While most academics like to equate volatility with risk, I hold a different view. To me, volatility should be viewed with enthusiasm. It gives the true investor the opportunity to buy and sell great businesses at attractive prices. Business-oriented investors who view investing as the opportunity to acquire ownership stakes in excellent companies will find that volatility is an investor's best friend.
My approach to investing is rather simple: Look for good companies selling below intrinsic value and hold onto them for a long time. However, it's important to remember that investing also has to be sensible. If a stock you acquire happens to appreciate rather quickly and no longer seems fairly valued, take advantage of the volatility to sell it and allocate your capital to another undervalued security. Likewise, if volatility results in a declining stock and your methodology is sound, then you either buy more of an even better value or sit tight while the gap between market price and intrinsic value narrows. Any way you slice it, greater market volatility leads to more potential opportunities for the enterprising investor.
One should not incorrectly equate market volatility with market timing. Using volatility in an attempt to buy at the bottom and sell at the top is a good way to erode your capital. Anyone who was buying housing and mortgage-related securities in the last year is paying an expensive price today. Instead, an investor should welcome volatility on a stock-by-stock basis. Companies like Countrywide Financial
A 16-year annualized return of 0%
Warren Buffett, who is synonymous with the phrase "my favorite holding period is forever," has admitted that maybe he should have sold Berkshire Hathaway's
An investment in the Dow Jones index during the 16 years beginning in 1966 and ending in 1982 would have been worth about the same amount at the beginning and the end of that time period. Hovering around 1,000 in 1966, the Dow remained around 1,000 in 1982. Any dividends earned had been wiped out by inflation during that time. Yet during that 16-year period occurred one of the most opportunistic buying opportunities in the United States. Taking advantage of the volatility, Buffett began gobbling up stocks in 1974 (he had been out of the game since about 1969, when he shuttered his partnership). In 1970, dismayed with the high stock prices, Buffett remarked, "I feel like a sex-starved man on a desert island."
Yet in 1974, excited about the exceedingly low levels of stocks, Buffett remarked, "I feel like a sex-starved man in a harem filled with beautiful women."
In 1974, the buy-and-hold Buffett we know today was selling "stocks he'd bought at three times earnings to buy those selling at two times earnings." During the six-year stretch between 1976 and 1980, Berkshire Hathaway had an annualized rate of return of more than 60%! Volatility is indeed an investor's friend.
Very recently, Buffett announced that Berkshire has divested its entire stake of Chinese oil company PetroChina
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Fool contributor Sham Gad is managing partner of the Gad Partners Fund, a value-centric private investment partnership modeled after the 1950s Buffett Partnerships. He has no positions in the companies mentioned. The Fool has a steady disclosure policy.
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