By Brian Regan, CFA
Investing and managing stock volatility requires a specific kind of mindset.
Savers, Speculators, and Investors are all involved in their well-thought-out financial strategy, but they are invested in a responsible mix of ETFs and mutual funds. Speculators are chasing the latest mania using options or leveraged ETFs hoping to escape the boredom. It is also critical that a patient contrarian is capable of resisting a lot of anxiety.
The patient contrarian sees short term mania as it is and ignores it while speculators leap in headfirst. Here are a few recent examples of prevailing trends that were best ignored.
Ethereum Price is expected to be the tenth most trending Google search in 2021. The searches climbed from May 9 to May 15. On May 3rd, the ETH-USD price was up to $3,928. As of today, the price is down nearly 49%.
GME, the name for GameStop, was the fifth most popular search in 2021. The searches took place from January 24 to January 30. GameStop is down more than 72 percent since the January 28th peak with severe volatility, bringing the total amount of profit to 89% in February 2021.
AMC Stock was the second most popular search in 2021. It had two massive increases in searches. The week of January 24th and the week of May 30th. It currently stands 80% below the standard set on June 1st.
During the epidemic, a lot of people switched to Zoom rather than going to the office. The predominant belief was that it must be a great stock. Netflix was almost $700 and has dropped to under $200.
As speculators exit a stock in a single scale, uncertainty may arise from an investor. Catalysts can involve a lot of trading that can cause enormous dislocations and deviations that can last for a long time. That is why patience is so important to the investor mindset.
Investors buy a stock for the underlying business, and returns on stock come from rising prices and dividends. Typically, buyers and sellers are putting the stock price at large, but they are also exerting pressure on the general public. This is because the cash flows that produce the buybacks and dividends, which is likely to take time to get complicated.
Investors are more interested in Zoom or Netflix at the new lower prices (they might buy back a larger percentage of stock) than they were at their highs, and they weren''t interested in GME or AMC (that ETrade baby is funny! ). Savers are continuing to purchase (albeit modest amounts) with each successive paycheck.
It''s a psychological battle between logic and emotion. It requires a rare investor mindset. If you have time and cannot deal with anguish, then be a saver rather than an investor (you will do great!).
About the author: Brian Regan
Brian Regan, the CFA and the MBA, has been the Chief Investment Officer of Asset Management Resources LLC, an investment advisory company. Employees of Asset Management Resources, including Mr. Regan, may own shares of the discussed stocks in this piece and may recommend these stocks to clients of the company. He has experience in portfolio risk management, asset allocation, fixed income security selection, and macro-economic analysis.