"One thing is certain. I am guarded now. I am very sensitive to commidity prices, interest rates, and am of the view that value based companies and defensive stocks will need to be purchased reduce portfolio volatility"
Thats the age-old problem. I posted something on another forum yesterday outlining my views on market volatility. I'll cut and paste it below (I post under a different nic on that other forum, one day I should consolidate the 'Clark Kent' brand across all boards ... hehehehe)
------------------------------------------- There are many technical and 'physcological' issues which have an important effect on managing volatility which I believe have been poorly communicated over the years.
Firstly, it is the effect of tax. There are countless of long term investors in this country who have become quite wealthy by investing in what Buffett calls the "inevitables", which in the Australian context means, Westfield, major banks, Wesfarmers, Woolworths etc.
If someone develops the knack of buying the 'right' investments (not restricted to the stockmarket) they will "inevitably" become victims of their own success.
Therefore, if you own 1,000 shares of Woolworths, and you also think that they are currently changing hands in the market at a price which you wouldnt necessarily be adding to your holding, this does not necessarily translate to a "sell" decision. Because, if you sell, you are faced with the "certainty" of paying Peter Costello 25% of your sales proceeds, against the "probability" that you will never be able to re-acquire those shares again at a price which would have made the whole sell-transaction profitable.
Buffett has only ever openly expressed regret about not selling assets at the height of the 2000 bubble, but then again, here in Australia we did not see such crazy market valuations.
Therefore, in a lot of ways what happens in the market seems unrelated to your original decision to buy 1,000 shares of Woolworths at a price which 'then' represented good value to you. Or in Buffett speak, if you think of 1,000 shares of WOW representing ownsership of aisle "8" of the Smith St Collingwood Safeway store, it is rarely wrong to own it, regardless of what the market is doing.
No statistics regarding volatily and drawdown can ever be complete without factoring in the effect of foregoing the benefit of Peter Costello's interest free loan.
Now, suppose you want to add aisle "9" of the Smith St Safeway store to your asset collection. You look at the market price and say, 'fcuk this for a joke, I'll stick my cash in CBA term deposits'.
Where does that leave you ? Would you prefer a continuation of what appears to be a market overvaluation of WOW, or would you wish for the market price to fall (making you poorer as far as your current 1,000 share holding is concerned) so that you can add one more supermarket aisle to your assets at a 'good' price ? Nasty psychological problem, aint it ?
Where does that leave us ? Certainly, I believe that it rarely pays to disturb our past successes. The market can just about be ignored when it comes to that. I think we can correct our past mistakes, eg sell Amcor when you can get a good price for that dog, but given the above, how often can it be right to sell WOW ?
Therefore, that leaves us with worrying about what to do with our 'next' dollar. It always comes back to the 'next' dollar. Do all your rebalancing, asset allocation, diversification and what not with your 'next' dollar. If the stockmarket does not offer attractive opportunities, pay off debt, buy real estate etc.
When it comes to considering the stockmarket in isolation, trying to 'always' maintain the high-water mark of your ill-gotten gains (who's fault is it that some people decide to pay ridiculous prices for assets?) seems tough. Selling does not achieve the desired commercial result, not with Costello lurking around the corner.
You can always try to be 100% insured (say with put options) which will keep you portfolio on a smooth north-east ascent, but not as steep an ascent as the increase of the assets' incease in intrinsic value.
The only legitimate no-cost way to achieve such a result is beyond the capability of most investots. Super investors like Julian Robertson suggested that not only do you need the valuation skills to buy 'good' assets at the right price (it rarely pays to short the good stuff) you also need the valuation skill to short the 'bad' stuff when they are overpriced (it rarely pays to be long the cr*ap companies). Very few can realistically get to that level. If we could, they'd be writing books about us in 20 years, and it would not matter one bit what the market did day-to-day.
ASX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
(20min delay)