The Australian share market continued to tank Tuesday Australia time, after a poor lead from Europe and the US. Clearly, volatility is not over yet. The question is: How do you trade it? Moreover, should you be trading the ‘Brexit’ at all?
Define what ‘quality’ is first
The answer to whether you should trade the Brexit is simple. If you hold or can access quality stocks, then you should buy more. If you are not sure about your holdings, you should not be trading.
Where many investors stumble is that they think it is simply a problem of timing; they think ‘buying low and selling high’ requires only good timing. That is only partially true. What they don’t realise is that, in order to profit from ‘buying low and selling high’, finding quality assets to ‘buy low’ is vital.
You see, quality stocks can’t keep you insulated from crashes. But they do rise again after periods of negative volatility. This makes any market turbulence an opportunity for investors.
However, the same cannot be said about poor quality stocks. Poor quality stocks go down in value not only during crashes, but in normal market conditions as well. For them, it has nothing to do with timing; they are simply going to go down regardless of what the market is doing. So what you really need to do is to hold quality stocks at all times.
That may seem obvious, but it’s chaotic times like these that people forget these simple, vital concepts.
So how do you identify quality stocks? That deserves much thought. I use a simple criteria to define quality stocks for my readers at Emerging Trends Trader, but my method isn’t the only one. To me, anything that appreciates in value should be defined as a quality stock. I know many will point out that companies with bad financial health can appreciate in value as well, in the short run. That is true, but that is where I draw my line. If something is making money, it qualifies as ‘quality’ because I am after the gain.
Ultimately, you need to define what ‘quality’ means to you personally. It will depend on your investment timeline, and your tolerance for risk. If you don’t know, then you shouldn’t be trading the Brexit because you can’t be sure your stock will bounce back after the volatility.
Gold, yes or no?
Should you own gold? The simple answer is, ‘Yes.’ There are many theories on gold in the market. You probably have your own. I’ll give you the data, and you can decide for yourself.
Over the long run, gold tracks the commodity basket. So in the event of a major commodity crash, gold would crash. In a commodity bull market gold would go up.
But over the short run, gold moves up when there is volatility in risky assets such as stocks — or volatility in the market in general. Gold is seen as a safe haven by investors, which is why they run to bullion at the first sign of trouble.
I am often uncertain about gold. To start with, it is near-impossible to value gold, other than using the market price. If you use gold as a strategic asset then, more often than not, you are speculating on the future of the global monetary system, inflation or some other macro factor. That’s all fine, except you’re making predictions for a faraway future.
I myself tend to invest based on known data, without making too many predictions. To me, if gold goes up during a volatile period, it is a good reason for having it in the portfolio. If the commodity market crashes, then I won’t hold gold — or I would at least reduce it to a small share of my portfolio. If gold gets ahead of the commodity basket due to volatilities in the market (like now), I would be cautious because I know it’s unsustainable. Either the commodity basket would rise to catch up with gold, or gold would fall at some point.
Knowing what you don’t know
We are in a volatile period due to Brexit. However, I urge you to not think too hard about the future of Europe and Britain. It is easy to predict things out of thin air…things that may not even occur. It takes humility to admit that we simply don’t know what will happen.
We know there will be a lot of changes and adjustments in the Euro region, and the world, due to Brexit. That will create volatility, both upside and downside. That’s about all we can know with confidence. What you need to focus on is finding quality stocks to invest in when the market takes a pounding.
Look, you should find it easy to agree that good businesses are good businesses, and they move up over time. When you find good businesses to invest in, then you want to ‘buy low and sell high’.
Analyst, Emerging Trends Trader
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