Recent volatile in domestic and global markets has been prominent enough to rattle even some of the most seasoned investors. Summer is a time when most people look forward to sitting back and relaxing in the sun with their favorite beverage. Unfortunately, it is also a period when stock markets weaken due to a lack of interest and lower trading volumes. But while many people can’t be motivated to buy stocks during the warm days of summer, they are typically much more willing to sell them, especially in the face of uncertain market conditions. This volatility also often carries over into the fall. There has been no lack of news over the past few months to cause investors to push the sell button. Weak commodity prices, poor global economic outlook, talk of recession in Canada and rising interest rates in the U.S. and of course a steady stream of poor data from China. Investors are spooked and it isn’t hard to understand why. 

The TSX index has dropped more than 12% from its year high less than 5 months ago and markets in the U.S. haven’t fared any better. But rather than being alarmed, KeyStone sees this as an opportunity. Only 5 months ago, we were looking at markets with stretched valuations but the recent sell off is clearly starting to open up some opportunity….in dividend stocks, small-caps and in U.S. stocks as well. 

It is clear that the macro-economic outlook isn’t rosy but we wouldn’t necessarily consider it dire at the moment either. In

addition, even in a challenging economic environment it is still possible to find high-quality, growing companies that are selling at a discount due to distressed stock market conditions. We also have to remind ourselves that markets have undergone this cycle in nearly every year since the crash of 2008. Investor optimism pushes stock prices and valuations higher, then gives way to fear, sending markets tumbling, and finally turns back to into optimism (or at least neutral sentiment) allowing stocks to recover. Whether it is concerns over Europe, the U.S., China, or the possibility of rising interest rates, investors have found plenty of reasons to hit the sell button over the last 5 years in the face of any uncertainty. But it has been the investors who remained calm during these periods that profited year after year and the ones that followed the herd who have lost money. 

So the question becomes how can investor’s best position themselves with the markets facing the potential for further volatility in the fall? The first piece of advice (as always) is to take a 1 to 3 years view on the stocks you own and buy and don’t be too concerned about what happens in the short term, as long as the fundamentals of your companies remain solid. Beyond that, here are a few simply strategies we employ in almost any market conditions but that are particularly important to remember when we enter period as rocky and the one we are in right now.

1. Don’t be a Speculator: KeyStone’s methodology draws a distinct line between the practise of investing and the practise of speculating. Most people who buy and sell stocks would automatically consider themselves to be investors. Our view is that most individuals who purchase shares in individual companies are in fact speculators. Investing is the use of sound strategy, proven techniques, and successful experience. Investing requires that you know what you are doing (or utilize the services of a skilled financial advisor) and that you purchase stocks at less than or equal to their intrinsic value. With respect to companies that have failed to produce revenue or profits, it is basically impossible to assign an intrinsic value of greater than zero as there exists nothing concrete to analyze. We would consider any investment into a company with little to no revenue or profits as being a pure speculation. Investing in industries that are wholly dependent on commodity price (such as oil & gas or mining) should also be considered largely speculative. 

1. Diversify by Sector: Recent events in the energy sector provide a perfect example of the importance of diversifying into different industries. Being overly exposed to one industry or sector increases overall portfolio risk substantially. This is especially true then we talking about a commodity driven industry like oil & gas or metals where the investment risk is already high. Try to avoid accumulating too many stocks that operate in the same (or similar) industry and particularly those industries that are dependent on commodity prices. Within your 8 to 12 stock portfolio, you will have room to diversify into a multitude of different industries and geographies. Companies that operate in the same industry (and often geography) are exposed to many of the same risks. Diversifying provides significant risk management to your portfolio.

1. Enter Stock Positions Gradually: Purchasing a stock position does not have to be an all or nothing proposition. Often times we find a company that appears attractive but see the possibility of its share price moving lower in the short term. If we fill 100% of a position in such a company we get all of the upside exposure but also all of the downside risk. But if we wait for the possibility of a better entry price then we risk losing out on the opportunity all together. For that reason, it is often a wise strategy to fill a position in the company gradually over a period of time. For example, if an investors intention is to eventually fill a position of $10,000 in a particular stock then that investor could fill half ($5,000) or a third ($3,300) of the position initially and then purchase the remainder at a later date. This can help you to mitigate risk and benefit from volatility that occurs through the year. This strategy may also allow you to preserve some capital in the event that December tax loss selling provides further opportunities. 

1. Buy Strong Balance Sheets: The balance sheet is the financial foundation of a business. Companies with low to reasonable debt levels are in a far better positions to whether an economic storm. Better yet…companies with solid stockpiles of net cash can actually benefit from that storm if they can opportunistically acquire assets in a depressed market. Using an appropriate level of debt is not an unreasonable strategy and certainly a necessity in some industries. However, while companies with excessive debt may enjoy the benefits of leverage during periods of strong economic growth, that debt can be disastrous for investors when the economy and markets turn. The objective as an investor is to ensure that you are not buying a company that is so leveraged with debt which makes it more susceptible to economic and market contractions.