Investing Around Volatility

09/17/2012 2:00 pm EST

Focus: STOCKS

Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright talks about how to invest with confidence during times of market uncertainty and volatility.

How should investors be handling all of the volatility we’ve been seeing in the markets?  We’re talking about that today with our guest, Kelley Wright.  Kelley, what is the best strategy here?  It could be driving people crazy.

Well, part of Mr. Market’s job is to confuse as many people as he can as often as possible.  That’s not true, of course, but that’s the way that we think about it. 

Volatility is just like all of the other cycles.  It comes, it goes.  Part of it is we’re in the summertime.  The dog days where a lot of the traders are gone.  A lot of professionals are gone. So that leaves the kids sometimes to play around, and they get in, they get out, move the market up, and move the market down.

So part of it is the seasonal tendency, but what I would tell investors is don’t worry about necessarily what the market is doing.  Know what you want to buy.  Know what you want to own.  What is your style?  What appeals to you?  What’s attractive to you? 

In other words, the main thing is to keep the main thing the main thing, and that’s what you want to buy, what you want to own. I prefer to look at it as a market of stocks as opposed to a stock market. What we do is we define what we’re looking for and then when it offers value, whether the market’s going crazy or whether it’s snoozeville, you buy. 

Should we then be prepared to sit through some of this volatility and not allow ourselves to get shaken out?

I think that’s often the best way to go, because when volatility is wild it’s usually transitory.  I mean the bluster, and it comes and then it goes.  You know, we look at each other and we go what was that all about? 

Look at this week.  It’s wild Monday, Tuesday, Wednesday, Thursday, and today it came back and we ended up flat for the week.  Okay, a bunch of noise, bunch of action.  Did it mean anything?  No.  But, you know what?  You had some great opportunities intraweek to buy some really great value stocks.

Speaking of volatility, one thing we’ve heard about a lot more in the past couple years has been the VIX.  A lot of people call it the fear index. A lot of people use it as one of their trading indicators. How do you see this?

The way that I was raised was when the VIX is high it’s time to buy, and when the VIX is low it’s time to lay low.  Okay, and that’s because when the VIX is high it means that people are paying up for put options. 

In other words, they want to protect their portfolios.  They think something bad is going to happen.  Maybe something bad is in the middle of happening. That’s often when you find really good opportunities, especially for a value guy like me.  I mean, I want to pay the lowest price I can for what it is that I’m looking for. 

Usually, you’re going to find that when the fear is high, people are scared, they’re exiting, and they’re going crazy.  That’s when guys like me step in and go thank you very much, thank you very much.

So what I would say about the VIX is when it does get high, that’s when you need to start looking for opportunities.  Okay, when the VIX is low, when people are complacent, when there’s kind of the apathy, watch out. Don’t turn your back on a dull market.  It could whack you over the head.

Great warning there.  Thank you very much, Kelley.

Sure.

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