probably not true”. In such cases, it may be a good idea to book out of such stocks and reallocate to other stocks.

A systematic approach would work best for you

One way to naturally overcome these bouts of volatility in the markets is to adopt a systematic or phased approach to investing. Don’t jump into the market in one go. It is like doing a SIP in equities, just like you do in a mutual fund. By spreading your investments, the rupee cost averaging works in your favor.

Another advantage of this systematic approach is that you have cash available when the markets correct. It would be really sad if you are absolutely convinced that the market is offering a buying opportunity but don’t have the investable surplus to capitalize on the same.

Incredible returns are born out of incredible pessimism

Now, incredible pessimism is not something you get to see often. Just take 4 cases in the last 18 years. There is the election bottom of May-2004, Lehman bottom of March 2009, Rupee crash bottom of August 2013 and the COVID bottom of March 2020. If you had allocated investments in even blue chips stocks in any of these periods, you would be sitting on a portfolio of multi-baggers.

To sum it up, don’t stress yourself about market corrections and volatility. This is an opportunity for you to rethink your strategy and to pick up some great stories at great prices.

Related Story

Open Free Demat Account (Rs699)
Open ZERO Brokerage Demat Account

  • 0

    Delivery Brokerage for Lifetime

  • 20

    Per order for Intraday, F&O, Currency & Commodity