Volatility is back in a big way. Dow Jones has had a couple of 4-digit swings, and it has been a bloodbath in many markets. Uncertainty in overlapping major risk areas is fueling a brutal sell-down.
The risk areas include:
- China slowdown due to COVID measures and property weakness
- Central bank tightening due to persistent inflation
- Commodity imbalances due to Russian invasion
In highly volatile situations, I find it useful to establish as much certainty as possible, because uncertainty fuels fear and leads to sub-optimum decisions being made. Reaffirming and reminding ourselves of the certainties make it easier for me to maintain rational decision-making.
Everyone has their own set of high-conviction ideas from which to establish these certainties. Some of my own are:
1. Considering the very long term picture, it is still possible for markets to fall significantly further
Looking at the big picture, recent falls do not actually look very big. Markets have risen a lot, and recent falls are much less than recent rises. It is entirely possible for the S&P 500 to fall significantly below 4000.
2. No one can predict the markets with absolute certainty
Trust no one. Many will seem to know a lot and present compelling evidence, but it is impossible to be absolutely sure about the markets. Trust no one entirely.
3. Avoid crowded trades even if they seem logical and well-recommended
When a trade has become crowded, potential upside becomes limited and potential downside conversely grows a lot.
4. What goes up a lot has a higher probability of falling a lot
No matter how compelling a high-flying stock’s business case, it always has a higher chance of falling fast to the ground. Remember that fundamentals can change, and research reports are not perfect.
Conclusion
Reinforcing your own set of certainties will help anchor yourself in volatile times, and prevent decisions being made based on more emotion than logic. To develop your own set of high-conviction ideas, do read extensively and spend time to analyze markets deeply.
