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  • Writer's pictureIshfaaq Peerally


The stock market is always volatile and sometimes more volatile than other times which can be shown by the $VXXB . Is volatility a good thing for investors and for traders? Yes. It is a good thing for both.

Let's look at other asset classes, for example real estate. If you buy a property today, you have to expect that it increases in value after some times for you to make a profit but if you want to make a huge profit, you'll have to expect that the price increases rapidly and that there is bubble. It is the same thing for any other asset classes. But for stocks, there is something different, there are always those moments of pessimism and moments of optimism. There is never an equilibrium in the market. So stocks are always either too expensive or cheap. Rarely you'll see a stock being at the right price relative to its intrinsic value. Last month, the $SPX500 was down by 6% and this month it is already up by 4%. That doesn't mean that the companies in the index lost their intrinsic value in that short amount of time. It only means that last month people were more pessimist and this month more optimist.

Let's look at a concrete example, $SWKS is down by more than 30% since Donald Trump announced new tariffs on China. The company has only 10% of its sales directly related to China so worst case scenario, one would expect only a fall of 10%. But the stock fell by 30% giving us the opportunity to buy at a lower price. The same logic can be applied to $FB and $AAPL last year. At some point in the future, all these companies are most probably going to be in bubbles and then it will be time to sell. Buy low, sell high. Never forget this rule.

Now for the trader, the most profitable year of $GS ever was in 2009 during at the peak of the Great Recession. Why was that? It is because Goldman Sachs is a bank doing a lot of trading and the partners and traders there took the opportunity to make a lot of trades during that period. Even during Q4 of 2018, Goldman Sachs had better than expected revenues and profits. That's because the market was in a correction and there was a lot of trading going on, a lot of volatility.

I know that it is hard sometimes to see that your portfolio is losing its value or that you just see that you have unbelievable unrealized gains and you don't know whether to take the profits or keep holding. But if you know what you are doing and you keep a long-term perspective(even if you're just a day trader), you'll understand that market volatility is actually something great and something useful to you.

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