Over the past 18 months, the markets have been tumultuous and unpredictable. As an investor, I had to navigate through uncertain times and make decisions based on rapidly changing market conditions.
In this article, I will elaborate on my experiences and share my insights on how to invest during market volatility.
Q4 2022 hedge fund letters, conferences and more
In 2022, I decided to reduce my positions due to the soaring market valuations and unprecedented bullish sentiment. At the time, I didn’t have a view on how the markets would behave in the following year, but I presumed that the upward trajectory would persist as I set off on a lengthy sabbatical.
However, history turned out differently.
In February 2022, Russia invaded Ukraine, setting off a chain of events that shook the global economy. As a result, inflation spiked rapidly, and the Federal Reserve had to raise interest rates at an accelerated pace to maintain economic stability.
This led to multiple high-profile crypto-related catastrophes, including the Terra/Luna Saga and the bankruptcy of FTX, one of the most established crypto exchanges.
Stock markets also tumbled into a bear market, with high-tech growth stocks experiencing the most severe drawdowns, some plummeting as much as 70-80% from their all-time highs.
Despite the market turbulence, I maintained a watchlist of high-quality companies that I desired to invest in. These were businesses boasting robust competitive advantages, exceptional management, and steady earnings growth.
Remarkably, several of these outstanding companies, which demanded a premium merely a year ago, now presented themselves at more appealing valuations.
However, as some of these high-quality stocks experienced a surge in prices over the last few months, I slowed down my purchasing activity significantly. It’s essential to stay disciplined and adhere to a value-oriented approach, avoiding overpaying for assets even when they possess strong fundamentals.
During this time, “value stocks” saw a rally, presenting a prime opportunity for me to divest some of my legacy positions. For instance, I took advantage of the strong performance of City Developments to sell my shares and recycle it into higher quality companies.
After a robust rally in January, market sentiment has shifted, with fear creeping back in. It’s no surprise that people are concerned about a potential repeat of the 2008 Great Financial Crisis.
As we are still in the early innings of the crisis, it’s expected that disruptions will occur, especially when interest rates have surged from virtually zero to five percent.
So what should we do? Although there is some caution in the current market, it’s not as extreme as the fear experienced during the sell-offs in March 2020 or other dramatic market downturns. However, it’s important to remain cautious and keep a level-headed approach to investing.
One key strategy is to focus on investing in high-quality companies with strong balance sheets.
This means looking for companies with robust competitive advantages, excellent management, and steady earnings growth. Warren Buffett, one of the world’s most successful investors, has often emphasized the importance of investing in high-quality companies with long-term growth potential.
It’s also essential to avoid excessive margin or debt when investing. Margin trading involves borrowing funds from a broker to invest in securities, which can amplify gains and losses.
While this strategy can be lucrative, it can also be risky, especially during times of market volatility. In addition, investing with debt can lead to significant losses if the investments do not perform as expected.
Finally when investing during market volatility, it’s important to stay disciplined and avoid making emotional decisions. It’s easy to get caught up in the fear and panic of a market downturn, but it’s important to remember that investing is a long-term strategy.
By maintaining a level-headed approach and sticking to your investment plan, you can avoid making rash decisions that could harm your portfolio.
Investing during market volatility can be challenging, but it can also present opportunities. By focusing on high-quality companies with strong balance sheets and staying disciplined, you can navigate market fluctuations and come out ahead in the long run.
