Capitalizing on the volatility of the stock market

If you were on Google’s “stock market volatility”, you would find a wide range of observations, conversations, reports, analyzes, recipes, criticisms, predictions, alarms and causal confusion. Books were written; indices and measuring instruments have been created; rational conclusions and conclusions were provided. However, volatility remains.

Statisticians, economists, regulators, politicians and Wall Street gurus have addressed the issue of volatility in one way or another. In fact, the daily turns are explained, reported, recorded for further analysis by experts and scratches on the head.

The only question I still have about all this comic hubbub is why don’t you relax and enjoy it? If you only own income-generating securities, diversify appropriately and adopt a disciplined profit routine, you can make stock market volatility your best friend (VBF).

A few decades ago, an unnamed professor of statistics took me out of a semi-comatose state with an observation about statisticians, politicians and economists. “In the real world,” he said, “there are liars, wretched liars, and any member of the aforementioned groups.” An economist or a politician, armed with a battery of statistics, is indeed an ominous force.

Well, now, all economists and statisticians have high-powered computers and the ability to analyze volatility with the same degree of certainty (or arrogance) that they have developed in terms of individual-stock risk analysis, the correlation dynamics of economic and geographical sector, and future prediction in general.

  • But the volatility (and the uncertainty it causes or results from, depending on the expert you listen to) persists.

In fact, modern computers are so powerful that economists and statisticians can now calculate the investment prospects of almost anything. So rich in statistics are these masters of probabilities, alpha, beta, correlation coefficients and standard deviations, that the financial world itself has become, banal, boring and easy to deal with. Yes of course.

Since I can foresee the future with such a high degree of probability and can cover myself against any uncertainty with another high degree of probability, then why is the financial world in such a chronic state of upheaval? And why does volatility and uncertainty continue?

I expect you to expect an opinion (yet another opinion) on why volatility is so pronounced as it seems to be compared to previous years. Frankly, Scarlett, I can’t really get the hell out of me. The uncertainty we are asked to believe is caused by volatility simply is not. Uncertainty is the condition for regulating the investment game … and life, in fact.

The more you invest in higher risk securities, the more you speculate about future directional changes, the more you ignore the growing revenue and focus only on the market value, the more uncertain your investment environment becomes. So risk, speculation, poor diversification, low revenue generation and only market value expectations combine to exacerbate uncertainty, but nothing can eliminate it … it’s just safe.

Volatility, on the other hand, is simply a force of nature, one that must be embraced and treated constructively in order to succeed as an investor.

But this machine-driven hyper-volatility, which we have recently experienced, has been amplified by the darker forces of “disgusting science” and the changes it has encouraged in the way financial professionals view portfolio structure. modern investment.

On the positive side, improved market volatility actually enhances the power of equity and revenue security disciplines and strategies in the Market Cycle Investment Management (MCIM) methodology … an approach to market reality that embraces market turbulence and leverages market volatility for results that leave most professionals either speechless or in denial.

  • MCIM focuses on the highest quality equity securities and well-diversified income security portfolios, creating a lower-than-normal risk environment where price fluctuations can be treated productively without panic. Higher prices generate profitable transactions; lower prices lead to additional investment. Basic quality, diversification and revenue generation create a more “tolerable coefficient of uncertainty” than other methodologies.

But without the necessary (or available) statistical data to support the following view, consider this simplistic justification for the current stock market hyper-volatility.

Volatility is a function of supply and demand for the common stock of a finite number of dirty, bad, greedy, polluting, corrupt congressmen, job creation, supply of goods and services, innovation and wealth development, foundation support, supply of gifts, corporate tax collection.

Those of us who trade common stock in general, investment worth stocks in particular, owe a debt of gratitude to the real creators of volatility: the hundreds of thousands of derivatives that bring a completely speculative type of indirect demand and supply to the markets. of securities. .

In general, the fundamental, emotional, political, economic, global, environmental and psychological forces that impact stock market prices have not changed significantly, even if they have not.

Short-term market movements are as unpredictable as they have ever been. They continue to cause the uncertainty you face, using proven risk minimization techniques such as asset allocation, diversification and profit taking.

The key exchange agents, the new copies of the block, are derivative betting mechanisms (index ETFs, for example) and their impact on the finite number of shares available for trading. Every day, on the stock exchange, thousands of shares are traded, a billion shares change hands. The average weight is “held” for a few minutes. No one seems to be looking for analysts to return stories of “fundamental” brilliance, profitability or income production.

In addition to trading with derivative financial instruments, such as sectors, countries, companies, commodities and industries, we have a multitude of index betting devices, short-term games, options strategies, etc. What is Exxon’s common share? I have heard that the hosts of financial discussions warn listeners to never, ever, buy individual capital!

  • Is today’s movement in any individual capital the result of the demand for the company’s shares itself or the demand for more funds, indices and other derivatives that follow or include the company in their “model”? How many derivative owners have an idea of ​​what is in their ETF?

We are in an environment where investors feel smarter in their relationships with sectors than in companies; where 401k “retirement” plans (they really aren’t retirement plans, you know) are banned by regulators from even providing reasonable return investment opportunities, and where government fiscal policies have forced millions of real estate accounts. Retirement savings to seek refuge in shark infested waters around Wall Street.

Market volatility is here to stay, at least until multi-tier and multi-directional derivatives are moved to the Las Vegas casinos where they belong, until regulators realize that 7% after higher spending is better than 2 % after minimum expenses and up to interest rates are allowed to return to somewhat normal levels … and this feels to some as a high level of uncertainty.

For the visible future, we will have to find a way, a methodology, to do both of our VBFs.

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