Volatility in markets occasionally goes up significantly.
Why? This is because events – be it politically or military – happen unexpectedly. Traders often extrapolate recent market tranquility as the norm. These ‘unprobable’ events were attached with too low a probability. When they hit, the whole market panicked.
Witness the 12-percent fall in the South Korean KOSPI Index today (4 March).
But for long term investors, volatility could be a good thing. As Warren Buffett observed:
“The true investor welcomes volatility … a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”
When volatility hit share prices, they undervalue businesses. This means you can buy good business at a discount.
One stock that I have in mind is Lloyds (LLOY), one of UK largest banks. The financial company has been doing well in recent years. Prices more than doubled; those multi-billion share buybacks means investors are getting a larger slice of company’s earnings.
Earlier this year, Lloyd surged 14% after breaking the 100p psychological level.
But the uptrend overheated. And following recent geopolitical uncertainty, prices have now retreated back below 100p. At the time of writing, Lloyd’s share is changing hands at 97-98p.
With Buffett’s quote in mind, long-term investors may want to take a look at this bank stock should prices continue to slip in the days ahead.
Of course I wouldn’t know where Lloyd’s correction will end. But its multi-decade chart is suggesting more potential upside.
