There's a saying in the market that good news begets good news and bad news begets bad news. A positive spark can create tailwinds and a negative spark can ignite the beginning of a downward spiral. So far in 2015, the rule seems to be market volatility. A 400-point intraday swing in Dow Jones yesterday may be just the beginning.
Whether you view the decline in the price of oil as a net positive or negative for the market, the apparent certainty is that when oil prices are volatile, the markets become volatile. Oil is the ultimate commodity -- its price affects every facet of the economy at every level. And the impact is both immediate, as in the form of gas prices, and forward looking, as in the form of capital spending, investment, and corporate budgets. So volatility is here to stay.
The most astute investors view volatility as the simple movement in prices, not to be confused with risk. Nonetheless, it's very difficult for many investors to deal with 10%, 20% or even 30% price swings. Thus, volatility begets more volatility. So if you aren't willing to accept a little, or a lot, of volatility, then watch from the sidelines.
Also, as always, focus on investments with catalysts, or events that will drive value. In general, the best catalyst is simply value -- buying a business for significantly less than the value of the future cash flows. But in these market times, having a catalyst is even more critical.
Aside from value, event-driven catalysts provide the added benefit of a timeframe. A potential spin-off, for example, is an event-driven catalyst that occurs under a known future time frame. The Manitowoc Company (MTW) is an example of investment with a catalyst. Last month, Carl Icahn revealed a 7.7% stake in the company. Icahn's goal is to split up Manitowoc's crane business from its food service business. Manitowoc shares are trading at nearly half the level they were trading at a year ago.
Nelson Peltz is working to shake du Pont (DD). Interestingly, shares in du Pont have performed very well, but Peltz feels a split and better corporate governance can still unlock value.
Such catalysts typically aren't affected by market volatility. If anything, they can be a source of investment gain against a headwind of market declines. As you would expect, there are no sure things with catalysts, but if you identify the right ones, they can be the next best thing.
