Investment Management

Volatility = Opportunity

Investing requires patience and discipline, yet flexibility.  Volatility in the public investment markets is a given.  At OHFG, we believe that market volatility should not elicit a string of four-letter words from investors!

In fact, we believe that most long-term, individual investors should yearn for periods in the market with increased volatility.  For it is in periods of extreme market volatility, that long-term investors may be given their best chance of buying and holding stocks that can compound and potentially outperform the market for years to come.

Generally speaking, the investment team invests opportunistically. Depending on the market regime, this means sometimes investing client funds very rapidly, and in other regimes, it makes taking a more periodic, gradual approach. We always stay flexible.

And in times of extreme market volatility we look for certain things. The insurance world may provide a good example. Most people have a basic understanding of how insurance markets and pricing work.  Under normal circumstances, the longer an individual wants to insure themselves against an event or loss, be it health, death, or property, the more expensive the insurance will cost.

The real-world financial markets don’t always behave in this rational manner. Sometimes they behave irrationally. Due to factors like fear or panic, volatility in markets may lead to certain securities or sectors being priced at “irrational” levels. We look for these “irrational” opportunities to accelerate our investment schedule.

Here’s an analogous situation: Imagine being a homeowner on a Friday afternoon with a clear catastrophe (fire, tornado, flood) rapidly approaching. You don’t have insurance. In a panic, you call your insurance agent, Fred, who is willing to sell you a short-term policy.  “Thank you!” you exclaim, “How much will it cost me?”

Fred types your data into his computer and gives you two quotes: “You can pay $1000 for the 3-day weekend, or you can pay $750 and insure your things for the next 2 months.”

“Great,” you answer, “I only need the insurance for the weekend, so I’ll take the 3-day policy!” and you hang up the phone.

With that decision, you have unfortunately just decided to pay 25% more for something that will give you only 1/20th the coverage. The “you” in this scenario has just made an emotional, irrational financial decision…and you’ve just made Fred and his insurance company your new best friend!

These are the types of “irrational pricing” situations that can occur in times of volatility in financial markets.  Our investment team looks to capitalize on these opportunities in order to better help our clients achieve their goals.

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