In Volatility Lies Opportunity

 No one likes Volatility.

=> Manufacturer doesn't like volatility in inputs
=> Buyer doesn't like volatility in output
=> Employer doesn't like volatility in performance
=> Employee doesn't like volatility in bonus
=> Analyst doesn't like volatility in earnings
=> Investor doesn't like volatility in prices

In financial literature the ill-treatment of volatility is worse, it is used interchangeably with risk - The measure of volatility(Beta) is considered the measure of Risk. This is drilled so deeply at an early stage of an individual's life that poor Volatility has become the Ugly duckling, devoid of friends and admirers. But as was the case in the fairy tale, the duckling indeed is a beautiful white swan.

The advisory/ trading community comprises of more than 9000 brokers, 50000 sub brokers & over 150,000 Authorized persons all of whom operate a trading terminal. The listed universe has just 8000 odd stocks with limited float. It is an over researched market thus extremely difficult for stock pickers to find opportunities & build positions. To my rescue comes volatility. I cite a brief example:-

Let's take the case of Manappuram Finance. This is an extremely well run company, in the business of gold loans where entry is difficult & margins are high. In 2012, RBI decided to tighten the noose on account of the rally in gold prices & imposed certain regulations to ensure systemic safety of these institutions & curb the then prevalent aggressive practices. The stock corrected from a high of ~ Rs. 90 in 2011 to less than Rs. 10 in 2013. At that point the stock had a dividend yield of 18% yet it was tough to find takers as a "volatile regulatory environment" coupled with "volatility in underlying asset" led to this stock being red flagged. In three years, the market now believes the worries were baseless it's back to INR 75 with the stocks attracting headlines like these .. http://economictimes.indiatimes.com/markets/stocks/news/what-led-to-manappuram-finance-share-surge/articleshow/53048116.cms

An over researched market can take pricing to extreme ends & volatility is the ingredient which might give you a great entry point. There are many examples of random corrections - LIC Housing finance, MCX, Maruti & recently Nestle. In all these cases near term volatility on account of regulation, management or earnings lead to sharp corrections & thus creating an opportunity.

If one is patient then volatility can do wonders to returns. My mental checklist :-

1) Track but don't act, this requires immense patience
2) Have a fair price in mind & when one sees the market price substantively lower, be bold & buy big
3) Be prepared for the price to drift lower in the near term
4) Keep a close track of all developments to ensure that the investment premise holds

These opportunities have resulted in a CAGR of 40-100%. Thus I feel in volatility lies opportunity.