It is of prime importance to define your edge, as otherwise you will simply keep you oscillating like a pendulum.
Market movements can often be too tough to handle, especially when it mirrors an investor’s mood swings! As investors, we tend to make changes in our portfolio by pitching into to stocks that we believe will work. The next month or so is going to be specifically volatile for the Indian markets and with our country set on the outset of an election, one thing is certain — the market will be unpredictable.
But while the gyrations can be scary, they can also provide us with enough opportunity to learn from. So I will take you through 3 principles which can help you gather takeaways from each market turn, and thereby evolve you as an investor.
Find your Edge
Edge is built over time by observing a market phenomenon and trying to make it repeatable in some sense. Some people try to codify this mathematically and make it into a computer generated system. Some people subconsciously follow it, developing the intuition over time. You need to build ‘Your Edge’ if you want to make investing sustainable and scalable and not a flash in the pan. Your edge is an astute combination of the ability to:
● Ensure your investments are not in the same basket;
● Portfolio is well balanced risk-wise;
● Picking stocks only after interpreting the financial results;
● Keeping your blinders on to remind yourself that you are in it for the long term!
It is of prime importance to define your edge, as otherwise you will simply keep yourself oscillating like a pendulum.
Identify your Universe
Investing in a select few stocks or a pre-set universe is a must in volatile markets. It allows you to have a better sense of the prices in a sector you are focusing on. You could be more thorough with your analysis if you define your degrees of freedom. In fast moving markets, a large number of different positions could give headaches while getting in and out of positions.
A cycle can last anywhere from a few weeks to a number of years, depending on the market in question and the time horizon at which you are looking. A day trader using five-minute bars may see four or more complete cycles per day while, for a real estate investor, a cycle may last 18 to 20 years.
Although not always obvious, cycles exist in all markets.
For the smart money makers, the accumulation phase is the time to buy because the values have stopped falling and everyone else is still bearish. Be a smart investor and recognize the different parts of a market cycle, to take most advantage of them to make profit. This will ensure that you are less likely to get fooled into buying at the worst possible time.
Timing the market and making most of the volatility requires a lot of experience and patience, or as I mentioned above – finding your edge! But if you are able to implement these three simple rules to your benefit, then volatility will not be so daunting anymore.