Growing Capital
October 17, 2013

Volatility

Written by PenderFund

Technically, volatility refers to the average difference between a stock’s expected and actual returns. The actual returns may be above or below what is expected or benchmarked, and diversifying a portfolio will smooth the overall volatility of that fund.

We believe it is important to distinguish between risk and volatility. In our view, volatility (or beta) is a value investor’s best friend. Periods of volatility demonstrate the market’s pricing inefficiencies and can be difficult to navigate. Price dips (or hikes)  illustrate the importance of knowing and monitoring the intrinsic value of an investment at all times. A drop in stock price is more often a factor of market dynamics than a sudden loss in company quality, though this happens.

We take a conservative approach to allocating capital to investments, but we will capitalize on opportunities to start new positions or add to existing positions when stocks are cheap. When volatility provides extreme pricing, it produces opportunities to buy low. We will take advantage of a wide discount to our estimate of intrinsic value in anticipation of stronger returns from a sale once prices converge on intrinsic value and, subject to our ongoing fundamental analysis, will occasionally ride the wave of price appreciation.

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