One of the more frequent questions I get from investors like you, as well as the institutional ones I have known for many years, is: how do I decide if something is a short-term or long-term opportunity? It is a timely question, even when the stock market is humming along like it did in the last half of 2013. But these days, with the return of volatility to the market, it’s even more crucial to understand the differences between the two. It is even more important not to mistake one for the other, since that situation can lead to disastrous results and a loss of capital.
As I just mentioned, volatility has returned during the last few weeks, as evidenced by the sharp move higher in the volatility index (see chart below). Reasons for this move include renewed concerns about global growth, a growing number of companies slashing their short-term outlooks and issues in the emerging markets, as well as worries about a potentially stepped-up timetable for the Federal Reserve to complete its tapering plans. While I continue to think the pace of the Fed’s curbing efforts will remain data-dependent, the overall combination of factors has pressured the U.S. stock market lower, and the S&P 500 Index now is down about 4% from the end of last year as I share this update with you.
Pullbacks in the stock market can be a solid and a very profitable ally to the patient investor. To me, a patient investor is someone who has the stomach to deal with short-term volatility, much like what we have seen recently, as well as the patience to let the underlying investment thesis play out. You always have to know why you are buying a stock and what the sign posts to watch for are to make sure the story is on track. It is very much in sync with the “buy and hold” strategy, except that I recommend my PowerTrend Profits subscribers use any material pullback to scale even further into a position. It is an investing technique used by professional investors that lets you reduce your average cost basis, while increasing your exposure to that particular security. Of course, you should only do this when the underlying reasons to own that stock are still intact.
Chris Versace is the editor of PowerTrend Brief — a FREE, weekly electronic newsletter. He also writes PowerTrend Profits, a paid monthly newsletter that helps individual investors profit through buying shares of companies poised to win big in the 8 PowerTrends, as well as writes the PowerTrader trading service that seeks to deliver short-term gains using stocks, ETFs and options. Chris has been ranked an All Star Analyst by Zacks Investment Research.