Today was a rough day in the market. They are more common than you might think. I typically dislike the constant coverage of what the market is doing, and investing experts who are happy to tell you why the market tanked today. Where were they this morning? I’ve never seen a pre-market headline that told me the market would be down 2% today. That would be helpful.
But I thought I would take the opportunity with all the excitement today to comment on market volatility. One commentator reports that this is a buying opportunity. Another reports that inflation is back. The January numbers say so. Be cautious.
Who do you believe? What do you do?
Is This a Buying Opportunity?
Maybe. Maybe not. Arista Networks (ticker ANET), is one of my favorite long-term holdings. I bought shares in 2017 and they are up about 300%. Arista was down almost 10% at one point today and I thought this might be a buying opportunity. It was trading at $254 per share. I took a look at the Arista stock price chart on Yahoo finance and saw that Arista’s stock price hadn’t traded this low since…last week. If it wasn’t a bargain last week, what makes it a bargain this week?
It’s easy to fall into the habit of seeing a company you like on sale and buying more to take advantage of a bargain or to reduce your cost basis. I don’t like the cost basis argument. For me this has never worked out. It always seems to be even cheaper next week. Taking advantage of a bargain on the other hand can be a solid strategy. I have found that in the heat of a market meltdown, I am not at my best to assess what’s really a bargain.
Make Plans Before the Meltdown
I’m proud of myself for looking at Arista’s stock history and not hitting the buy button. I’ve learned this lesson the hard way. My alternative…as part of the research I regularly do on all the companies of which I own shares, I decide at what point I would like to buy more shares. I look at how much of the company I hold today. If it’s already a large part of my portfolio, there may be no price at which I’d buy more. If it’s not too big right now, and I still find it a compelling investment, I may decide that I’d be interested if it pulled back 10%. Of course I have a spreadsheet that keeps track of this for me and companies pop up to the top as they near my price target. But the key is that you want to set these targets in advance. You don’t want to make decisions in the heat of a market meltdown. Your emotions are high. You’re hearing market experts tell you now is the time to look for bargains. The pressure to capitalize is high.
You will often be rewarded for doing nothing.
Investing is an area where laziness often pays off. If you can ignore the noise and stick to your knitting, more often than not, you’ll wind up ahead of your peers. Market moves of 1% or 2% in a single trading session are frightening and can have a big impact on your portfolio. But so far, every time the market has had a big drop, it has gone on to new highs.
On the other hand, let’s say you knew the market would be down today. 1st thing this morning you sold all of your equity positions. Good for you. What then? Do you buy back in at the end of the day? Next week? In order for you to get ahead on this trade, you need to be right twice. You need to guess when it will go down, and then you need to be able to call the low point so that you can buy back in. If you’ve figured out how to do this consistently, please post a comment.
Market Analogy
I once heard a great analogy for the stock market. This is from Ralph Wanger, portfolio manager of the Acorn Fund:
He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.
Wrap-up
Volatility is part of investing. The last 100 years have proven that if you can stay the course and not react to volatility, you will be rewarded in the long run.
Easy for me to say. Let me know your thoughts.